## Double Dividends Optimal Pollution Revisited

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Generally speaking, then, the economic picture that emerges from the application of preventive measures to industrial processes is significantly different from the economic picture illustrated by Figure 21. The rising cost curve of Figure 21 may be a relatively accurate description of the cost of cleaning up emissions by add-on technologies at the end of the pipe. But preventive measures have a very different

BOX 7 ECONOMICS OF PREVENTION—A WORKED EXAMPLE

Suppose that company X invests in a solvent recovery scheme which costs \$100,000 to install and recovers 4,000 gallons of solvent each year which would otherwise have been discarded. Suppose that the cost to the company of purchasing fresh supplies of solvent is \$8 per gallon and that the cost of disposing of discarded solvents is \$3 per gallon. The operating costs of the system are \$4,000 per year.

The total annual savings from the scheme are:

Raw material savings: \$32,000

Disposal costs savings: \$12,000

Less operating costs: -\$4,000

Total annual savings: \$40,000

(a) The simple payback on the investment is 100,000/40,000=2.5 years.

(b) If we assume that the solvent recovery equipment has a lifetime of 15 years and that the required rate of return on the capital in the company is 25 per cent, then the Net Present Value of the scheme is given by:

Since this NPV is high, the project should be deemed acceptable at the given rate of return.

(c) The calculated internal rate of return (i.e. the rate of return at which the Net Present Value is zero) is 39.7 per cent. Since this is comfortably above the required rate of return of 25 per cent, we can see again that the project should be regarded favourably as profitable to the company.

economic profile. One simple way of illustrating this new profile is shown in Figure 22.8

A series of technology cost curves is shown in Figure 22. The individual cost curves have the same kind of profile as the one in Figure 21: as environmental protection is increased, the costs also increase. But Figure 22 also illustrates another kind of shift. Suppose that we start out at a particular point (point X) on a particular technological trajectory (curve A). Certainly, one way of increasing our degree of environmental protection is to travel further up this cost curve, i.e. implement more of the same technology. And there are additional costs associated with this movement.

Figure 22 Economics of preventive environmental protection

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Figure 22 Economics of preventive environmental protection

However, it is clear that a range of other options is available to us if we are prepared to countenance a shift, not along the same technological trajectory, but from one technology cost curve to another. For instance, suppose that we shift to curve B. At point Y on curve B we have the same degree of environmental protection but at a lower cost. At point Z on curve B we have a greater degree of environmental protection for the same cost. Equally, we might then want to look for a further technological shift on to curve C, for instance, where costs are even lower for the same degree of environmental protection.

This is one way of illustrating the difference between conventional approaches to environmental protection and the preventive approach. But we have to be a little bit careful in interpreting this simplistic illustration. It involves a rather broad definition of what we mean by a technology. Essentially, a technology is taken here to be a means of providing a particular service. And it is assumed that the level of service supplied remains constant as we shift between different technological alternatives.

As an example, let us consider the problem of sulphur pollution. Sulphur dioxides are released when coal and oil are burned, because the sulphur content of the fuel is oxidised during the combustion process. Unless measures are taken to prevent it, the sulphur dioxide gas is emitted through the smoke stacks of power stations and factories. When it reaches the atmosphere, the gas is often transported for hundreds of miles before combining with water vapour and falling as acid rain. There is now increasing pressure on countries to reduce acid emissions and firms may find themselves faced with specific regulations limiting the amount of gas they are allowed to emit.

We have already discussed (in Chapter 4) the end-of-pipe response to sulphur pollution: flue gas desulphurisation. This option is quite effective at first in reducing the amount of sulphur emitted. But it imposes additional operating and capital costs on the firm.9 As levels of sulphur are reduced, the costs for further reductions using end-of-pipe technology rise considerably. For an industrial firm, the preventive strategy would be to consume less fuel by improving the energy efficiency of its processes. Installing more energy-efficient technologies may incur upfront capital costs, but it would save on the company's electricity bills, and reduce all kinds of environmental emissions.

When we come to look at the electricity supply industry, the situation becomes a little more complicated. There are sometimes some efficiency gains which can be made within the electricity production process. For instance, new technologies which gasify coal, and then produce electricity through an integrated combined cycle process tend to be more efficient than conventional coal technology. Generally speaking, though, there are high capital costs associated with these efficiency improvements and the emission reductions are relatively low.

Substituting fossil-fuelled electricity generation with alternative methods of generation is one of the other options which could be considered. In particular, certain renewable energy technology options have shown considerable promise over the last few years (Plate 3). These technologies convert natural energy flows (such as wind energy, hydroelectric energy and solar energy) into useful power. The economic costs of these new technologies vary considerably depending on where the technology is located, how strong the ambient energy flows are, and so on. But generally speaking, renewable energy costs have been falling rapidly for a decade.10 Moreover, they have the advantage not only of eliminating sulphur dioxide pollution but also of reducing or eliminating a number of other air pollutants. Carbon dioxide (which contributes to the problem of global warming) is the most obvious of these other pollutants. Because of their environmental advantages, the Brundtland

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Plate 3 Solar energy in California—'the foundation for energy in the twenty-first century'?

Plate 3 Solar energy in California—'the foundation for energy in the twenty-first century'?

Source: © The Environmental Picture Library/James Perez

Commission has argued that renewable energy technologies should be 'the foundation for energy policy in the 21st century'.11

But there is a different way of thinking about pollution prevention from electricity generation. The power station delivers electricity to consumers. As I have already indicated, however, consumers do not really want electricity for its own sake. Rather they want certain kinds of energy services which electricity can provide for them such as light, warmth, cooking heat, mobility and the convenience of electric appliances. By improving the efficiency with which electricity is used in consumer appliances, we could actually reduce the demand for electricity from power stations. The power station would burn less fuel and emit less pollution. This is exactly in line with the aims of preventive environmental management. But it does highlight an extremely important, and rather complex issue. Prevention is not always something that can be carried out within the geographical boundaries of an industrial firm, particularly if that firm is supplying specific commodities

(such as electricity) to consumers. This issue is so important that I shall return to it in some detail in the next chapter.

Despite these reservations, the picture shown in Figure 22 allows us to compare the old, received wisdom about the costs of environmental protection, and the new, preventive paradigm. The search for preventive environmental management options becomes the search for new technological cost curves which offer increased environmental protection at lower cost. We should note here that the concept of 'optimal pollution' levels is overturned by the economics of preventive environmental management. Supposedly optimal levels shift continually towards improved environmental quality as we unveil increasingly cleaner technological cost curves.

The industrial experience cited earlier in this chapter and summarised in Boxes S to 7 indicates that the search for cleaner technological cost curves is far from fruitless. There is a wide variety of profitable avenues for exploration. Companies from all over the world have benefited from them. And the lesson from this wealth of evidence is perfectly clear: there is significant potential to reduce environmental burdens without compromising economic welfare.