Investments in material efficiency: the introduction and application of a comprehensive cost–benefit framework

ABSTRACT

Increasing material efficiency is considered to yield multiple economic and environmental benefits. This paper firstly introduces a comprehensive cost–benefit framework to systematically assess the viability of investments in material efficiency. The framework comprises several components by (1) comparing a business-as-usual scenario with a scenario of scaling up investments in material efficiency, (2) covering economic and environmental dimensions, and (3) considering direct and indirect effects. In a second step, we match the framework to existing evidence from the literature, followed by an application of the framework to a microeconomic investment project financed by a multilateral development bank. Our results suggest that material efficiency investments can yield positive net benefits, which typically increase when non-monetary dimensions are additionally taken into account. Overall, our analysis calls for a more comprehensive approach towards material efficiency investment appraisals, the internalisation of externalities, and further empirical research to better understand the implications of moving towards material efficient economies.

KEYWORDS:

• Competitiveness
• cost–benefit analysis
• investments
• material efficiency

JEL CODES:

• L60
• O31
• O33
• Q38
• Q56

Acknowledgments

The authors would like to thank Nigel Jollands for his support and contributions to this paper. The helpful comments and suggestions by the editor and two anonymous reviewers significantly improved the quality of the paper. All remaining errors are entirely those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Total material requirements (TMR) is a material indicator that includes all unused materials and indirect material flows across the supply-chain. For an overview of material indicators, refer to Bringezu (2013).

2. The evidence provided does not necessarily imply an increase in competitiveness since this also depends on the response from competitors. However, a favourable macroeconomic environment could be considered as a proxy for competitiveness. Evidence on a direct impact of resource efficiency on competitiveness is inconclusive (Flachenecker 2015).

3. The investment project is presented anonymously to comply with confidentiality agreements.

4. Future costs and benefits are typically discounted by using a discount factor . For economic costs and benefits, an interest rate in the economy is often taken to represent which (in normal economic circumstances) is a positive rate (). However, the level of the interest rate is highly debated (e.g. Arrow et al. 1996). For environmental costs and benefits, no universally agreed discount factor exists which is due to the high degree of uncertainty involved in estimating future impacts of GHG emissions (Pindyck 2007). Some apply a range of positive discount rates which illustrates this uncertainty (e.g. U.S. Government 2013). Given the lack of reliable estimates to discount environmental costs and benefits, we chose not to apply any discount rate in order to avoid any mismatch between economic and environmental impacts. Applying discount rates, our results would only change in terms of their level but not in terms of their trend (unless the economic discount rate exceeds the environmental one in our case study by a factor of 583). This means that the year in which the investment yields a positive accumulated net benefit might change, but the overall conclusions drawn from our results are likely to remain valid.

5. The actual GHG emissions are likely to be slightly lower since the embodied GHG emission for PVC plastics already include the electricity consumed during the production process. However, the GHG emission factor for PVC plastics is a ‘conservative’ figure since it calculated assuming a best available technology benchmark. Additionally, the figure excludes any environmental pressures that occur at the local level (e.g. local air and water pollution) due to the lack of adequate information.

6. However, this does not mean that there are no health impacts. For an overview of general environmental and health impacts of PVC, refer to (EC 2004).

7. We would like to thank an anonymous reviewer for pointing out these initiatives.