Level of analysis: any, but primary focus on the micro level (products & services),
Assessed aspects of sustainability: economic and environmental
Main purpose of the assessment: Quantify and analyse the life cycle costs.
Description of the methodology: This method entails data collection and calculations of all costs associated within the life cycle of a product that are directly covered by one, or more, of the actors involved in the products life cycle, including external costs that are anticipated to be internalised in the decision-relevant future.
Detailed description
Life cycle costing (LCC) belongs to the group of sustainability tools that focus on flows in connection with production and consumption of goods and services. They focus on evaluating different flows in relation to various products or services instead of for example regions or nations LCC is an economic approach that sums up” total costs of a product, process or activity discounted over its lifetime”. It is associated with cost in general rather than just environmental cost for example (Ness 2007).
A robust LCC framework will be able to link life cycle analysis studies to the monetary cost systems used by business decision-makers. Unless these dollar driven decisions can be assessed in terms of the physical limits of natural systems, it will be difficult to assess progress toward sustainability. Therefore, LCC is seen alongside LCA as two of the three pillars in an evaluation of sustainability, with the third, social assessment, still in its infancy (Ciroth et al. 2008).
According to the SETAC Working group on LCC there exists three different types of LCC; conventional LCC, environmental LCC and societal LCC. The conventional LCC is, to a large extent, the historic and current practice, in many governments and firms, and is based on a purely economic evaluation, considering various costs associated with a product which is born directly by a given actor. External costs are often neglected. Environmental LCC summarizes all costs associated within the life cycle of a product that are directly covered by one, or more, of the actors involved in the products life cycle, including externalities that are anticipated to be internalised in the decision-relevant future. These costs must relate to real money flows. The environmental LCC is not a stand alone technique, but is seen as a complementary analysis to the environmental life cycle assessment. A complementary life cycle assessment (LCA), with equivalent system boundaries and the same functional unit is required (Ciroth et al.2008).
The environmental LCC as compared to the conventional LCC can be seen as a tool for both external communication and certification as well as labelling, while conventional LCC is more likely to be used as an internal tool. In environmental LCC it is obligatory to include all life cycle stages, while the conventional LCC often does not take into consideration the end-of-life costs (Ciroth et al. 2008).
The most common discussed and debated issues in environmental LCC are the following:
– What costs should be included in an environmental LCC? According to the SETAC working group (Ciroth et al. 2008), an environmental LCC should include internal and internalized costs, including foreseeable future internalisation of external cost.
– Whose costs are accounted for? Does the LCC assess the costs of the user/consumer, of the producer, or of the society? A cost of one actor can be a revenue of another actor.
– Which life time should be considered? Four different lifetimes may be used in LCC: economic, technical, physical and utility life.
– Which discount rate should be used?
The third LCC is the societal LCC which uses an expanded macro-economic system and includes a larger set of costs and also includes, as opposed to conventional and environmental LCC, governments and other public bodies that could be indirectly affected through externalities. The societal LCC includes all of environmental LCC plus additional assessment of further external costs, usually in monetary terms (Ciroth et al. 2008).
Societal LCC can at times be called CBA-type LCC as it resembles the Cost-Benefit Analysis. It includes a larger set of stakeholder groups, such as public bodies and governments and aims at quantifying environmental effects of society in monetary terms. Within the CALCAS project, a separate SWOT analysis is made for CBA, while this report will focus on a SWOT of the environmental LCC.
In general, the environmental LCC aims at (Ciroth et al. 2008):
– comparing life cycle costs of alternatives,
– detecting direct and indirect (hidden) cost drivers,
– recording the improvements made by a firm in regards to a given product,
– estimating improvements of planned product changes, including process changes within a life cycle, or innovations, and
– identifying win-win situations and trade-offs in the life cycle of a product, once it is combined with LCA (and, ultimately, societal assessments when the latter is standardised).
Strengths
One of the most important strengths of the environmental LCC is that it adds an economic dimension to LCA. It contributes to the evaluation of the economic dimension of sustainability. LCC complements the LCA in the meaning that elements that are not of interest for LCA are of high interest for LCC, such as costs for R&D and costs involved in the product design phase.
The LCA and LCC if used together amplify the spectra of sustainability evaluation and contribute to increasing the validity of these. For example, in the LCA it is possible to identify so called hot-spots, that is analyse where in the life cycle the large environmental pressure will appear. In a similar way, the LCC makes it possible to identify where the major costs will appear during the life cycle. By evaluating the costs in relation to the environmental effects, it is possible to appreciate the impact that a cost saving can have on environmental effects. In a similar way you can evaluate how an environmental improvement will change the costs. In order for this to be possible, it is important that the life cycle of the product or service is divided in equal phases to those in the LCA, that is that costs and effects occur in all phases, such as design, R & D, manufacturing, management and end-of life phases.
LCC makes it possible to take into consideration future costs at an early stage and relate them to the initial costs. In this way greater emphasis can be put to long term thinking and costs for maintenance and reparation will be given other proportions. The LCC can give the investment analysis an expanded time perspective and enable an investigation of the environmental costs which can make visible future revenues, for example from selling end-of life products. Further, LCC gives a better view of the total costs of a product compared to normal investments analysis, such as the pay-off method which primarily focuses on amount of years that an investment will be recovered.
As a result, environmental LCC has the potential to support the trade-off between environmental and overall affordability targets by including all monetary flows along the product life cycle. Those solutions can be identified that (a) have the highest efficiencies (where do we get most environmental improvements per $ and (b) have the highest affordability for the customer along the life cycle. Furthermore, added costs in the design phase can be justified in terms of future savings, either for the customer or for the recycling of the products (Schmidt 2003).
The ultimate goal of sustainability is to redirect corporate investments toward business models that achieve a better balance of environmental protection and social equity. The product design has been identified as a key leverage point for promoting a shift to more sustainable business systems. LCC is a tool that can help guide this transition (Ciroth et al. 2008). LCA and LCC, when carried out in an integrated manner and from a systems perspective, have a high potential for moving industrial practice towards sustainable development (Rebitzer 2003).
In addition, the process of realizing an LCC stimulates learning. Collecting data, estimating future events, identifying environmental aspects to consider, and learning about the complexity and diversity of environmental costs, etc., is an important benefit from doing the LCC. Such benefits should not be neglected in the development of decision support tools (Baumann & Gluch 2004).
Since LCC adds economic information to the LCA, it may broaden the audience of the LCA. Combining LCC and LCA also facilities eco-efficiency assessments which can make understanding easier and further extend target audience for the use and interpretation of LCA (Ciroth et al. 2008).
Weaknesses/Limitations
The integration of LCC into LCA can be hampered by the lack of a standard for LCC. In May 2008, the new SETAC working group’s book on environmental LCC was published which defines the environmental LCC, and balances scientific and economic points of view and is a step towards a guideline. There exist at least two commercial standards for conventional LCCs (ASTM international 2002, International Electrotechnical Commission 2004). The first is directed to the building industry and the second of a more general nature.
Another argument against including LCC analyses in the LCA is that it is difficult to find reliable and adequate data. Environmental LCC should include data on future markets and the possible development of these. Such information can be difficult to obtain and is very uncertain. Many assumptions and estimations must consequently be made, which implies that the result from the LCC calculation is naturally beset with a high degree of uncertainty (Gluch 2003). This leads to LCC results not being robust.
Another feature that might hinder the broadening of LCA through the use of LCC is that it is quite time consuming to realize in comparison to common investment analyses such as the pay-off method and calculations of net present value.
LCC tools derive from normative neo-classical economic theory. This means that they are based on theoretical assumptions that fail to help in decisions in situations of uncertainty or when the outcome is irreversible. The theoretical base also implies that LCC-oriented tools neglect items with no owner, such as air and seawater, and underrate future environmental costs (Baumann & Gluch 2004). Hunkeler et al. (2008) suggests that external costs that are expected to be internalized in the near future, through for example environmental taxes should be included. However, other environmental costs are not accounted for in the LCC.
In summary the following barriers can be identified that prevent a wider or more informed use of LCC as a support tool for LCA:
– lack of uniform practices, common approaches and measures,
– difficulties in defining some of the cost factors,
– difficulties in evaluation of the effects of the changes in a product’s operational conditions,
– too many factors of uncertainty, and
– poor quality of data from suppliers and lack of comprehensive data for products’ performance in the operational phase.
Opportunities for broadening and deepening LCA
There is a growing interest among scientists, industries and policy makers to cover the economic dimension of sustainable development in a robust and reliable way. Enterprises, just as much as the public sector and NGOs, require tools and concepts that can be understandable, standardised, applied on a large scale , and valid, not merely for specific cases, but also in movement towards sustainability. The LCC covers the economic dimension of sustainable development. Of the three independent pillars of the sustainability assessment, it constitutes the one that decision-makers tend to focus on the most.
Within the EU policies there exists a growing interest of life cycle thinking and especially to enhance the use of the LCA and LCC in conjunction. For the LCA, there exist procedural standards as specified in ISO14040. These standards may with slight adaptations, be used for LCC as well. This could allow for well-aligned studies covering the environmental and the economic part of sustainability analysis.
Threats for broadening and deepening LCA
The current lack of infrastructure for environmental LCC is a threat and obstacle to broadening the LCC approaches:
– there are few scientific journals that focus on environmental LCC; as a consequence studies rarely relate to each other and are often not founded on previous discourse; the different variants of LCC can render the studies difficult to understand, or perform, in particular for beginners (Ciroth et al. 2008),
– there is no generic data format for Environmental LCC,
– there are no adequate databases; cost information is much more variable over time than life cycle inventory data; therefore static databases are not very useful for LCC,
– there is insufficient knowledge and lack of quality training, and
– there is often limited cooperation between clients and suppliers,
As already mentioned, LCC calculation are often difficult to realize: due to the lack of data and poor quality of existing data, many assumptions and estimations must consequently be made, which implies that the result from the LCC calculation is naturally beset with a high degree of uncertainty. The uncertainty in forecasting future consequences causes decision makers to perceive LCC calculations as unreliable. Further, there doesn’t exist a consistency in estimating the life cycle, which can cause confusion. This can make these tools difficult to use and undermines their confidence in the result from LCC and LCA. In summary, LCC adds to the already perceived complexity of LCA studies, which can result in a lack of interest and hesitation in using these sustainability tools.
Literature/Internet links
ASTM E917-02 Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
Ala-Risku T, Kopri E. (2008) Life cycle costing: a review of published case studies. Managerial Auditing Journal 23(3): 240 – 261.
Baumann H, Gluch P. (2004) The life cycle costing (LCC) approach: a conceptual discussion of its usefulness for environmental decision-making, Building and Environment.
Ciroth A, Hunkeler D, Huppes G, Lichtenvort K, Rebitzer G, Rudenauer I, Steen B. (2008) Environmental Life Cycle Costing. SETAC Press, Pensacola, FL. Publishing House Taylor and Francis.
International Electrotechnical Commission (2004) IEC 60300-3-3: Dependability Management – Part3-3: Life cycle cost analysis – Application guide
Ness B, Urbel-Piirsalu E, Anderberg S, Olsson L. (2007) Categorising tools for sustainability assessment. Ecological Economics 60: 498-508.
Rebitzer G, Seuring S. (2003) Methodology and Application of Life Cycle Costing. International Journal of LCA 8(2): 110-111.
Schmidt W-P. (2003) Life Cycle Costing as Part of Design for Environment, Environmental Business Cases. Int J LCA 8(3): 167-174.