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2.13 When is an impact significant? EnTA involves a four-step approach - Describe, Identify, Characterise and Evaluate (DICE) - as described in Section 2.9. The first three steps are relatively straightforward since generally they only require the collection of information relevant to a specific pressure induced by the technology. In contrast, often the most difficult part of an assessment is evaluating the 'significance', or 'importance', of the environmental impact resulting from a particular pressure. In the Workbook a series of basic questions are asked for each environmental pressure:
For wastes and other materials released by the technology into the environment useful guides for 'significance' are the emission and ambient concentration standards prepared by the relevant national regulatory agency, or developed by international bodies such as the World Health Organisation (WHO). These standards provide helpful guidance as to what pollutants are likely to be of concern, and at what concentrations they are likely to be harmful to the human population, and to the environment at large. Any pollutant that is likely to exceed these concentration limits should be considered to produce a significant impact. A more general approach is to assess the different
characteristics of a potential impact. To do this it is useful to ask the
following questions:
Answering each of the preceding questions, even in a qualitative manner, will provide an indication of the severity of the impact and provide an initial basis for comparing impacts. 2.14 Assessing Economic Viability This part of the assessment is designed to prevent the environmental and related damage that may occur if a technology intervention fails to meet its goals because of poor economic performance. The life cycle costs approach is used as it brings attention to the consequences of providing inadequate financial resources for design and development, and for decommissioning costs. Failure to do so may lead to poor environmental performance during the technology's lifetime, and high environmental costs due to shortcomings in the decommissioning of the technology. It should be borne in mind that any new technology needs to be profitable as soon as possible, if it is to be sustainable. An environmentally acceptable and economically viable technology will also have relatively small decommissioning costs. The level of assessment of economic viability appropriate to an EnTA intentionally falls far short of a formal cost-benefit or other economic assessment. Rather, it is intended to provide indicative information that will help determine if the proposed technology intervention is economically viable. The results may also suggest that a more detailed economic analysis would be appropriate. The assessment of economic viability undertaken in an EnTA includes an overview of the general economics, explicit consideration of cost elements that would not always be included in a conventional assessment of economic viability, and the highlighting of those cost elements that are subject to significant change under certain conditions and have the potential to determine the profitability of the technology investment. Assessing the General Economics The payback time (PBT) is one of the simplest, but consequently limited, indicators used for assessing the economic performance of a technology investment project. In its simplest form the only information required to estimate the payback time is the total installed costs of the project and the anticipated annual cash flow. The former is simply divided by the latter. Generally a payback time of three years or less is preferred. A worked example is provided in Annex 3. A slightly more realistic estimate of the payback time accommodates year to year variations in the anticipated return from the technology investment. In this case calculating the payback time involves summing the expected annual cash flows for each succeeding year, until the total reaches the cost of the project (see Annex 3). The concept of payback time has two major limitations - it ignores any benefits that occur after the payback period and it also ignores the time value of money. This latter problem can be overcome by using another indicator of economic performance, the internal rate of return (IRR). The internal rate of return is based on the concept of the present value (PV) of future costs and income. The present value is the future value of a cost or income, adjusted by the interest rate that is anticipated to prevail over the period of time involved. The interest rate used in the calculation is more commonly referred to as the "discount rate", for it describes the rate by which the future value of costs and income will be reduced (i.e. "discounted") relative to their present value. The formula for calculating the present value is provided in Annex 3, along with a worked example. The internal rate of return is the discount rate which results in the present value of a series of investments being equal to the present value of the returns on those investments. In other words, the internal rate of return is the discount rate which results in the net present value of the investments and returns, made at given times into the future, taking on a value of zero. Determining the internal rate of return involves estimating the time-value of the investments (i.e. costs) and returns (i.e. income). Therefore the temporal sequence of these is important. In general there is no direct way to calculate the internal rate of return; it must be found iteratively by estimating an initial value and using it to calculate the net present value. The value for the internal rate of return is revised and the calculation repeated, as necessary, until the net present value is effectively zero. An example calculation of the internal rate of return is also provided in Annex 3. It is possible to expedite the calculation by using a spreadsheet, financial calculator or computer software capable of calculating values of the internal rate of return. Knowledge of the internal rate of return allows comparison of investment performances over comparable, fixed time periods. For example, if the internal rate of return for a planned technology intervention is 12%, while the prevailing interest rate is 7%, investing in the technology represents a better investment. However, this conclusion ignores the complicating factor of risk - investments that offer a better payback generally carry a greater risk that the assumed future income will not be paid. The internal rate of return shows how much caution will cost, or how much is to be gained if some risk is accepted. Consideration of Externalities In conventional economic assessments, such as the simple indicators described above, significant cost elements may not be included. These are referred to as "uninternalized costs elements" or "externalities". Examples of such unpaid costs include the use of ecosystem and other environmental services as inputs and for waste disposal and aesthetic benefit. Other unpaid costs may arise from uncompensated adverse impacts on the individuals, communities and, in some instances, the global population. Explicit consideration of such costs, which is referred to as "internalizing" the uninternalized cost elements, is hampered by the fact that it is exceedingly difficult, if not impossible, to place a monetary value on many external costs. Given the aim of EnTA, it is impractical to place a monetary value on most if not all of the environmental, social and other externalities. Where it is possible, these additional costs should be included in calculating the indicators used in the general economic assessment. When it is not possible in the context of EnTA, internalizing the uninternalized cost elements is best left to a more comprehensive cost-benefit analysis, should one be necessary. However, in an EnTA every effort should be made to identify and characterize in qualitative terms any uninternalized costs that might compromise the environmental and economic performances of the proposed technology investment. Externalities can arise at any stage of the life cycle of the technology intervention. Special attention should be paid to externalities that might arise during the planning, commissioning and decommissioning of the technology. Highlighting Critical Cost Elements Some technology interventions have cost elements that are subject to significant change (i.e. "volatility") under certain conditions. These often have the ability to determine the economic viability of a technology investment by causing large swings in production costs, including those external costs discussed above. An EnTA should identify these cost elements, and be able to assess whether the viability of the technology would be compromised by plausible, even if unlikely, changes in these production costs. For example, in the case of lead acid battery recycling, scrap batteries account for about 60% of production costs. In other processes, energy or labour might be significant cost factors. All three costs are potentially volatile, and careful consideration should be given to assessing the viability of any technology investment where such cost elements are dominant.
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