Managing environmental costs is a critical area where managers apply life-cycle costing and value engineering. Environmental laws like the U.S. Clean Air Act and the U.S. Superfund Amendment and Reauthorization Act have introduced tougher environmental standards, imposed stringent cleanup requirements, and introduced severe penalties for polluting the air and contaminating subsurface soil and groundwater. In some countries, such as Sweden, the government levies a carbon tax, a fee or surcharge on carbon-based fuels and other sources of pollution. A carbon tax puts a monetary price on greenhouse gas emissions. Other regions such as the European Union use a cap-and-trade system, where the government puts a limit or cap on the overall level of carbon pollution and conducts a market auction for pollution quotas. Companies pay for the right to pollute and can then either sell (or buy) these rights to (or from) other companies if they pollute less (or more) than their quotas.
Environmental costs that are incurred over several years of the product’s life cycle are often locked in at the product- and process-design stage. To avoid environmental liabilities, reduce carbon taxes, or the cost of buying pollution quotas, managers in industries such as oil refining, chemical processing, and automobile manufacturing value engineer and design products and processes to prevent and reduce pollution over the product’s life cycle. In the computer industry, laptop manufacturers like Hewlett-Packard and Apple have introduced recycling programs to ensure that chemicals from nickel-cadmium batteries do not leak hazardous chemicals into the soil. The carbon tax has spurred innovation in the design of energy-efficient products and clean energy solutions, such as solar and wind power.*
What is the effect of sustainability investments on overall financial performance in subsequent periods? A new organization, the Sustainability Accounting Standards Board has begun defining standards for environmental, social, and governance (ESG) performance for different industries. The relevant (or material) ESG standards vary across industries based on financial impact and interest of user groups. For example, the relevant ESG standards in the oil and gas industry include greenhouse gas emissions and water and wastewater management, while the relevant ESG standards in the technology and communications industry include life-cycle impacts of products and services and energy management. When measured over multiple periods, companies that have higher relevant ESG ratings have higher future profitability and financial performance, perhaps because of customer loyalty and satisfaction, employee engagement, or brand and reputation.*