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The economics of resource recovery : the case of lubrication oil King, Janice Ilene Norman 1981

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THE ECONOMICS OF RESOURCE RECOVERY: THE CASE OF LUBRICATION OIL by JANICE ILENE NORMAN KING B.Comm., The University of British Columbia, 1977 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE MASTER OF ARTS in The Faculty of Graduate Studies School of Community and Regional planning We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA October, 1981 (c) J a n i c e I l e n e Norman King, 1981 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make i t freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. School of Community and Regional Planning, The University of British Columbia, 2075 Westbrook Place, Vancouver, B. C , Canada V6T 1W5 Date o ^ T c 6 e « /L JIZ-I /Abstract Environmental concern and the possibility of energy shortages have drawn attention to means for recovering material and energy resources from waste products. The focus of this thesis is on the application of cost-benefit analysis as a methodological technique for evaluating the economics of resource recovery: namely used lubrication o i l . The study i n i t i a l l y focuses on the general concern of the economics of resource recovery. This i s undertaken primarily by a review of existing literature. An investigation of cost-benefit analysis as advanced by Pearce, pearce and Dasgupta, Canadian Treasury Board Secretariat, Winch, Nath, Anderson, and Settle, to name a few, reveal a comprehensive and systematic framework for the evaluation of public investment alternatives. Items for inclusion in the analysis are a l l costs and benefits to every member of, a defined society whose welfare would be affected by the project i f implemented. Many goods and services do not enter into the market system, causing d i f f i c u l t y in deriving monetary values for some of the components, especially environmental concerns. For example, the case study reveals two areas: 1) benefit of pollution abatement stemming from resource recovery of used lubrication o i l , and 2) costs associated with the improper disposal of the waste products from the recycling process of used lubrication o i l . An attempt is made to apply the cost-benefit framework to the case of lubrication o i l recycling in the province of British Columbia. Adequate quantitative data were not available, particularly on the social costs and benefits, to fu l l y employ the cost-benefit technique, therefore restricting the analysis in that only an identification of costs and benefits was prepared. When quantification of costs and benefits i s not possible, a detailed description of the unquantifiable items indicates to the decision maker the extent of the components. Included in this study i s a presentation of the environmental impacts of used o i l disposal. The limitations of the cost-benefit analysis as an evaluation technique arise because of limited information and data needed to evaluate, in monetary terms, environmental improvement. Future i v . research could involve a "simulation" of the market to determine a plausible shadow price that gives an indication of what the market price of the item would have been i f i t had been normally traded. A determination of the price that consumers would be willing to pay for the benefits of pollution control with the knowledge that some pollution would be produced by the recycling activity would aid the analyst in placing values on the costs and benefits. TABLE OF CONTENTS Pages Abstract CHAPTER 1 - Introduction I. Introduction 1 II. Economics of Resource Recovery 1 III. Objectives 3 IV. Concept of Benefit - Cost Analysis 4 V. Used Lubrication O i l Studies 4 VI. Summary 6 CHAPTER 2 - The Economics of Resource Recovery I. Introduction 8 II. The Solid Waste Problem 9 III. Theory of Externalities - 11 IV. Environmental Policy objective 13 V. Optimal Pollution Level 13 VI. Summary 24 CHAPTER 3 - Cost - Benefit Analysis I. Introduction 26 II. Benefits 27 III. Costs 35 IV. Discount Rate 37 V. Uncertainty and Risk 42 VI. Distributional Considerations 46 VII. Limitations of Cost - Benefit Analysis 49 v i . CHAPTER 4 - Case Study - Lubrication Oil I. Introduction 52 II. Waste Oil Inventory 52 III. Environmental Effects of Used Oil 56 IV. Identification of Benefits 60 V. Identification of Costs 63 VI. Summary 70 CHAPTER 5 - Conclusions I. Introduction 73 II. Economics of Resource Recovery 73 III. Benefit - Cost Analysis and the Case Study 74 IV. Suggestions for Further Research 77 BIBLIOGRAPHY 83 v i i . . LIST OF TABLES Page I. Toxicity of Some Compounds Found in Used Oil 68 II. Metal Content of Acid Sludge 69 v i i i . LIST OF FIGURES Pages 1. Total Cost of Pollution 15 2. Private and Social Optimal Recycling Ratio 18 3. Total Tax on Pollution 21 4. Pollution Tax and Recycling 23 5. Demand for a Private Good 29 6. Total Benefits for Large Projects 32 7. Total Demand for a Public Good 34 8. The Effect of Discount Rate Changes on the Magnitude 41 of Net Present value 9. Waste Oil Inventory 54 10. Used O i l Disposal Practice 57 11. Assumptions for Further Research 79 1. CHAPTER 1 I. Introduction Interest in resource recovery has been growing recently in response to the potential environmental damage due to improper disposal of wastes and the continuing prospects of energy shortages. One of the resources with which society should appropriately be concerned is lubricating o i l . Used lubricating o i l can be recycled in order to (1) conserve petroleum -a non-renewable resource and (2) protect the environment. Large quantities of used automotive and transportation lubricants and industrial o i l s are currently discarded or re-used in ways that may cause human and natural environment hazards while f a i l i n g to u t i l i z e either the energy potential or lubricative capacity which remains in the o i l . II. Economics of Resource Recovery The decision to recycle i s primarily governed by economic conditions. An economic evaluation of recycling activity involves 2. an identification and assessment of the costs and benefits. Project acceptance is based on a evaluation which shows that a project's expected benefits be in excess of estimated costs. The existing literature on the economics of resource recovery is largely general in nature. The economics of waste paper recycling has been examined by Turner, Grace and pearce (1977) . Spofford (1971) has reviewed briefly paper residuals, returnable vs. non-returnable containers, and municipal composting. The economics of the recovery of materials from industrial waste has been presented by Bridgwater (1975) , while Abert, Alter and Bernheisel (1974) have examined the economics of resource recovery from municipal solid waste. Even though past research has dealt with the economics of resource recovery of particular commodities, attention has not been placed on the specific costs and benefits of the activity. In the case of used lubrication o i l , research has examined the market economics of lube o i l re-refining per se; however, l i t t l e attention has been paid to the social costs and benefits. Mascetti and White (1978) present an assessment of the economics of producing re-refined o i l , using figures for the investment requirements and lube 3. o i l manufacturing costs as they pertain to seven re-refinery processes. There i s no mention of the social costs and benefits attributable to lube o i l re-refining. In consideration of the research, this thesis w i l l attempt to examine the economics of resource recovery; namely, the examination of overall costs and benefits of lubrication o i l re-refining. I l l . Objectives The three objectives of this study are: 1) to investigate the economics of resource recovery 2) to present the concept of cost/benefit analysis relevant to a resource recovery project 3) to assess the potential of this technique for environmental policy planning in a case study of used lubrication o i l in the Province of British Columbia. The study w i l l develop and assess cost/benefit analysis as i t pertains to planning in environmental management. The concept of cost/benefit i s straightforward but, i t s application to the recovery of used lubrication o i l i s complicated by the lack of 4. published data required to quantify the costs and benefits. The analysis presented herein is based on a case study of used lubrication o i l in the province of British Columbia. IV. Concept of Benefit-Cost Analysis Benefit-cost analysis is one economic methodology frequently used by government agencies to enhance decision making processes. Such analysis considers a l l the expected social costs and benefits over a project's lifetime in order to calculate the discounted net social benefit. In this study, the technique i s used to identify the costs and benefits pertaining to the recovery of used lubrication o i l . The Province of British Columbia was chosen as the geographic frame for the study. The technique as applied herein provides a systematic and quantitative approach for identifying the major costs and benefits relevant to the issue of resource recovery of used lubrication o i l . V. Used Lubrication Oil Studies Some of the data found in this thesis were extracted from two 5. relatively exhaustive studies of used lubrication o i l funded by research grants from the Department of Energy, Mines and Resources, Ottawa. These studies were conducted jointly by the Department of C i v i l Engineering and the School of Community and Regional Planning at the University of British Columbia during the summer of 1979 and the spring/summer of 1980. The studies are entitled: Used Oil Practices and Disposal Methods by the Do-It-Yourself Oil  Changer in the Greater Vancouver Area by J.I.N. King and W.K. Oldham, and Used Oil Inventory for the province of British  Columbia by J.I.N. King. Contents of the studies include: - present used o i l disposal practices in British Columbia - environmental impacts of used o i l disposal - lubricating o i l inventory for British Columbia - volume of potentially recoverable lubrication o i l The purpose of the studies was to determine lubrication o i l volumes and used o i l disposal practices in Br i t i s h Columbia. Volumes of potentially recoverable lubrication o i l are calculated, with user surveys forming part of the data base. 6. A consideration apart from the volume of used o i l collected i s that of the end use of the o i l . Many methods of disposal or re-use of used o i l create risks of polluting a i r , water, or s o i l . The hazards created by discharge into the environment vary depending upon the quantity of used o i l discharged, the means of disposal, and the type of impurities contained in the o i l . With regard to the latter point, road o i l i n g , for example, deposits lead and other heavy residues. Industrial use of oil-derived fuels i s of concern due to the possibility of high ash and metallic constituents in used crankcase o i l resulting in fine particle emissions of potentially harmful materials upon combustion. Oil re-refining also may cause environmental degradation with improper disposal of waste products. VI. Summary As indicated above, there are many known sources of pollution stemming from the disposal or re-use of used lubrication o i l . Benefit-cost analysis provides the analyst with a technique for identifying the costs and benefits associated with the recovery 7. of used lubrication o i l , in that a reduced level of pollution (i.e. net social benefit) i s anticipated from the activity. 8. CHAPTER 2 I. Introduction Millions of pounds of potentially valuable resources are discarded every year in urban and industrial wastes. Concern for environmental protection and resource conservation has drawn attention to possible means for recovering materials and energy resources from waste products. It has been cited that "our economic system recycles insufficiently to spare us the consequences of solid waste pollution and resource exhaustion" (Carlsen, 1973; 653). Recycling tends to be considered only when other courses of action are obviously unsatisfactory, either because of a shortage of natural raw materials or because of environmental considerations (Barton, 1979; 13). Recycling is not an end in i t s e l f , but must be economically and ecologically defensible (pearce and Walter, 1977; 31). At present, narrow economic considerations are the major criterion of recycling f e a s i b i l i t y (Clark, 1971; Henstock, 1976; Bridgwater, 1975). In the past, the ava i l a b i l i t y of raw materials at a price comparable to, or lower than a recyled product constrained the level of activity in resource recovery. Many recovery methods have 9. been proposed but then rejected on economic grounds. It has generally been cheaper to dump the wastes and pollute water and the atmosphere, than to process them (Barton, 1979; 22) . However, the trend i s changing as the high cost of materials and of environmental damage associated with increased residuals has become evident (Walter, 1975; 31). II. The Solid Waste Problem Private enterprise has not recycled to the technological limit in the past. The reason for this i s two-fold. F i r s t , in the past relatively cheap virgin resources were available; for example, petroleum. Secondly, society has not been faced with the f u l l costs of production and consumption attributable to waste disposal. The collection of municipal refuse for example, is funded from general municipal taxes and not on an individual basis. Hence, there has been no reason for the individual to decrease the level of refuse. With increased amounts of waste generation due to economic growth, there i s demand placed on land requirements for disposal. Pearce (1976) and Georgescu-Roegen (1975) present the case 10. that the environment can recycle few waste elements by a "natural" process, and they stress the need to tailor the disposal of wastes to the receiving capacity of the environment. Thus, the solid waste problem, in part, stems from the environment's inadequate capacity to absorb growing waste loads. In particular, there seems to be an inadequate cheap supply of land for disposal, despite the fact that over 80 percent of the population is spatially concentrated in urban areas (Goddard, 1975; 4) . Increased spatial competition has been cited as an inflationary factor to land prices, thus magnifying the opportunity costs of u t i l i z i n g land for waste disposal (Carlsen, 1973; 60). Population density and material a f f l u -ence have combined both to increase the magnitude of the waste disposal problem and the public's perception of the environmental pollution accom-panying many disposal methods. Heightened public concern has re-sulted in more public expenditures as well as more public regulation in the area of waste management (McFarland, 1972; 11). Hence, the solid waste problem is one of supply and demand. It results from an imbalance between the economic supply of and disposal mechanism for waste materials, and from a 11. divergence between the value to consumers of an additional unit of waste generation and the costs of managing that waste (collection and disposal). The problem can further be defined as an excess supply of waste materials resulting from a mismatch between costs and benefits of material use in general, and/or generating and managing waste materials in particular (Goddard, 1975; 4). Increased production and consumption of commodities have resulted in ever increasing quantities of wastes. A direct consequence of the volumes of industrial and urban wastes i s the increasing public expenditure on finding solutions to handle wastes. The potential threat to the environment is documented as a major reason for analyzing the impact of resource recovery on lessening the quantities of residuals and wastes (Walter and Maltezou, 1974; Henstock, 1976; Pearce, 1976; Spofford, 1971; Barton, 1979; Goddard, 1976) . III. Theory of Externalities It i s a fundamental principle of economic theory that the free operation of perfectly competitive markets w i l l lead to an efficient allocation of resources in the absence of externalities 1 (Dewees et a l , 1975; 7) , public goods and decreasing returns to scale. Thus when prices f a l l , quantity demanded increases and conversely when prices rise, activity demanded f a l l s to bring the economy back into equilibrium. As Dewees explains, a principal cause of environmental degradation i s the failure of the market system to account f u l l y for environmental quality. The private firm rarely evaluates the damages associated with the impacts of i t s activity on the quality of the environment, whereas, society as a whole (in theory), certainly would. In the private sector of the economy, decision makers are intent on profit maximization, ignoring such external consequences, since they are not reflected in the market prices of their transactions. From the private firm's point of view, market prices reflect " a l l " i t s costs and benefits. However, from society's point of view, market prices generally do not capture a l l the relevant social costs and benefits, especially where the allocation of public goods - such as the atmosphere, water and land - are involved. 1. An externality arises when an economic activity performed by one person generates an effect, beneficial or otherwise, on some other person who i s not party to the activity (Winch, 1971; 123). IV. Environmental Policy Objective The causes of environmental pollution have created pollution levels which are greater than that which i s socially desirable. Scott and Graham (1972: 54) define pollution as "the impairment of the quality of water, s o i l or a i r , so that the enjoyment of subsequent use by others i s reduced and prevented." This thesis defines the solution to the environmental problem in terms of a single criterion: maximizing social welfare. The objective of maximizing social welfare i s to achieve a pollution control level such that any further control would impose abatement costs greater than the savings in pollution damage or welfare benefits that would result (Dewees et a l , 1975; 16). V. Optimal Pollution Level Social welfare is maximized when pollution is controlled until the point at which the marginal costs to the polluter of further control i s just equal to the marginal social damage costs of further emissions. In short, the optimal pollution level i s that 14. at which the marginal benefits of further emission control just equals the marginal costs of that control. If monetary values for a l l "costs of control" and "benefits of control" can be estimated for each different pollution level, they could be represented in curves such as those presented in Figure 1. As the level of pollution rises , the cost of pollution (curve CP) w i l l begin rising and continue rising at an increasing rate. The cost of control curve (cc) represents the levels of pollution in the presence of controls. To reduce pollution below point b, costs w i l l increase. The control curve eventually becomes vertical at a level of pollution where further expenditure i s incapable of reducing pollution. The optimal pollution level -p* - i s the point where the costs of pollution and the costs of control are equalized. Goddard (1975; 84) presents two reasons for the rate of resource re-use to be below the optimal re-use ratio: (1) unpriced resources i.e. no specific price attached to collection and disposal services; (2) uncontrolled externalities e.g. pollution. A rate of resource re-use below the optimal re-use ratio occurs 1 5 . TOTAL COSTS OF POLLUTION because existing recycling activity i s based on the private sector decision of profit maximization, which ignores social costs of waste disposal. Consequently, where externalities occur, the private market optimum does not conform to the social optimum. When the private sector evaluates the economic f e a s i b i l i t y of recycling a c t i v i t i e s , the decision is based on the difference between the cost to the firm of using virgin materials and the cost to the firm of using recycled materials. Other factors to be examined are the a v a i l a b i l i t y of a consistent supply of residuals of a specified quality and quantity, plus processing and/or reprocessing technology. What the private decision ignores are the social costs and benefits associated with recycling. The social benefits include: (1) reduction in pollution due to the decrease in residuals disposed of directly into the environment, (2) extension in the raw resource l i f e , (3) reduction in public costs associated with land disposal, releasing land for alternative social uses. Because of the above, the optimum level of recycling i s generally greater than the actual level. However, the pollution 17. associated with recycling effort must not be ignored. "We must therefore watch our step so as not to substitute a greater but distant pollution for a local one" (Georgescu-Roegen, 1975; 171). It should not be overlooked that recycling processes can have their own environmental impacts, even to the extent that the net result is the reverse of that intended (Barton, 1979; 23). A hypothetical analysis i s shown in Figure 2, where i t i s illustrated that the private and the social optima do not coincide. The socially optimal re-use rate (r soc) is where a l l social costs, are minimized. Whereas, the private optimal re-use rate (r priv) i s where the marginal cost of employing reclaimed resources in the production process is just equal to the marginal reduction in costs of using virgin materials. The private and socially optimal recycling rates do not necessarily coincide although they could be made to do so were the recycling technologies themselves more polluting than was the disposal of wastes from the manufacturing process employing virgin materials (Henstock, 1976; 711). The private objective i s , given an unchanged level of revenue, to minimize the total cost of resources - i . e . to minimize TOTAL GROSS BENEFITS p r i v a t e optimum FIGURE 2 PRIVATE AND SOCIAL OPTIMAL RECYCLING RATES SOURCE:Henstock,1976;711 Pearce,1976;174. C=TCv(X) + TCr (X) where TCv and TCr are the total costs of virgin and recycled resources respectively. Labour costs are included in T C V (X) and TC ^ (X) . The social objective is to minimize S = TCv(X) + TCr(X) + TECp,e(X) + TECp,v(X) + TECp,r(X) - BERL(X) - L(X) where TECp,e is the total external cost associated with individual manufacturing firm ; TECp,v i s the total external cost of pollution from the use of virgin materials; TECp,r i s the total external cost of pollution from the recycling process; and BERL and L are the present values of gains in the resource l i f e and in land respectively. Disposal costs are included in TCv and TCr. The above discussion is taken, in part, from Henstock (1976) and Pearce (1976). An activity (recycling) generating social benefitis (pollution reduction) w i l l not take place on an optimal scale i f those benefits are not appropriated via the charging of a price (pearce, 1976; 320). To-day's prices generally do not reflect a l l the 20. social costs associated with residuals generation and disposal, although with the current emphasis on air and water quality standards, prices are starting to include at least a portion of these costs (Spofford, 1971; 571). In many cases, a fee is imposed on the producer for his use of the environment's assimilative capacity, as a factor input to his production process. One way to achieve a more efficient allocation of a i r , water and land resources is to place the cost of the "externalities" (by means of a charge or tax) on those who discharge the residuals. If a fee were imposed on residuals discharged to the environment, relative prices of factor inputs to production would sh i f t and process changes and/or re-use might well be stimulated (Spofford, 1971; 571). Imposing this "effluent charge" would tend to induce alternative combinations of raw material inputs, production processes, types of product outputs, materials re-use, and residuals handling, modification and disposal. pearce (1979) presents this issue. The imposition of a tax, T, in that T = T E C p r V + T E C P / R w i l l raise the level of recycling to the social optimum. Figure 3 r * RECYCLING RATIO — ^ FIGURE 3 TOTAL TAX ON POLLUTION SOURCE:Pearce i n Marquand,1974 illustrates the effect of a tax for the arb i t r a r i l y chosen recycling rate, r*. The cost of the "externalities" are equal to TEC ^ (r = o to r = r*) and TEC J r = r* to r = 1) and thus P,R* P,V* the tax is equal to the sum of these. Figure 4 presents the implication of a tax on an imperfectly competitive market, where D = demand curve MR = marginal revenue curve MC^  = margin cost of virgin materials to the firm MC = marginal cost of using recyled inputs R MC. = summation of MCV and MCf*. 3 The firm's objective in the analysis is to maximize profits. Profit maximization is at point F where output equals X^  . The marginal cost to the firm (MC.. ) at point X p (or point F on the MC _. curve) , equals 0P V = GS for virgin materials plus OPR = GC for recycled materials. The price at Xp would be equal to the distance OG in Figure 4. It is assumed that there are external costs associated with the use of virgin materials and none with the use of recycling inputs. Thus, MSC vequals marginal externality associated with the use of virgin materials and MSC- equals 23. P,C FIUGRE 4 POLLUTION TAX AND RECYCLING SOURCE:Pearce i n Marquand,1974 marginal cost of using virgin and recycled materials (allowing for an external cost of using virgin materials). The joint marginal social cost curve (MSC ) of using virgin and recycled inputs at J point X , is determined by summating OS = G'A and OS = G'D. S V R The imposition of a tax equal to the total external cost w i l l secure x , the social optimal output level . The tax, effects a s lower output for the private firm, X , thereby changing the s recycling ratio. The pollution tax changes the input levels to OS for recycled and OS for virgin inputs to achieve the social R V optimum level. The new price level, at X , is equal to 03" in S Figure 4. The analysis illustrates that the imposition of a pollution tax, in the instance of external costs associated with the use of virgin materials, adjusts the firm's level of output, and also alters the level of recycling activity. VI. Summary Population growth and natural resource exploitation have combined both to increase the magnitude of the waste disposal problem and society's perception of the environmental pollution which accompanies waste disposal. This concern has drawn attention to resource recovery. The decision to recover resources from solid wastes is based primarily on economics. Consequently, i t is important to investigate the costs and benefits associated with recycling. 26. CHAPTER 3 I. Introduction Interest in resource recovery projects has increased dramatically in the past few years. Concern is place on the benefits attributable to resource recovery. Herein l i e s the problem: that of deciding on the desirability of specific recovery projects. Benefit-cost analysis is a tool that can be used to assist in such decisions. It consists of the systematic assessment of the direct and indirect, tangible and intangible, benefits and costs of a project to determine economic f e a s i b i l i t y (Auld, 1972; 53) . The basic criterion of benefit-cost analysis is to maximize social benefits net of costs. The analysis is used to establish what the general welfare of society would be with and without a proposed project in order to establish what additional benefits and costs i t generates. In theory, items for inclusion in the analysis are a l l the gains and losses of every member of society whose well-being would be affected by the project i f implemented (Lichfield, Kettle, Whitbread, 1975; 58). In general, a project is worthy of being undertaken whenever the present value of the associated stream of net benefits from a project (discounted at the appropriate social rate of discount) i s greater than the present value of the costs (Davidson, 1967; 345) . II. Benefits Benefits encompass those consequences of policy that increase welfare. Freeman (1979; 3) defines the benefit of an environmental improvement as the sum of the monetary values assigned to these effects by a l l individuals directly or indirectly affected by that action. The existence of externalities means that not a l l costs w i l l be included in market-price transactions. Generally, market prices w i l l not include a l l benefits since such externalities are not usually included (Pearce, 1978; Spofford, 1971; Anderson and Lee, 1977; Winch, 1971). A common reason for this i s the failure of the private market system to allocate e f f i c i e n t l y common property rights in economic goods such as clean air and unpolluted water (Spofford, 1971; 568 and pearce, 1971; 54). 28. In the absence of a market price, one requires a judgment about value. It i s not enough, however, to demonstrate that such externalities exist. Some measurement, however imperfect, about the magnitude of these externalities i s essential (Pearce, 1976; 110) . The objective of cost-benefit analysis i s to guide the decision maker in the choice of capital projects and expenditures which w i l l maximize the gains to social welfare. Social welfare has been related to some aggregation of individuals' preferences, and these in turn are represented by the individuals' willingness to pay for commodities. Market prices of a commodity are used as a measure of benefits although substantial modifications have to be made to allow for market imperfections and for situations in which no markets exist for the product of the project i.e. outdoor recreational services. Figure 5 w i l l illustrate the case in point. Market demand prices for output are derived by a summation of the individual demand curves such as 6^  and d, to obtain the market demand curve. As indicated, P ^ i s the market demand prices associated with output . The total revenue, or effective payment FIGURE 5 DEMAND FOR A PRIVATE GOOD SOURCE:Davidson(1967) i n Dorfman and Dorfman 30. for the good, that individuals would pay for would, in a competitive market, be equal to the rectangle OP AQ . It is not, 1 1 however, a measure of their willingness to pay (WTP) and hence of their true preference for the good. It is usual to approximate the willingness to pay by adding to the effective payment, the consumer surplus (or S) polygon p^  DA. The argument i s that there are some consumers who would have paid more than P^  for the product. The total willingness to pay is therefore illustrated by the area ODBAQ^in Figure 5, so that Total WTP = P r Qj+ S i.e. the total WTP for any good is equal to the purchase price multiplied by the amount purchased, plus the consumer surplus (S). A consumer surplus i s the excess of consumer's willingness to pay for a good or service over and above i t s market price. In the case of Figure 5, the market price of the benefits would underestimate total benefits unless the consumer surplus i s equal to zero. That i s , persons who are not direct beneficiaries of a project obtain some "overspill" benefit or u t i l i t y from a good or service for 3 1 . which they have not paid. A consumer surplus that i s equal to zero would be relevant only i f a government project would not provide a significant change in the total output of a.particular market. If a large government project i s undertaken, the effect w i l l be to increase supply sufficiently to drive down market price, and therefore to change the willingness to pay. The benefits, or willingness to pay would equal the area under the demand curve between A and A^  in Figure 6. From Figure 6, i t i s illustrated that the change in output i s equal to c^Q^A-A. Thus, the change in willingness to pay becomes Total gain to the general welfare of society would be estimated by summating and discounting benefits (as illustrated by the relevant area under the demand curves) for each time period over the l i f e of the project. In reality, however, such integrations are rarely performed since we rarely have s u f f i -cient information and the typical case i s that the discounted expected market price is used as a valuation of the future stream of benefits. This generally leads to a FIGURE 6 TOTAL BENEFITS FOR LARGE PROJECT SOURCE:Davidson(1967) i n Dorfman and Dorfman downward bias in our estimate of benefits. (Davidson, 1967; 348). The valuation of benefits for public projects i s complicated by the lack of an efficient market demand price. Since a public good i s , by definition, a good that can be consumed by one individual without reducing other individuals* p o s s i b i l i t i e s of consuming that good (Bohm, 1973; 32) , the total demand for a public good involves a vertical addition of the individual demand curves (that i s , a summation of consumer surpluses). As discussed earlier in this section, the total demand for a private good i s a horizontal summation of individual demand curves, where the consumption of one individual leaves less for others at a given supply. The total demand for a public good i s illustrated in Figure 7. To compete in the p o l i t i c a l market place cost-benefit analysis has adopted the guise of simulating the market demand price -a shadow price measuring how much consumers would be willing to pay i f the good was marketable -even for public goods, where the investigator knows that no efficient market price can exist (Davidson, 1967; 355). The problem of getting consumers to reveal their true willingness to pay for a public good i s a serious one . H QUANTITY FIGURE 7 TOTAL DEMAND FOR A PUBLIC GOOD SOURCE:Bohm(1973) and Davidson(1967) More often than not, a consumer will underestimate willingness to pay, fearing he himself will have to pay for the good. Or conversely, a consumer could exaggerate demand in the case where he believes that an increase in production will not cause him monetary loss. In the presence of these concerns, Davidson (1967; 355) expounds "that there is no acceptable substitute for informed value judgments in the evaluation of benefits of public goods." III. Costs Costs are normally taken to be the opportunity costs or supply prices at full employment of inputs (Davidson, 1967; 346). Social costs can be thought of as the real opportunity costs2 of alternative actions (McFarland, 1972; 10). The social costs include a l l the costs borne by firms (private costs); the costs borne by society including disposal or reclamation (transportation, reprocessing, etc.) and the costs that tend not to be reflected in markets (e.g. pollution costs) (Walter,, 1976; 320). These costs include the expenditures needed to render the polluted resource f i t for use, the expenditures made to avoid pollution effects, plus the ~ A opportunity cost is the value,(benefits) foregone in one use ecause scarce resources are employed in another. damages inflicted upon society by the wastes themselves (Auld, 1972; 8) If a private firm decided to introduce a resource recovery f a c i l i t y to recycle o i l , for example, concern would be to maximize profit. The costs of increased pollution due to the introduction of the f a c i l i t y would not be borne by the firm but rather by a third party (society) and do not enter the firm's cost functions. What the firm f a i l s to take into account are 'external' effects -e.g. air and water pollution -which are possible by-products of the recovery process. The establishment of social net benefit as the objective function requires that the price attached to the costs reflect society's valuation of the f i n a l goods and resource involved. The costs must include shadow prices which w i l l reflect the social opportunity cost associated with using the resource in the proposed project. Shadow prices should relfect marginal social cost rather than marginal private cost. Divergences between private and social costs may be attributable to market failure. Instances of market failure have provided traditional justifications for the provision of public services (Canadian Treasury Board Secretariat, 1976; 37. 13). Shadow prices simulate what users would pay for the services of these outputs i f a market was present and the goods were sold in a perfectly competitive market. Diffi c u l t y arises in the valuation of shadow prices from government projects. An example is in the valuation of collective-consumption goods, such as defense and the legal system. The p o l i t i c a l system determines the required payment in the form of taxes for the support of such services. Clearly there is no one figure for the social cost of any item that can be proved to be correct. This is due to the fact that social costs are based on ethical judgements. In each case, i t appears that a mixture of value judgements and empirical research would be needed to resolve the issue, there being no alternative but a case-by-case approach (pearce, 1978; 29). IV. Discount Rate Since most projects have future costs and future revenues, the net benefits for each time period are discounted at a chosen discount rate to yield a net present value (NPV). The sum of each 38. of these values i s the NPV of the project. The choice of the appropriate discount rate w i l l depend upon the anticipated opportunity cost of the capital investment and value judgements (Winch, 1971; 161). The opportunity cost of the project can differ depending on whether the project i s within the government sector or the private sector. If capital i s to be diverted from other government projects and the interest rate of government bonds is representative of the rate of return (ROR) on marginal government expenditure, then the use of that rate w i l l be the opportunity cost of the project. On the other hand, a private sector investment may be financed through the issuance of a bond series, then the interest rate attached to the bond w i l l represent the opportunity cost of capital. One conventional practice i s to use a measure of the opportunity cost of capital in the private sector as a discount rate for public sector a c t i v i t i e s (Anderson and Settle, 1977; 85) . However, i t has been documented that the private opportunity cost is inappropriate for discounting the future effect of government projects (Canadian Treasury Board Secretariat, 1976; 25) . This viewpoint i s held, for individuals are considered to be "myopic" in their consumption and savings decisions. Society does not adequately take into consideration the welfare of future generations, therefore saving less and consuming more. The above reasons have been presented by Anderson and Settle (1977) for using a social discount rate that is lower than the private opportunity cost of capital. There is much controversy over what constitutes the appropriate discount rate (Anderson and Settle, 1977; Pearce, 1971, Bohm, 1973; Canadian Treasury Board Secretariat, 1976). The literature leads to the conclusion that there is uncertainty and a lack of consensus in attempts to determine and establish a social discount rate. Accordingly, the Canadian Treasury Board Secretariat (1976) recommends that the calculation of the net present value of benefits and costs incorporate a range of social discount rates: a social discount rate of 10%, and of 5% and 15% for sensitivity analysis. 3 Hartle (1974; 30) further expounds that the inevitable subjectiveness in choice of a social discount rate provides an 3^  In the light of current interest rates, the discount rate would necessarily rise to accomodate the change in rates for public and private lending and borrowing. A more appropriate discount rate would possibly be 20%, and 25% and 15% for sensitivity analysis. 40. instance where the use of sensitivity analysis may be advisable, to test whether the conclusions of an evaluation are affected greatly by the choice of a particular discount rate. Figure 8 illustrates the effect of discount rate changes on the magnitude of NPV. As the discount rate for the evaluation increases, the NPV decreases. The mathematical expression for the NPV of future income i s : NPV = — X i + _ * 2 — + • • • x n _ x (1+i) ( 1 + i ) 2 ( l + i ) n ° NPV = net present value XQ = i n i t i a l capital X-|y X 2... = positive cash flows in years 1, 2 ... i = discount rate The above formula, illustrates the relationship between the discount rate and NPV. When i = 0, NPV = X + X„+X -X . It is presented in Figure 8 that i f the X's are positive, NPV always FIGURE 8 THE EFFECT OF DISCOUNT RATE CHANGES ON THE MAGNITUDE OF NET PRESENT VALUE falls as discount rates arise. By estimating the net benefits of projects at different levels of discount rates, i t is possible to ascertain the extent to which project outcomes are sensitive to differences in this respect (Bohm, 1973; 110). Costs will typically exceed benefits at first while benefits exceed costs later. Thus, increases in the discount rate reduces the NPV of the future costs and benefits, causing a lower benefit-cost ratio or lower NPV. V. Uncertainty and Risk The establishment of a project's future benefits and costs involves risk and uncertainty. Risks refer to the situations in which information about the probability of an outcome's occurrence is available, whereas uncertainty refers to situations where there is no such information (Anderson and Settle, 1977; 99). Even the most careful estimate of benefits contain inaccuracies because of errors in the measurement of variables and errors in statistical estimation of relationships (Freeman, 1979; 30). Further, much of the data associated with the costs and benefits of a proposed resource recovery facility inherently is not quantified due to the limited knowledge of the relationships. For example, when dealing with the relationship between pollution and quality of li f e , estimates of benefits attributable to reduced levels of pollution from solid waste disposal are not readily available. Therefore judgment must be made on an informed interpretation of the limited literature. It is not always known exactly what damage a pollutant does, exactly what value to at-tach to i t , or exactly how polluters would respond to a given change in costs. In econ-omic terms, we are usually ignorant of the marginal damage cost curve associated with a given pollutant, and whilst individual polluters may know how they would react to change in their control costs, the central authorities of one sort or another, who need to make the decision as to the magnitude of the external costs which should be internal-ized, are usually ignorant of the marginal control cost curve for polluters as a whole and even for the specific pollutors in a spec-i f i c polluters in a specific location (Pearce, 1974; 94) The literature stresses the importance of making allowances for risk and uncertainty. Forecasts regarding the costs and benefits of a project are difficult, and the longer the l i f e of the project, the greater the possibility for uncertainties attached to them. One method to handle risk and uncertainty with regard to a project is to perform sensitivity analysis. Sensitivity analysis would indicate the sensitivity of the cost/benefit model to changes in the discount rate and future estimated benefits and costs, for example. This technique aids in the evaluation of specific assumptions in the analysis. Further, three conventional techniques have been suggested for dealing with risk and uncertainty in cost-benefit analysis (a) adding a risk premium to the 'pure' rate of discount in calculating present value. (b) raising those items of costs or reducing those items of benefits that appear to be uncertain, by a certain percentage. (c) using a project l i f e less than the formal economic l i f e for comparable but relatively riskless projects. A common technique for allowing for uncertainty i s the use of a risk premium. A risk premium involves increasing the discount rate. The justification of this method is to reduce the importance in the analysis of data forecast for the far future (Canadian Treasury Board Secretariat, 1976). However, as Dasgupta and Pearce (1972) explain "what the risk-premium argument implies, for example, is that the extent of underestimation of costs (or overestimation of benefits) involved in a project design increases monotonically with time." In reality, most project future outcome is either better or worse than anticipated. The second type of adjustment is that of applying a premium or a discount on estimated costs and benefits. In many cases, approximations of, or minimum/maximum limits to, the true value of project effects may be quite sufficient for reaching a decision as to whether the project should be accepted or not (Bohm, 1973; 116) • The third alternative i s that of reducing the project's l i f e . The method has the effect of withdrawing the later year's benefits and costs and reducing the time period within which the project i s to break/even. When cost-benefit analysis for a project is undertaken in a systematic manner with relative certainty, the above three adjustment techniques are not necessary (pearce & Dasgupta, 1972; 196). The adjustments could unduly alter the decision-makers' choice regarding a proposed government project. Alternatively, the benefit/cost analysis could include estimates of anticipated outcomes that might arise i f circumstances alter (Rivlin, 1972; 19). This information provides the analysis with data to highlight the sensitivity of the results to various decision makers, and on how and what to avoid once the project has begun. VI. Distributional Considerations Benefit-cost analysis focuses on the economic efficiency of government projects; that i s , on the identification and quantification of real benefits and costs of such a c t i v i t i e s . The basis of the efficiency criterion states that the gains of the project allow for potential compensation to the "losers" and s t i l l leave a net increase in the value of the production to society. Decision makers are not concerned solely with efficiency in resource allocation, but also with the equity or redistribution aspect of policies. Thus, in addition to providing information on benefits, information on who is being affected by environmental pollution and who w i l l benefit from environmental improvements i s necessary. Some of the most familiar classifications used in the analysis of distributional considerations are income, age, region, occupation and sex. However, i t is extremely d i f f i c u l t and costly to perform the estimation of the distributional effects of benefits and costs attributable to a project. For example, a matrix describing the distributional effects of a project affecting ten age groups, five regions and fifteen occupations would require numerous data. Further, i t s effects in decision making, i f a l l the cell s were f i l l e d , would be negligible for i t would be d i f f i c u l t to interpret. Consequently, while distributional effects may be of considerable interest, the cost of identifying and measuring such effects and the problems associated with transmitting highly detailed information suggest the analyst should normally work with relatively broad classifications (Anderson and Settle, 1977; 107) . It is common for distributional assessments to be limited to simply identifying whether particular groups are gainers or losers, with no serious effort being made to measure the magnitude of a program's distributional consequences (Anderson and Settle, 1977; 103) . The integration of the distributional effects into the benefit-cost analysis can be undertaken by a change in the discount rate. 48. The equity aspects of the policy would mean discounting rates higher or lower than current market interest rates. A higher rate would be chosen in the case of non-market goods -social services, etc. - i f the government policy was aimed at the present poor individual in society and away from future generations. The inclusion of equity considerations in social cost/benefit analysis can be achieved by two methods: Planning Balance Sheet analysis and Goals - Achievement analysis. Lichfield, Kettle and Whitbread (1975) discuss the two approaches as they pertain to distributional considerations. planning Balance Sheet analysis focuses mainly on the costs and benefits f a l l i n g directly on those who produce and operate the project and on those who consume the goods and services i t generates. The analysis organizes the costs and benefits of the affected groups of individuals into a comprehensive set of social accounts. Where a quantification of the costs and benefits i s not possible, symbols are placed into the accounts to denote the level of cost or benefit associated from the activity. In Goals - Achievement analysis, individuals are classified according to some criterion that assesses equity, i.e. income levels. Weights are assigned to the particular groups in order to represent society's preference with respect to alternative distribution of the costs and benefits which account for the net social benefit. Application of the weights i s undertaken by the decision maker. Diff i c u l t y arises when a decision maker i s confronted with the issue of equity considerations versus efficiency consideration. Considerations of equity pertain to the fairness and justice of the occurrence of costs and benefits on particular groups in society, while efficiency considerations deal with the a b i l i t y to produce goods and services with a minimum of expense. VII. Limitations of Cost-Benefit Analysis Validity of cost-benefit analysis depends largely on the a b i l i t y of the welfare function to correctly specify the value of the choices to society and on our a b i l i t y to correctly enumerate and evaluate, with the aid of the welfare function, the associated costs and benefits (Pearce, 1971). The social worth of a project is judged by i t s net contribution to raising the level of aggregate 50. consumption of these items of value, regardless of whether or not they are bought or sold (Lichfield, Kettle, Whitbread, 1975; 59). Nevertheless, for the most part, environmental-protection programs are heavily loaded with aesthetic considerations and other intangibles (benefits that are real and important to society) but that are not automatically quantified in the market economy (Hines, 1973; 117) . Limits to the applicability of cost-benefit analysis to public policy decision making arise because of limited information and data needed to evaluate, in monetary terms, environmental improvement (Pearce, 1976; 97) . A major obstacle to effective policy decision making aimed at resource conservation is the lack of understanding and quantitative data on environmental impacts (Purcell and Smith, 1976; 93). Benefit-cost analysis is not simply a decision-making tool. Rather i t should be considered as a framework with a set of procedures to aid in the organization of available information. It is a tool for organizing and expressing certain kinds of information on a range of alternative courses of action. Ultimately, due to the many inherent d i f f i c u l t i e s in the accurate assessment of total benefits and costs, decisions regarding resource development are often made on p o l i t i c a l rather than economic bases (Coomber, 1973; 3). Because policy choices about environmental quality objectives are made in a p o l i t i c a l context, and are l i k e l y to involve comparisions and tradeoffs among variables for which there i s no data or methodology to establish commensurate market-price values, monetary benefit and cost data w i l l be only a partial determining factor of the acceptance or rejection of a particular project. This factor does not negate the importance of benefit and cost formulation as one form of data presentation. The case for benefit/cost analysis rest on the importance of having before the decison maker information on the measurable benefits and costs of alternatives. In addition, l i s t i n g s of non-quantifiable benefits and costs are important so that the decision maker can make an informed decision. 52. CHAPTER 4 I. Introduction Chapter 4 w i l l present a cost/benefit case analysis as i t pertains to the evaluation of the economic efficiency of resource recovery u t i l i z i n g used lubrication o i l . Concern for environmental pollution has been cited as a major stimulus for the recovery of used lubrication o i l (Pearce, 1975; Irwin, 1975; Barton, 1979; Weinstein, 1974) . Further, the increase in petroleum product prices has stimulated the current interest in recycling. Any or a l l motivations are representative of the equity objective, or some indication that shadow input price diverges from market price. II. Waste Oil Inventory In order to discuss the costs and benefits associated with used o i l recycling, specification of the system is necessary. The waste o i l inventory illustrates the inventory of the o i l from production through the economic sectors to the fi n a l destination of the residual -the environment. In order to determine volumes of used o i l associated with various disposal practices, a survey of used o i l sources and major o i l collectors was conducted in the four regions which account for 75 percent of total o i l sales in British Columbia: Lower Mainland; Prince George; Okanagan; and Southern Vancouver Island (King, 1980) . The survey was primarily limited to the largest c i t i e s in the four regions: Vancouver; Penticton; Kelowna; Kamloops; prince George and Victoria. Information was gathered during personal interviews, telephone interviews and mail questionaires. Major consumers of lubricating o i l are service stations, automobile dealerships, government, transit services, transport companies, the construction industry, the mining and the forest industry. Being the major consumers of lubricating o i l , the above are consequently the major sources of used lubricating o i l . Additionally, the do-it-yourself o i l changer amounts to 15 -20 percent of total lubrication o i l sales in British Columbia (King and Oldham, 1979; 14). Figure 9 presents the waste o i l inventory for the Province of British Columbia. In British Columbia, over 23 million Imperial gallons of SALES 2 3 .3 I CRANKCASE OIL 14 .5 4 INDUSTRIAL OIL 8 .8 RECOVERABLE OIL 1 1 . 8 R e - r e f i n i n g 3 .0 Road o i l 2 . 3 NON-RECOVERABLE OIL 1 1 . 5 ~ f 1 F u e l 3 .0 O t h e r 3 .5 Waste I r u n o f f t o a d j a c e n t f i e l d s a i r p o l l u t i o n p o l l u t i o n t o l a n d and a i r FIGURE 9 " WASTE OIL INVENTORY ( m i l l i o n s o f i m p e r i a l g a l l o n s ) SOURCE:Data i s t a k e n f rom K i n g , 1 9 8 0 lubricating o i l were purchased in 1978. Crankcase lubricants account for 14.5 million Imperial gallons or 62%, while industrial lubricants account for 8.8 million Imperial gallons or 38% of the total o i l sales. Of the 23.3 million Imperial gallons of lubricating o i l sold in British Columbia, approximately 11.8 million Imperial gallons, or 50%, are potentially recoverable. For crankcase lubricants, a percentage of 63% or 9.1 million Imperial gallons should be available for recovery. On the basis of analyses conducted in both Canada and the United States (Skinner, 1974), a recovery factor of 30% i s applied to industrial uses of lubricating o i l . Using this figure, the recoverable volume in B. C. would be 2.6 million Imperial gallons. As Figure 9 indicates, the current principal end uses of used o i l in the province are: 1) re-refining; 2) disposal into the environment; 3) dust control agent on roadways; 4) fuel in greenhouse heating systems, boilers and asphalt plants; 5) direct re-use as a lubricant. Of the approximately 11 million Imperial gallons of potentially recoverable used o i l arising from a l l sources in British Columbia, 9 million Imperial gallons are concentrated in the four regions under review. The present end uses of this 9 million imperial gallons of used o i l is summarized in Figure 10. On a Province-wide basis, i t is currently estimated that approximately 25%, or 3 million Imperial gallons of used o i l in the Province is collected for re-refining. The remainder of the o i l i s disposed of as (1) fuel in greenhouse heating, (2) fuel for asphalt dryers, (3) a dust suppressant, and (4) a lubricant. III. Environmental Effects of Used Oil The improper disposal of used o i l s i s a serious environmental problem for several reasons. F i r s t l y , the disposal of o i l on land tends to introduce lead and other toxic substances, some of which may be carcinogenic, into the s o i l and through percolation and runoff, to contaminate surface and groundwater supplies (Irwin, 1977; 702). Used o i l s are not readily biodegradable because of the inherent thermal and oxidation s t a b i l i t y of the hydrocarbons, and Disposal Method Burning - fuel in asphalt plants and fuel in greenhouse heating Road Oiling (government) Re-Refining a) Acid/Clay and b) PROP (re-refining to begin 1980) Unknown End Use Total Volume of Oil (millions of gallons) Percentage of Total 2.7 30% -2.45 asphalt - .25 greenhouse .6 7% 2.6 29% 3.1 34% 9.0 100% Source: King (1980) FIGURE 10 USED OIL DISPOSAL PRACTICE (FOUR REGIONS UNDER REVIEW) 4. The category "unknown end uses" i s expected to include private road o i l i n g , direct re-use as a lubricant, fuel in boilers and d i r -ect disposal into the environment. 58. the resistance of certain oxidation-inhibitors intended to minimize oxidation during use (Walter and Maltezou, 1974; 436) . Micro-organisms in the s o i l are not able to easily decompose these hydrocarbons. Evaporation from used o i l disposed on the land i.e. road o i l i n g , contributes hydrocarbons to atmospheric pollution (Irwin, 1977 705). Secondly, the used o i l applied as a dust suppressant to unimproved roads does not necessarily remain on the road surface. Varying degrees of used o i l migration occur due to dust transportation and runoff, vo l a t i l i z a t i o n , adhesion to vehicles and biodegradation, depending on the rate of application and composition of road surface. The runoff pollutes surface water, adjacent fields and crops with o i l , additives, and other contaminants the o i l has accumulated through use in engines and machinery. Used o i l applied as a dust suppressant does contain such toxic or carcinogenic chemical contaminants as 2, 3.7, 8 -tetrachlorodibenzodioxin, polychlorinated biphenyl (PCB), and 2, 4, 5 -trichlorophenol (Irwin, 1977; 703). Further, the amount of polynuclear aromatics (tetrachlorodibenzodioxin and trichlorophenol) in lubricating o i l has been found to increase in used automative o i l , causing used o i l to be potentially more toxic than virgin o i l . The EPA (Weinstein, 1974) found that over an extended period of time: a) 70 to 75 percent of the used o i l leaves the road by dust transportation and run off; b) 25 to 30 percent i s lost by vo l a t i l i z a t i o n , adhesion to vehicles and biodegradation; c) 1 percent stays on the road. The actual percentage of the road o i l that i s transported from the road surface, depends on the rate of application and composition of road surface, runoff and dust migration. Lead and other heavy residues contained in used o i l s migrate from the road into nearby water sources. Areas adjacent to roads treated with used o i l can receive metallic contaminants, creating an environmental hazard. The EPA indicates that as much as 200 milligrams per kilogram of originally deposited lead, can be carried by wind to contaminate fields or crops adjacent to the oiled roads. The amount of waste o i l disposed of in British Columbia 60. represents a threat to the environment as well as a waste of a potentially re-usable resource. Annual disposal of approximately 10 million Imperial gallons (11.8 million Imperial gallons of recoverable o i l - 3 million imperial gallons of o i l used for re-refining + .75 million Imperial gallons of residual from the re-refining process) to the environment in British Columbia, albeit widely dispersed, may have a cumulative effect on v i t a l l i f e support systems. It is appropriate, therefore, at this stage of the analysis, that waste o i l be re-used to conserve energy resources and to reduce environmental pollution. IV. Identification of Benefits Pearce (1975) outlines three social benefits stemming from resource recovery: 1) the present value of the extended resource l i f e brought about by recycling; 2) any reduction in pollution caused by direct disposal into the environment; 3) reduced demand for land for disposal purposes releasing i t for 6 1 . alternative social uses. The extension in resource l i f e tends to be small due to the fact that the present value of the gain in resource l i f e requires the use of a discount factor (see Chapter 3, pages 37 through 42 for a discussion of the effect of discount rates on present values). The reduced demand for land for dumping i s insignificant, for o i l being a liquid, requires no specific acreage for i t s disposal. The waste o i l is generally disposed of as a road o i l , not on land specifically allocated for o i l disposal as i s the case for solid wastes, i.e. domestic garbage. The benefit of pollution abatement stemming from resource recovery of used lubrication o i l i s the reduction in pollution damage. Thus, the primary source of benefit i s the expected level of reduction in environmental damage as a result of the project being undertaken. Oil damage can be divided into i t s effects on land (i.e. crops), water, air and therefore, causing effects on human health. It i s d i f f i c u l t to quantify even the direct benefits attributable to the avoidance of pollution to the environment. There i s l i t t l e agreement as to the relative effect on the environment of recycling. This i s due to the substantial number of variables that enter into the evaluation as well as the d i f f i c u l t y in weighing their relative effects. Further d i f f i c u l t i e s are encountered in evaluating the amount of economic damage. Research needs to be undertaken on the overall relationships between damages and environmental quality. No study has yet determined the economic value of the material damages suffered from different levels of a i r , water and land pollution specifically related to o i l . It i s lik e l y that no significant relationship exists between used lubrication o i l levels and damage to water, air and land in that effects of o i l pollution are relatively small in comparison to pollution levels from other sources. Lave and Seskin (1970) report the problems of measuring the effects of changes in air pollution levels. Scientists s t i l l disagree on the quanti-tative effect of pollution on animals, plants, and materials. Some estimates of the cost of the soiling and deterioration of property have been made, but the estimates are only a step beyond guesses. We conjecture that the major benefit of pollution abatement w i l l be found in a general increase in human happiness or im-provement in the "quality of l i f e " , rather than in one of the specific, more easily measurable categories. Nonetheless, the "hard" costs are real and at least theoretically measurable. A major concern i s whether recycling technologies are more or less polluting than the disposal of "virgin" waste. According to Pearce (1975) and Irwin (1975) the pollution from direct disposal into the environment and the disposal of the by-product from the recycling process, do not constitute similar pollution concerns. Re-refining mimimizes the amount of used o i l entering the environment by recycling i t and concentrating the contaminants for managed disposal. The hazards created by discharge of used o i l into the environment vary depending upon the quantity of used o i l discharged (whether i t i s used o i l per se or recycling wastes), the ground composition, and the type of contaminants contained in the used o i l or by-product from the recycling process. Re-refining i s one means of solving the problem of used lubrication o i l . Unfortunately, d i f f i c u l t i e s such as the problem with the disposal of the process residuals prevent re-refining from being the simple solution to the waste o i l pollution problem. V. Identification of Costs The costs associated with a program of resource recovery of used lubrication o i l are those of collection, residuals handling, disposal, transportation and environmental degradation (transportation and re-refining). These costs are determined by the market and, thus, are readily available in principle. Total costs for delivery of used o i l to a re-refining f a c i l i t y arise from the local collection and storage costs and long-haul transportation from the various regions of the province to the re-refinery. The costs of such collection w i l l be a function of the location of the re-refining f a c i l i t y and the future quantities of used o i l from each source (Synergy West, 1974; 61) . Two re-refining processes are employed in the Province of British Columbia; one, the acid/clay process and two, the PROP re-refinery process. In the report "Utilization of Used O i l " by Mascetti and White (1978) information is presented on the cost factors of various re-refining processes. The acid/clay process i s discussed, but no data is available on the PROP process. The acid-clay process has high chemical costs, high waste disposal costs, and a low yield. These factors are sufficient to offset i t s low process energy requirements and result in high production costs. The data, as found in the above-noted report, is presented below to give an indication of the range of pertinent costs associated with a resource recovery process that i s presently employed in British Columbia. The costs for this province in 1981 dollars would be significantly different than those found in this 1978 document. However, presentation of the data does ill u s t r a t e potential profits of the one re-refining process. There is no mention of cost data pertaining to environmental degradation from transportation or re-refining of the of the used o i l . "A comparison of the production cost data ($.83 per gallon) for the acid/clay process to the actual market price of the re-refined ($1.18 in the Mid-West) and virgin lube o i l ($1.47 -$1.85/gallon on the West Coast) indicates the potential profit of resource recovery by the acid/clay process, and the potential for further profit i f the price differential between re-refining and virgin lube o i l s disappears." (Mascett and White, 1978; 3 -17) Skinner (1974) prepared a cost break-down for the acid/clay process in Canada. These costs were in the following range: Cents/gal. Collection costs 4 - 5 Storage costs 0 - 1 1 / 2 Re-refining costs 24 - 26 TOTAL COST on re-refined base o i l stock 28 - 32 1/2/gal. By comparison, virgin base stock had a market value of $.53/gallon (August, 1973 price) before the addition of additives. As the two illustrations indicate, there is a substantial differentiation between the total cost of re-refined o i l and that of virgin base stock (i.e. $.83 for re-refined o i l and $1.27 -$1.85 for virgin o i l per gallon in the U. S. case, whereas, in the Canadian case, $.28 -$.325 for re-refined o i l and $.53 for virgin base stock per gallon). Recent virgin o i l price increases have created a continued divergence between virgin o i l and recycled o i l stock prices. Resource recovery of used o i l s is environmentally desirable because i t conserves a valuable resource. However, improper disposal of the waste products can cause contamination of the environment in the same way as direct disposal of used o i l can. Depending on the recycling process, several by-products are produced, the disposal of which may be potentially hazardous to society, causing a social cost. Carcinogens, heavy metals and other toxic agents such as PCBs are in the used o i l and as a consequence are concentrated in the wastes from the re-refining process. The EPA found that used o i l contains polynuclear aromatics, some of which are classified as carcinogenic agents, can be found in used o i l s . Other toxic agents are also found within used o i l s and re-refining wastes, due to the concentration effect of re-refining. Table I presents a l i s t i n g of these toxic agents. The acid/clay re-refining process, used by three re-refiners in the Province, generates approximately 35 percent waste (by volume) from used o i l collected. The acid sludge and spent clay from the process contain sulfuric acid and lead. Table II provides a li s t i n g of the average metal content in acid sludge. At present the re-refiners in Vancouver and Victoria dispose of the by-product in the c i t y dumps, while the re-refinery in Winfield stores the waste product for later use as a fuel in a greenhouse operation. TOXICITY OF SOME COMPOUNDS FOUND IN USED OIL (FROM THE TOXIC SUBSTANCES LIST, 1973 ED., U.S. DEPARTMENT OF HEALTH, EDUCATION AND WELFARE, PUBLIC HEALTH SERVICE, NATIONAL INSTITUTE FOR OCCUPATIONAL SAFETY AND HEALTH, ROCKVILLE, MARYLAND 20852) -Naphthalene (16282) TXDS o " r l - r * t LD50-2200 ag/Kg i-pr-aui LDLo»150 n j / K j U.S.O.S.-»lr rERTAC 37.22139.81 Xylene (24890) •CCDS: l h l - h s n TCLo-200 Fpn TTX-I?-1 c r l - r a t LD50-4 300 =g/Xg C. S.O.S.-air FFJIEAC 37,22139,72 Toluene (23467) TXDS: i h J - h = i TCLo-500 ??D T7X-CS • o r l - r a t LD50-3000 cg/K^ l ? r - r a t LDSO-1640 = g / K j D. S.O.S.-air FE*1AC 37,22i39;72 Fhrnanthrene (1R120) TXDS: o r l — L U LD50-700 = g/K3 »k=-=us TDLO-2160 =g/Kg 13'JI TFX-NFO Eeniene. E t h y l (3039) : TXDS: occ-h=r, TDLo-200 ?pn Tr.C-IXS orl-r»t LD5O-3500 =g/Kj te.-,it-it, rTopvl (3076) TXDS: o r l - r a t LE50-4H30 K g/K^ C t i n i i a . as c h l o r i d e (4793) TXDS: o r l - r a t LDSO^BB =g/K^ icu-r»t TDLo-2.2 eg/Kg T7X-CAR a i c h l o r i d e (1412S) TXDS: o r l - g p g LDLo - 2000 n g / . » ^ U.S.O.S.-*ir FEPX/kC 37,22139,72 Z l n t as c h l o r i d e (24994) /TXDS: Jvn-rar. LDLo - 75 = g/Kg par-ck-n TDLc - 1 = g/K . g TTX - KEO U.S.O.S.-alr TVSS.C 37.;2139,72 TABLE I SOURCE:Weinstein,1974 69. KETA.I. CONTENT Or ACID SLUDCi El cment Gasoline' D i e s e l 1 E.P.A.2 Lead Pb 20,000 1.000 19,000 Calcium Ca - 6,400 12,000 -Phosphorus P 4,300 1,000 1 .700 Sod jirr. Ka 4,000 200 -Zinc Zh 2,100 200 2.10C S i l i c o n S i 1.400 BOO -Bariur. Ba 1,300 400 740 Iron Fe 1,100 SOO 2.200 Kajnesiirr Mi 1,000 70 -Alu=inurc AJ 140 40 S6C Chroriun Cr so 190 2E Boron B so 40 IE Copper Cu 40 40 190 Nickel Ki 30 35 -T i n Sn 30 35 -S i l v e r A* 0 14 0. Kancanese Kr. - - 63 Arsenic As - ' - 45 Holybdenur. HD - - IE Vanadiirr. V - - IB Cadr.iuni Cd - - 9 S t r o m iim.. Sr - - 2 Cobalt Co - - 0 Beryllium Be - • 0 Other Analysis * Sulphur \ 14. .9 14.1 Ash SO^ 4. .45 11.26 Acid \ (as 47. .5 40.E Sulphur S T i t r B t a b l e Acid Ash Combustib)es V i s c o s i t y f 7SC'F V i s c o s i t y f]GS°r V i s c o s i t y €12S°F pH Veirht NOTES: TABLE I I Additional 1 r.f cjxst i on 13.5 - 14.S'. 40 - 45. S - 15", 30 - 42i 4,000,000 cenTistoVes 475,000 150,600 O i l 12-16 / £ 8 l SOURCE:Skinner,1974 (1) Analysis obtained frtn r e - r e f i n e r y - p r i v a t e 12) ITU Rrpcrt "Vtste O i l Study Preliminary Kepcrt to the Congress. A p r i l 1973". 70. The environmental effect of the wastes from the acid/clay process are described by Weinstein (1974) The soluble free-acid probably leaches through the s o i l , and in alkaline s o i l i s f i n a l l y con-verted to sulfate salts, entering the ground-water or nearby streams. Some other sulfates in the sludge probably end up in the same way, but lead, barium, calcium, si l v e r , arsenic, molybdenum, titanium, strontium, and other heavy metal salts may remain in the l a n d f i l l . The PROP plant located in North Vancouver has been designed to produce 6,000 pounds per day of a f i l t e r cake and caustic solution containing the wastes from the re-refining process. The by-products are to be distributed as an asphalt extender to be used in asphalt manufacturing; as a coating on shingles to inhibit the growth of moss; and for l a n d f i l l disposal. Koch (1977) indicates that the use of o i l in asphalt paving may contain phenols which could leach from the asphalt. Although externalities can be identified, there i s no quantitative data on the effects of pollution from used o i l disposal and re-refining waste disposal. VI. Summary Some attempt has been made in this chapter to estimate the 71. benefits and costs of used o i l recovery. The estimates deal with the absolute volumes of used o i l disposed into the environment. The major benefit of resource recovery i s the reduction in pollution damage. Figure 9 indicates that there are 11.8 million Imperial gallons of potentially recoverable used o i l in the Province of which 3 million Imperial gallons i s presently re-refined. Therefore 8.8 million Imperial gallons are s t i l l available for re-refining. The benefit associated with the re-refining of these 8.8 million Imperial gallons i s as follows: 8.8 million Imperial gallons of Available for recovery x Recovery yield .8 = 7mlg of recovered o i l 8.8 - 7 = 1.8 mlg of residual product The costs attributable to the resource recovery process are the 1.8 million Imperial gallons of residuals produced. The above formulation illustrates that the benefit of used o i l 5. The .8 represents an average of the yield from the acid/clay process (60 to 70%) and the PROP process (90% or more) i.e. + 70% = 160 -2 = 80%. recovery is significant in absolute terms. Used o i l disposal into the environment would be at a maximum of 1.8 million Imperial gallons (residual product disposal) in comparison to a present disposal of 8.8 million imperial gallons. Thus, the net benefit is 7 million Imperial gallons of recovered o i l . A major obstacle to effective resource policy aimed at environmental protection is the lack of data on the impacts of resources in production and disposal. Given the preceding discussion on the costs and benefits of recycling used lubrication o i l , i t i s evident that cost and damage functions are not readily available. Therefore, the benefits and costs associated with the resource recovery of used o i l were only identified. The benefits and costs identified with the use of o i l residuals are primarily environmental issues. As i s presented in the analysis, market prices do not include the social costs and benefits of recycling a c t i v i t i e s i.e. non-market costs and benefits such as a i r , water and land pollution level changes. 73. CHAPTER 5 I. Introduction Increases in production and consumption of commodities have resulted in the problem of increased quantities of residuals. A direct consequence of the volumes of industrial and urban wastes is the public expenditure on solutions to handle the wastes. As the cost of maintaining wastes increases, there i s a welfare loss to society. Threat to the environment is documented as a major reason to analyze the impact of resource recovery on lessening the quantities of residuals and wastes no longer ut i l i z e d . II. Economics of Resource Recovery Historically, disposal costs have been close or equal to zero, and because of this there has been l i t t l e incentive to treat waste material. One of the reasons for general disregard of land, water and air resources stems from the fact that these resources have not been regarded as economic goods - that i s , goods which are relatively scarce. Our natural resources, as convenient avenues of waste disposal have been zero-priced as far as the individual manufacturing firm was concerned. Until recently, l i t t l e concern has been placed on the environmental impacts of waste disposal. However, society is slowly realizing that the external costs of waste disposal are significant in terms of maintaining environmental quality. Use of wastes to produce economic goods is one method of arresting pollution. In order to make judgements about the desirability of recycling, a consideration of the expected costs of pollution control in comparison to the anticipated benefits is required. The framework chosen herein to identify benefits and costs is benefit-cost analysis. III. Benefit-Cost Analysis and the Case Study The role of benefit-cost analysis in this study i s to consider the economic basis for reaching decisions about pollution control through recycling. Benefit-cost analysis is not a one-step, simple decision-making tool. Rather i t should be considered as a framework , with a set of procedures to help organize available information. Limits to the applicability of benefit-cost analysis to pollution problems arise because of limited information and data needed to evaluate, in monetary terms, environmental improvement. The case study of lubrication o i l reveals the practical problems associated with the data input. Complexities concerning information ava i l a b i l i t y have prevented the benefit-cost analysis from being entirely completed. This is due to the d i f f i c u l t y of calculating the benefits and costs of environmental pollution features of a project. Despite the volume of literature on the environmental effects of waste disposal, there s t i l l remains a considerable void in the research on the exact repercussions of this activity. An examination of the benefits and costs from recycling has indicated the need for more research on pollution damage and control. More specifically, with respect to pollution damage to a i r , water and land by o i l residuals i s well documented; however no study to date places an economic value on the loss. Determination of the socially optimal re-use ratio, for example, requires the av a i l a b i l i t y of hard data. Specific information required includes the following: - methods of residual handling and disposal - residuals re-use systems - production processes - residual generation associated with each production process - externalities of both market and non-market nature associated with production, re-use and disposal. Thus the major limitation of the case study is the absence of data on the interrelationships of pollution and recycling a c t i v i t i e s . This void in the research f a i l s to allow a determination for each benefit and cost in monetary terms. Nevertheless, an evaluation of the net benefits of recycling used lubricating o i l can be interpreted with aid of the waste o i l inventory for the province of British Columbia. That analysis allowed the examiner to calculate the absolute volumes of o i l to be recovered from the project. The net benefit attributable to the recovery of used lubrication o i l equals 7 million Imperial gallons for the Province of Br i t i s h Columbia. As in the case study of lubrication o i l , when quantification of major benefits and costs is not possible, a detailed discussion of the unquantifiable items is prepared. For example, benefit-cost appraisal of the recovery of used lubricating o i l is here accompanied by a discussion of the environmental impacts of used o i l on a i r , land and water. Presentation of the costs and benefits is an aid for the decision-maker, not a substitute for i t ; due in large part to the fact that existing prices generally do not reflect a l l associated social costs and benefits. The information available in each case must be reviewed by the decision-maker as to the expected effect of the non-quantifiable data on the calculation of the net present value. As Dodgson (1981) emphasizes Despite the considerable d i f f i c u l t i e s in-volved in applying benefit-cost analysis in practice, the alternative may be public decision-making which is arbitrary and i l l -informed, and which is more l i k e l y to be based on pressure from individuals who stand to gain financially from particular Government investment schemes, on factors such as perceived local pride and prestige... or on vague and unsubstantiated statements of the expected development or "multiplier" effects of projects. IV. Suggestions for Further Research 78. The shortcomings of the research are evident. The thesis has only identified the benefits and costs attributable to lube o i l re-refining. No monetary determination of the costs and benefits was attempted. In order to prepare a complete cost/benefit analysis numerous assumptions must be made. Figure 11 w i l l i llustrate some of the important areas where assumptions are required, in order to aid future research. The nature of the decision-making can be seen clearly in the diagram. Stage 1 encompasses those assumptions that must be made before any quantification of costs and benefits can be made. For example, even though a particular site may not be chosen, alternative locations can be identified and data acquired for a variety of decisions. To illustrate this point, during the course of the Synergy West (1974) study on the recovery of o i l for Alberta, a number of assumptions were made in order to develop the costs of a recycling system. The assumptions included: number of re-refineries; number of collection d i s t r i c t s ; types of storage f a c i l i t i e s ; and, determined recoverability rate. The cost of collecting, transporting and processing the used o i l at three alternative locations was calculated at 5-year intervals, up to 20 79. STAGE 1 1) number of f a c i l i t i e s to be located in the province 2) location of f a c i l i t i e s 3) type of recovery process 4) size of f a c i l i t y i.e. capacity STAGE 2 1) cost of collection 2) cost of transportation via r a i l and truck 3) cost of handling STAGE 3 1) volume of o i l that w i l l be recycled 2) volume of residual from recycling process 3) disposal method for residual FIGURE 11 Assumptions for Further Research 80. years in the future. To aid in the analysis of the data, a computer program was adopted that could store and compare the numerous data. Further to the major decisions of Stage 1, and repercussive considerations of Stages 2 and 3, there are areas in the cost/benefit analysis that require further research. Despite the seemingly extensive knowledge on the environmental impacts of used o i l disposal, the environmental effects w i l l vary with different concentrations of impurities in the o i l and different environmental conditions. For example, the extent to which o i l is used as a road dust suppressent affects the environment and the extent to which the residuals from a resource recovery process pollute the environment, cannot be easily compared. It would require a study to determine the associated environmental degradation of used o i l and re-refining wastes disposed of into the environment, with particular reference to British Columbia. As indicated in the case study of lubrication o i l , usually there is no market price for the benefits of pollution control or the costs of associated pollution due to pollution control i.e. environmental degradation due to disposal of re-refining residuals, 81-because the good is a public good. Future research could entail a "simulation" of the market, to discover what people would be willing to pay for the benefit of pollution control with the knowledge that some pollution would be produced by the recycling activity, even though they w i l l never be asked directly to pay a price. As estimation of how much people would gain in income and profit i f the services were provided, can be used an an indication of how much they ought to be willing to pay, as a maximum. Household surveys, in which individuals are asked questions concerning their willingness to pay for environmental amenities attempts to measure demand for environmental quality. An estimation of demand for environmental quality on a broad scale, i s initiated by the hypothetical situations contained in household surveys. The measurement of demand as indicated by a household survey w i l l probably indicate that there i s a real demand for environmental quality, measured in terms of willingness to pay for these amenities. The analyst can incorporate a ranking system to aid in the evaluation of environmental quality factors. The procedure of 82. ranking is undertaken until a l l the factors i.e. costs and benefits, have been given an imputed range of values. The range of values would be subject to a sensitivity check in order to determine at what levels of monetary value the analysis indicates a Met Social Benefit. Maniate and Carter (1973) discuss a general method of the above approach that can aid in the evaluation of environmental quality factors in Benefit-Cost analysis. Finally, the thesis has lead to the insight that the Government must decide to what extent they are to be concerned with the issue of used lube o i l . As private industry is the only participant in the re-refining process, the level of recycling is at the point where profits are maximized. The social value of avoided waste disposal of into the environment must be investigated in order to determine the 'optimal' recycling level i.e. the point at which the extra costs of recycling outweigh the extra benefits. 83. BIBLIOGRAPHY Abert, J.G., H. Alter and J.F. Berneisel."The Economics of Resource Recovery from Municipal Solid Waste". Science. 183, 1974, pp. 1052 -1058. Anderson, L. G. and R. F. Settle. Benefit-Cost Analysis: A  Practical Guide. Lexington Books, Lexington, Massachusetts, 1977. Auld, D.A.L. (ed.). Economic Thinking and pollution Problems. University of Toronto Press, Toronto, 1972. Barish, N.N. and S. Kaplan. Economic Analysis. McGraw-Hill Book Company, New York, 1979. Barton, A.F.M. Resource Recovery and Recycling. John Wiley and Sons, New York, 1979. Bohm, P. Social Efficiency. MacMillan Press, London, 1973. Bower, B. T. 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Kruckeberg, D.A. and A.L. Silvers. Urban planning Analysis:  Methods and Models. John Wiley and Sons, Inc., New York, 1974. Irwin, W.A. "Used O i l : Comparative Legislative Controls of Collection, Recycling and Disposal". Ecology Law Quarterly, 6, 4, 1978, pp. 699 -755. Irwin, W.A. and W.E. Burhenne, "A Model Waste Oil Disposal Program in the Federal Republic of Germany". Ecology Law Quarterly, 1, 3, Summer 1971, pp. 471 -477. Irwin, W.A. and R.A. L i r o f f . Used Oil Law in the United States and Europe. Office of Research and Development, U. S. Environmental Protection Agency, Washington, D.C., July, 1974. King, J.I.N. Used o i l inventory for the province of British  Columbia. Department of C i v i l Engineering and the School of Community and Regional Planning, University of British Columbia, Vancouver, June, 1980. (unpublished). King, J.I.N, and W.K. Oldham. Used Oil Practices and Disposal  Methods by the Do-It-Yourself Oil Changer in the Greater Vancouver  Area. 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