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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 B r i t i s h 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 t h i s 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 K i n g , 1981  In presenting for  an  t h i s thesis in p a r t i a l f u l f i l m e n t of the requirements  advanced  degree  at the University of B r i t i s h Columbia, I  agree that the Library s h a l l make i t f r e e l y available for and  study.  I further agree that permission for extensive copying  of t h i s thesis for scholarly purposes may my  department  reference  be granted by the head of  or by h i s or her representatives.  I t i s understood  that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission.  School of Community and Regional Planning, The University of B r i t i s h Columbia, 2075 Westbrook Place, Vancouver, B. C , Canada V6T 1W5  Date  o^Tc6e«  /L  JIZ-I  /Abstract  Environmental have  drawn  resources  attention  and the p o s s i b i l i t y of energy shortages  to means for recovering  from waste products.  application for  concern  material and energy  The focus of t h i s thesis i s on the  of cost-benefit analysis as a methodological technique  evaluating  the economics  of  resource recovery: namely used  lubrication o i l . The  study  economics review  initially  focuses  of resource recovery.  of  existing  analysis  as  Treasury  Board  literature.  advanced  by  on  the general concern of the  This i s undertaken primarily by a An investigation of cost-benefit  Pearce,  pearce  and Dasgupta, Canadian  Secretariat, Winch, Nath, Anderson, and S e t t l e , to  name a few, reveal a comprehensive and systematic framework for the evaluation  to  of public investment a l t e r n a t i v e s .  Items  f o r inclusion i n the analysis are a l l costs and benefits  every  member  of, a  defined  society  affected by the project i f implemented. not  enter  monetary  into values  whose  welfare would be  Many goods and services do  the market system, causing d i f f i c u l t y i n deriving for  some  of  the  components,  especially  environmental  concerns.  For example, the case study reveals two  areas: 1)  benefit  of p o l l u t i o n abatement stemming from resource recovery  of used l u b r i c a t i o n o i l , and 2)  costs  associated  with  the improper  disposal  of the waste  products from the recycling process of used l u b r i c a t i o n o i l . An case  attempt  i s made to apply the cost-benefit framework to the  of  lubrication  Columbia.  Adequate  o i l recycling quantitative  i n the province of B r i t i s h data  were  not available,  particularly  on the s o c i a l costs and benefits, to f u l l y employ the  cost-benefit  technique, therefore r e s t r i c t i n g the analysis i n that  only an i d e n t i f i c a t i o n of costs and benefits was prepared. When  quantification  detailed  description  decision  maker  study  is a  of costs and benefits i s not possible, a  of the unquantifiable items indicates to the  the extent  of the components.  Included i n t h i s  presentation of the environmental impacts of used o i l  disposal. The  limitations  of the cost-benefit analysis as an evaluation  technique  arise  because o f limited information and data needed to  evaluate,  i n monetary  terms,  environmental improvement.  Future  iv.  research  could involve a "simulation" of the market to determine a  plausible  shadow price that gives an i n d i c a t i o n of what the market  price  the item would have been i f i t had been normally traded.  of  A determination for  of the price that consumers would be w i l l i n g to pay  the benefits of p o l l u t i o n control with the knowledge that some  p o l l u t i o n would be produced by the recycling a c t i v i t y would a i d the analyst i n placing values on the costs and benefits.  TABLE OF CONTENTS Pages Abstract CHAPTER 1 - Introduction I. II. III. IV. V. VI.  Introduction  1  Economics of Resource Recovery  1  Objectives  3  Concept of Benefit - Cost Analysis  4  Used Lubrication O i l Studies  4  Summary  6  CHAPTER 2 - The Economics of Resource Recovery I.  Introduction  8  II.  The S o l i d Waste Problem  9  III.  Theory of E x t e r n a l i t i e s  IV. V. VI.  -  11  Environmental P o l i c y objective  13  Optimal P o l l u t i o n Level  13  Summary  24  CHAPTER 3 - Cost - Benefit Analysis I. II. III. IV. V. VI. VII.  Introduction  26  Benefits  27  Costs  35  Discount Rate  37  Uncertainty and Risk  42  D i s t r i b u t i o n a l Considerations  46  Limitations of Cost - Benefit Analysis  49  vi.  CHAPTER 4 - Case Study - Lubrication O i l I. II. III. IV. V. VI.  Introduction  52  Waste O i l Inventory  52  Environmental E f f e c t s of Used O i l  56  I d e n t i f i c a t i o n of Benefits  60  I d e n t i f i c a t i o n of Costs  63  Summary  70  CHAPTER 5 - Conclusions I. II. III. IV.  Introduction  73  Economics of Resource Recovery  73  Benefit - Cost Analysis and the Case Study  74  Suggestions f o r Further Research  77  BIBLIOGRAPHY  83  vii..  LIST OF TABLES  Page I.  T o x i c i t y of Some Compounds Found i n Used O i l  68  II.  Metal Content of Acid Sludge  69  viii.  LIST OF FIGURES  Pages  1.  Total Cost of P o l l u t i o n  15  2.  Private and S o c i a l Optimal Recycling Ratio  18  3.  Total Tax on P o l l u t i o n  21  4.  P o l l u t i o n 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 E f f e c t of Discount Rate Changes on the Magnitude of Net Present value  41  9.  Waste O i l Inventory  54  10.  Used O i l Disposal Practice  57  11.  Assumptions for Further Research  79  1.  CHAPTER 1 I.  Introduction  Interest response  to  disposal  the potential  of  shortages.  wastes  One  appropriately oil  i n resource recovery has been growing recently i n  can be  of  be  and  renewable  resource  quantities  of  used  the continuing  the resources with  concerned  recycled  environmental  damage due to improper prospects of which  i s lubricating o i l .  society  energy should  Used l u b r i c a t i n g  i n order to (1) conserve petroleum -a nonand  (2) protect  automotive  the environment.  Large  and transportation lubricants and  i n d u s t r i a l o i l s are currently discarded or re-used i n ways that may cause  human  utilize  and  either  natural  environment  hazards  while  f a i l i n g to  the energy potential or l u b r i c a t i v e capacity which  remains i n the o i l .  II.  Economics of Resource Recovery  The conditions.  decision to recycle i s primarily governed by economic An economic evaluation of recycling a c t i v i t y  involves  2.  an  identification  Project  and  acceptance  assessment  is  based  on  of  the  costs  and  benefits.  a evaluation which shows that a  project's expected benefits be i n excess of estimated costs. The recovery paper  existing  is  largely  recycling  (1977) . returnable  vs.  composting.  The  industrial Abert,  been (1971)  on  in  examined has  the  nature. by  reviewed  non-returnable  waste  Alter  general  has  Spofford  literature  of resource  The economics of waste Turner, Grace and  pearce  b r i e f l y paper residuals,  containers, recovery  and  economics  of  has  presented by Bridgwater  been  the  economics  of  municipal  materials from (1975) , while  and Bernheisel (1974) have examined the economics of  resource recovery from municipal s o l i d waste. Even  though past research has dealt with the economics of  resource recovery of p a r t i c u l a r commodities, attention has not been placed case  on the s p e c i f i c costs and benefits of the a c t i v i t y . of  used  lubrication  In the  o i l , research has examined the market  economics of lube o i l r e - r e f i n i n g per se; however, l i t t l e attention has been paid to the s o c i a l 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.  oil  manufacturing  processes.  costs  There  as  they  pertain  to  seven re-refinery  i s no mention of the s o c i a l costs and benefits  attributable to lube o i l r e - r e f i n i n g . In to  consideration of the research, t h i s thesis w i l l  examine  examination  the economics of o v e r a l l  of  resource  recovery;  attempt  namely,  the  costs and benefits of l u b r i c a t i o n o i l r e -  refining.  Ill.  Objectives The three objectives of t h i s 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  policy  the potential  planning  in a  Province of B r i t i s h  case  of t h i s technique f o r environmental study of used l u b r i c a t i o n o i l i n the  Columbia.  The study w i l l develop and assess cost/benefit analysis as i t pertains  to planning i n environmental management.  cost/benefit recovery  of  i s straightforward used  lubrication  The concept of  but, i t s application  to the  o i l i s complicated by the lack of  4.  published analysis  data  required  presented  to quantify the costs and benefits.  herein  is  based  on  a  case  study  The  of used  l u b r i c a t i o n o i l in the province of B r i t i s h Columbia.  IV.  Concept of Benefit-Cost  Analysis  Benefit-cost  i s one economic methodology frequently  analysis  used  by  government agencies to enhance decision making processes.  Such  analysis considers a l l the expected s o c i a l costs and  over  a project's l i f e t i m e in order to calculate the discounted net  benefits  s o c i a l benefit. In t h i s study, the technique i s used to i d e n t i f y the costs benefits  pertaining  to the recovery of used l u b r i c a t i o n o i l .  and The  Province of B r i t i s h Columbia was chosen as the geographic frame for the  study.  and  quantitative  benefits  The technique as applied herein provides a  relevant  approach to  the  for issue  identifying of  the  resource  systematic  major costs recovery  and  of used  lubrication o i l .  V.  Used Lubrication O i l Studies Some  of  the data found in t h i s thesis were extracted from  two  5.  relatively  exhaustive  studies  of  used l u b r i c a t i o n o i l funded by  research grants from the Department of Energy, Mines and Resources, Ottawa.  These studies were conducted j o i n t l y by the Department of  C i v i l Engineering and the School of Community and Regional Planning at the University of B r i t i s h Columbia during the summer of 1979 and the spring/summer  of 1980.  The studies are e n t i t l e d : Used  O i l Practices and Disposal Methods by the Do-It-Yourself O i l  Changer  in  Oldham,  and  Columbia  the Used  Greater Oil  Vancouver  Inventory  Area for  by J.I.N. King and  the  province  of  W.K.  British  by J.I.N. King.  Contents of the studies include: - present used o i l disposal practices  i n B r i t i s h Columbia  - environmental impacts of used o i l disposal - lubricating o i l inventory for B r i t i s h Columbia - volume of p o t e n t i a l l y recoverable l u b r i c a t i o n o i l The  purpose used  of  the  studies was to determine l u b r i c a t i o n o i l  volumes  and  o i l disposal  practices  i n B r i t i s h Columbia.  Volumes  of p o t e n t i a l l y recoverable l u b r i c a t i o n 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 c o l l e c t e d i s  that of the end use of the o i l . of  used  hazards upon and  o i l create created  by  the quantity the type  Many methods of disposal or re-use  r i s k s of p o l l u t i n g a i r , water, or s o i l .  The  discharge into the environment vary depending of used o i l discharged, the means of disposal,  of impurities contained i n the o i l .  With regard to  the l a t t e r point, road o i l i n g , for example, deposits lead and other heavy due used  residues.  to the p o s s i b i l i t y crankcase  potentially also  Industrial use of o i l - d e r i v e d fuels i s of concern of high ash and metallic constituents i n  o i l resulting  harmful  materials  i n fine upon  particle  combustion.  emissions  of  O i l re-refining  may cause environmental degradation with improper disposal of  waste products.  VI.  Summary  As pollution oil.  indicated  above,  there  are many  known  sources of  stemming from the disposal or re-use of used l u b r i c a t i o n  Benefit-cost  analysis provides the analyst with a technique  for identifying the costs and benefits associated with the recovery  7.  of  used  (i.e.  lubrication  o i l , in  that  a reduced l e v e l of p o l l u t i o n  net s o c i a l benefit) i s anticipated  from the a c t i v i t y .  8. CHAPTER 2 I.  Introduction  Millions discarded  of pounds  every  environmental  protection  to possible  resources  from  economic  system  (Carlsen, other because  potentially  valuable  resources  year i n urban and i n d u s t r i a l wastes.  attention  consequences  of  waste  of  and  means  conservation  Concern f o r has drawn  f o r recovering materials and energy  products.  recycles solid  resource  are  I t has been  insufficiently  waste  pollution  to  cited  that "our  spare  and resource  us the  exhaustion"  1973; 653). Recycling tends to be considered only when  courses of a  of action shortage  are obviously  of natural  unsatisfactory, either  raw materials or because of  environmental considerations (Barton, 1979; 13). Recycling i s not an end i n i t s e l f , but must be economically and e c o l o g i c a l l y defensible (pearce and Walter, 1977; 31). At present, narrow economic considerations are the major c r i t e r i o n of recycling f e a s i b i l i t y (Clark, 1971; Henstock, 1976; Bridgwater, 1975). In  the past,  comparable  t o , or  the a v a i l a b i l i t y lower  than  of  raw materials a t a p r i c e  a recyled product constrained the  l e v e l of a c t i v i t y i n resource recovery.  Many recovery methods have  9.  been  proposed  but  then  rejected  on  economic  grounds.  I t has  generally been cheaper to dump the wastes and pollute water and the atmosphere,  than to process them (Barton, 1979; 22) .  trend  changing  is  as  the  high  cost  of  However, the  materials  and  of  environmental damage associated with increased residuals has become evident (Walter, 1975; 31).  II.  The S o l i d Waste Problem Private  enterprise  l i m i t i n the past.  has  not recycled to the technological  The reason f o r t h i s i s two-fold.  F i r s t , i n the  past r e l a t i v e l y cheap v i r g i n resources were available; for example, petroleum. costs  of  disposal. funded basis.  Secondly, production The  from  decrease  the  generation  due  and  there level  has  of  has  been faced with the f u l l attributable  municipal  municipal  of  not  consumption  collection  general  Hence,  society  been  refuse.  taxes no  and  refuse not  to  waste  for example, i s on an individual  reason for the individual to  With increased amounts of waste  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, to  the  waste  and they stress the need to t a i l o r the disposal of wastes receiving  problem,  capacity  in  part,  of  the environment.  stems from the environment's inadequate  capacity to absorb growing waste loads. to fact  Thus, the s o l i d  In p a r t i c u l a r , there seems  be an inadequate cheap supply of land for disposal, despite the that  over  concentrated  80  percent  of  the  population  i n urban areas (Goddard, 1975;  Increased  spatial  competition  is  spatially  4) . has  been  cited  i n f l a t i o n a r y factor to land p r i c e s , thus magnifying the  as  an  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 p o l l u t i o n accompanying many disposal methods. Heightened public concern has resulted i n more public expenditures as well as more public regulation in the area of waste management (McFarland, 1972; 11).  Hence,  the  demand.  It  of  disposal  and  solid  waste  problem  is  one  of  supply  and  r e s u l t s from an imbalance between the economic supply mechanism  for  waste  materials,  and  from  a  11.  divergence waste and  generation  and the costs of managing that waste  disposal).  supply and  between the value to consumers of an additional unit of  of  The  problem  (collection  can further be defined as an excess  waste materials resulting from a mismatch between costs  benefits  of  material  use  i n general, and/or generating and  managing waste materials i n p a r t i c u l a r (Goddard, 1975; 4). Increased resulted  in  consequence increasing wastes. major  production  ever of  and  increasing  the  public  consumption of commodities have  quantities  of  wastes.  A  direct  volumes of i n d u s t r i a l and urban wastes i s the  expenditure on  finding  solutions  to  handle  The potential threat to the environment i s documented as a reason  for  lessening  the  Maltezou,  1974;  analyzing  quantities  the  of  Henstock,  impact  residuals  1976;  of resource recovery on and  Pearce,  wastes  1976;  (Walter and  Spofford, 1971;  Barton, 1979; Goddard, 1976) .  III.  Theory of E x t e r n a l i t i e s It  free  is a  operation  efficient  fundamental of  allocation  perfectly  p r i n c i p l e of economic theory that the competitive markets w i l l lead to an  of resources i n the absence of e x t e r n a l i t i e s  1  (Dewees  et a l , 1975; 7) , public goods and decreasing  scale.  Thus  conversely  when  when  prices  fall,  returns to  quantity demanded increases and  p r i c e s r i s e , a c t i v i t y demanded f a l l s to bring the  economy back into equilibrium. As  Dewees  degradation for  quality.  certainly  would.  environmental  society  as  a  whole (in theory),  the private sector of the economy, decision  on p r o f i t maximization, ignoring such external  since they are not r e f l e c t e d i n the market p r i c e s of  transactions.  prices  of  The private firm r a r e l y evaluates the  whereas,  In  are intent  consequences, their  p r i n c i p a l cause  associated with the impacts of i t s a c t i v i t y on the q u a l i t y  the environment,  makers  a  i s the f a i l u r e of the market system to account f u l l y  environmental  damages of  explains,  reflect  From the private firm's point of view, market  " a l l " i t s costs  and  benefits.  However,  from  society's point of view, market p r i c e s generally do not capture a l l the  relevant  social  costs  and  benefits,  especially  where the  a l l o c a t i o n of public goods - such as the atmosphere, water and land - are involved.  1. An e x t e r n a l i t y a r i s e s when an economic a c t i v i t y performed by one person generates an e f f e c t , b e n e f i c i a l or otherwise, on some other person who i s not party to the a c t i v i t y (Winch, 1971; 123).  IV.  Environmental P o l i c y Objective  The levels  which  Scott the  causes  are greater  than that which i s s o c i a l l y desirable.  and Graham (1972: 54) define p o l l u t i o n as "the impairment of quality  subsequent defines single  of water,  use by  criterion: social  soil  others  the solution  maximizing such  of environmental p o l l u t i o n have created p o l l u t i o n  to  a i r , so  that the enjoyment of  i s reduced and prevented." This thesis the environmental problem i n terms of a  maximizing welfare  or  social  welfare.  The objective of  i s to achieve a p o l l u t i o n control l e v e l  that any further control would impose abatement costs greater  than the savings i n p o l l u t i o n damage or welfare benefits that would result (Dewees et a l , 1975; 16).  V.  the  Optimal P o l l u t i o n Level  Social  welfare i s maximized when p o l l u t i o n i s controlled u n t i l  point  at which the marginal costs to the p o l l u t e r of further  control  i s just  further  emissions.  equal  to  the marginal  s o c i a l damage costs of  In short, the optimal p o l l u t i o n l e v e l i s that  14.  at  which  the  marginal  benefits of further emission control j u s t  equals the marginal costs of that c o n t r o l . If  monetary values for a l l "costs of control" and "benefits of  control" could  can be estimated for each d i f f e r e n t p o l l u t i o n l e v e l , they  be  represented  i n curves such as those presented i n Figure  1.  As the l e v e l of p o l l u t i o n r i s e s , the cost of p o l l u t i o n (curve  CP)  will  begin  The  cost  of control curve (cc) represents the l e v e l s of p o l l u t i o n  in  the  r i s i n g and continue r i s i n g at an increasing rate.  presence  of controls.  To reduce p o l l u t i o n below point b,  costs w i l l increase. The control curve eventually becomes v e r t i c a l at  a  l e v e l of p o l l u t i o n where further expenditure i s incapable of  reducing where  pollution.  the  costs  The optimal p o l l u t i o n l e v e l -p* - i s the point  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 r a t i o : (1)  unpriced  resources  i . e . no  specific  price  attached  to  c o l l e c t i o n and disposal services; (2) uncontrolled e x t e r n a l i t i e s e.g. p o l l u t i o n . A  rate  of  resource  re-use below the optimal re-use r a t i o occurs  15.  TOTAL COSTS OF POLLUTION  because  existing recycling a c t i v i t y i s based on the private sector  decision waste  of  profit  disposal.  maximization,  Consequently,  which  where  ignores s o c i a l costs of  e x t e r n a l i t i e s occur,  the  private market optimum does not conform to the s o c i a l optimum. When recycling  the  private sector evaluates the economic f e a s i b i l i t y of  activities,  the  decision  is  based  on the difference  between the cost to the firm of using v i r g i n materials and the cost to  the  firm  examined of  a  of  are  using  recycled  materials.  the a v a i l a b i l i t y of a consistent supply of residuals  specified  quality  reprocessing  technology.  What  private  the  and  quantity,  decision  ignores  benefits associated with r e c y c l i n g . (1)  Other factors to be  reduction  in  pollution  due  plus  processing  and/or  are the s o c i a l costs and  The s o c i a l benefits include: to  the  decrease  i n residuals  disposed of d i r e c t l y into the environment, (2) extension i n the (3)  reduction  in  raw resource public  costs  life, associated  with  land d i s p o s a l ,  releasing land for a l t e r n a t i v e s o c i a l uses. Because generally  of  the  greater  above, than  the  optimum  the actual l e v e l .  level  of  recycling i s  However, the p o l l u t i o n  17.  associated  with  therefore  watch  distant  recycling  effort  our  so  pollution  step  must not be ignored.  "We  as not to substitute a greater  for a l o c a l one"  (Georgescu-Roegen, 1975;  must but 171).  I t should not be overlooked that recycling processes can have their own  environmental  impacts, even to the extent that the net r e s u l t  i s the reverse of that intended A  hypothetical  illustrated coincide. social rate  that The  the  is  private  socially  costs, (r  analysis  (Barton, 1979;  is  and  optimal  are minimized.  priv)  shown  in  the  23). Figure 2, where i t i s  social  optima  do  not  re-use rate (r soc) i s where a l l  Whereas, the private optimal re-use  where the marginal cost of employing  reclaimed  resources  in  the production process i s j u s t equal to the marginal  reduction  in  costs  socially  optimal  although  they  of  recycling  could  be  technologies  themselves  wastes  the  from  (Henstock, 1976; The  using  v i r g i n materials.  rates  made more  to  do  not  do  so  polluting  The private and  necessarily were  than was  the  coincide recycling  the disposal of  manufacturing process employing v i r g i n materials 711).  private objective i s , given an unchanged l e v e l of revenue,  to minimize the t o t a l cost of resources - i . e . to minimize  TOTAL GROSS BENEFITS  private FIGURE  optimum  2  PRIVATE AND  SOCIAL OPTIMAL RECYCLING  RATES  SOURCE:Henstock,1976;711 Pearce,1976;174.  C=TCv(X) + TCr where  TCv  resources  and  TCr  are  the  respectively.  (X) total  costs of v i r g i n and recycled  Labour costs are included i n T C  V  (X)  and  TC ^ (X) .  The s o c i a l objective i s to minimize S = TCv(X) + TCr(X) + TECp,e(X) + TECp,v(X) + TECp,r(X) - BERL(X) - L(X) where  TECp,e i s the t o t a l external cost associated with individual  manufacturing firm ; TECp,v i s the t o t a l external cost of p o l l u t i o n from the use of v i r g i n materials; TECp,r i s the t o t a l external cost of  pollution  present  from  values  respectively.  of  the  recycling process; and BERL and L are the  gains  Disposal  in  the  resource  life  and  in  costs  are  included i n TCv and TCr.  land The  above discussion i s taken, i n part, from Henstock (1976) and Pearce (1976). An  a c t i v i t y (recycling) generating  reduction) benefits 1976;  will  not  take  place  on  s o c i a l b e n e f i t i s (pollution an  optimal  scale i f those  are not appropriated v i a the charging of a p r i c e  320).  To-day's  prices  generally  do  not  (pearce,  r e f l e c t a l l the  20.  social  costs  although  associated  with  standards,  the  with  current  prices  are  residuals generation and d i s p o s a l ,  emphasis  starting  these costs (Spofford, 1971;  571).  on  use  the  producer  for  his  on  air  and  way  to  In many cases, a fee i s imposed of the environment's a s s i m i l a t i v e  land resources  fee  were  i s to place the cost of the " e x t e r n a l i t i e s " (by  imposed  relative  prices  process  changes  1971;  571).  process.  achieve a more e f f i c i e n t a l l o c a t i o n of a i r , water  means of a charge or tax) on those who a  water q u a l i t y  to include at l e a s t a portion of  capacity, as a factor input to h i s production One  and  of  on  discharge the residuals.  residuals discharged  factor  inputs  If  to the environment,  to production would s h i f t and  and/or re-use might well be stimulated  (Spofford,  Imposing t h i s " e f f l u e n t charge" would tend to induce  alternative  combinations  processes,  types  residuals  handling,  of  of  raw  product  modification  material outputs, and  inputs, materials  disposal.  production re-use,  pearce  and  (1979)  presents t h i s issue. The  imposition  of a tax, T, i n that T=  will  TECp  r V +  TEC  P / R  raise the l e v e l of recycling to the s o c i a l optimum.  Figure 3  r*  RECYCLING RATIO  — ^  FIGURE 3 TOTAL TAX ON  POLLUTION  SOURCE:Pearce i n Marquand,1974  illustrates recycling TEC  P,R*  the  effect  rate,  ^  r*.  of  a  and TEC  the tax i s equal to the sum of 4  for  the  arbitrarily  chosen  The cost of the " e x t e r n a l i t i e s " are equal to  (r = o to r = r*)  Figure  tax  presents  J r = r* to r = 1) and thus P,V*  these.  the implication of a tax on an  imperfectly  competitive market, where D = demand curve MR = marginal revenue curve MC^  = margin cost of v i r g i n materials to the firm  MC  = marginal cost of using recyled inputs  R  MC.  = summation of MCV  and MCf*.  3 The  firm's  Profit  objective  maximization  marginal  cost  to  is  the  at  analysis  point  is  recycled  materials.  distance  OG  to maximize p r o f i t s .  F where output equals X^ .  the firm (MC.. ) at point X  MC _. curve) , equals 0 P  in  in  p  The  (or point F on the  = GS for v i r g i n materials plus OPR = GC for  V  The  Figure  price 4.  at  Xp  would  be  equal to the  I t i s assumed that there are external  costs associated with the use of v i r g i n materials and none with the use  of  recycling  associated  with  inputs. the  use  Thus, MSC equals marginal e x t e r n a l i t y v  of  virgin  materials  and  MSC-  equals  23.  P,C  FIUGRE 4 POLLUTION TAX AND  RECYCLING SOURCE:Pearce i n Marquand,1974  marginal an  cost of using v i r g i n and recycled materials (allowing f o r  external  social  cost  cost  of using v i r g i n materials).  curve  (MSC  The j o i n t marginal  ) of using v i r g i n and recycled inputs at J  point  X  ,  i s determined by summating OS  S The  imposition x  secure  = G'A and OS V  ,  of  a  tax  equal  = G'D. R  to the t o t a l external cost w i l l  the s o c i a l optimal output l e v e l .  The tax, e f f e c t s a  s lower  output  recycling OS  for  ratio.  the  private  The  pollution  for recycled and OS  R  optimum  level.  The  V  new  firm,  X s  ,  thereby changing the  tax changes the input l e v e l s to  for v i r g i n inputs to achieve the s o c i a l price l e v e l , at X  , i s equal to 03" i n S  Figure 4. The tax,  analysis  in  virgin  illustrates  that  the imposition of a p o l l u t i o n  the instance of external costs associated with the use of  materials,  adjusts  the  firm's  l e v e l of output, and also  a l t e r s the l e v e l of recycling a c t i v i t y .  VI.  Summary  Population combined  both  growth to  and  increase  natural the  resource  magnitude  exploitation  have  of the waste disposal  problem  and  society's  perception  which accompanies waste d i s p o s a l . to resource recovery. wastes  is  important recycling.  based to  of the environmental p o l l u t i o n This concern has drawn attention  The decision to recover resources from s o l i d  primarily  investigate  on the  economics.  Consequently,  i t is  costs and benefits associated with  26. CHAPTER 3 I.  Introduction  Interest dramatically  in in  resource the  recovery  past to  few  years.  resource  projects Concern  recovery.  has  increased  i s place on Herein  lies  the  benefits  attributable  the  problem:  that of deciding on the d e s i r a b i l i t y of s p e c i f i c recovery  projects. Benefit-cost such  analysis  decisions.  It  i s a tool that can be used to a s s i s t in  consists of the systematic  assessment of the  d i r e c t and i n d i r e c t , 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;  basic  criterion  benefits general  of  benefit-cost  net of costs. welfare  of  analysis  53) .  The  i s to maximize s o c i a l  The analysis i s used to e s t a b l i s h what the  society  would be with and without a proposed  project in order to e s t a b l i s h what additional benefits and costs i t generates. the  gains  In theory, items for inclusion i n the analysis are a l l and  losses of every member of society whose well-being  would be affected by the project i f implemented ( L i c h f i e l d , K e t t l e , Whitbread, 1975; In  general,  58). a  project i s worthy of being undertaken whenever  the  present  value of the associated stream of net benefits from a  project  (discounted at the appropriate s o c i a l rate of discount) i s  greater  than  the present  value  of the costs (Davidson, 1967;  345) .  II.  Benefits  Benefits welfare.  those consequences of p o l i c y that increase  Freeman (1979; 3) defines the benefit of an environmental  improvement effects  encompass  as  the sum  of the monetary values assigned to these  by a l l individuals d i r e c t l y or i n d i r e c t l y affected by that  action. The existence of e x t e r n a l i t i e s means that not a l l costs w i l l be included will  not include  usually 1977;  transactions.  a l l benefits  Generally, market p r i c e s  since such e x t e r n a l i t i e s are not  included  (Pearce, 1978; Spofford, 1971; Anderson and Lee,  Winch, 1971).  A common reason for t h i s i s the f a i l u r e of the  private rights  i n market-price  market  system  i n economic  to a l l o c a t e  goods  efficiently  common property  such as clean a i r and unpolluted water  (Spofford, 1971; 568 and pearce, 1971; 54).  28.  In the absence of a market p r i c e , one requires a judgment about value.  I t i s not enough,  externalities the  exist.  magnitude  of  Some  however,  to demonstrate  that such  measurement, however imperfect, about  these e x t e r n a l i t i e s i s essential (Pearce, 1976;  110) . The objective of cost-benefit analysis i s to guide the decision maker i n the choice of c a p i t a l projects and expenditures which w i l l maximize related in  the gains  to  social  welfare.  Social welfare has been  to some aggregation of individuals' preferences, and these  turn are represented by the individuals' willingness to pay f o r  commodities. benefits allow  Market prices of a commodity are used as a measure of  although  f o r market  markets  exist  recreational  substantial  modifications have  imperfections  and  f o r the product  services.  Figure  of 5  to be made to  f o r situations i n which no the project  will  illustrate  i . e . outdoor the case i n  point. Market the  demand  individual  demand  curve.  prices f o r output are derived by a summation of  demand curves such as 6^ and d, to obtain the market As  indicated,  associated with output  P ^ i s the market  demand  prices  . The t o t a l revenue, or e f f e c t i v e payment  FIGURE 5 DEMAND FOR A PRIVATE GOOD SOURCE:Davidson(1967) i n D o r f m a n and Dorfman  30.  for  the  good,  that  individuals  would  pay  for  would, i n a  competitive  market,  however,  measure of their willingness to pay (WTP) and hence of  a  be equal to the rectangle OP AQ . 1 1  their true preference for the good. willingness consumer are  to  surplus  some  product.  pay  by  adding  I t i s usual to approximate the  to  the  (or S) polygon p^ DA.  consumers  who  would  I t i s not,  have  effective  payment,  the  The argument i s that there paid  more  than  P^ for the  The t o t a l willingness to pay i s therefore i l l u s t r a t e d by  the area ODBAQ^in Figure 5, so that  Total WTP = P  i.e.  the  total  multiplied A  consumer  WTP  r  Qj+ S  for any good i s equal to the purchase price  by the amount purchased, plus the consumer surplus (S). surplus i s the excess of consumer's willingness to pay  for a good or service over and above i t s market p r i c e . of  Figure  total is, some  In the case  5, the market price of the benefits would underestimate  benefits unless the consumer surplus i s equal to zero. persons  who  "overspill"  That  are not d i r e c t b e n e f i c i a r i e s of a project obtain benefit  or  utility  from a good or service for  31.  which they have not paid. would  A consumer surplus that i s equal to zero  be relevant only i f a government project would not provide a  s i g n i f i c a n t change i n the t o t a l output of a.particular market. I f a large government project i s undertaken, the e f f e c t w i l l be to  increase  therefore  supply  to  willingness  change  to  pay  sufficiently the  From  Figure  equal to c^Q^A-A.  Total  6,  willingness  would  between A and A^ i n Figure  to drive down market p r i c e , and  equal  to  pay.  The benefits, or  the area under the demand curve  6.  i t i s i l l u s t r a t e d that the change i n output i s  Thus, the change i n willingness to pay becomes  gain to the general welfare of society would be estimated by  summating  and discounting benefits (as i l l u s t r a t e d by the relevant  area under the demand curves) for each time period over the l i f e of the project.  In r e a l i t y , however, such integrations are r a r e l y performed since we r a r e l y have s u f f i c i e n t information and the t y p i c a l case i s that the discounted expected market p r i c e i s 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 i n our estimate of benefits. (Davidson, 1967; 348).  The valuation of benefits for public projects i s complicated the  lack of an e f f i c i e n t market demand p r i c e .  is,  by  definition,  by  Since a public good  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 a  (Bohm, 1973; 32) , the t o t a l demand f o r a public good involves  vertical  summation section,  addition of  of  consumer  the t o t a l  the individual demand curves (that i s , a  surpluses).  demand  for a  As discussed e a r l i e r i n t h i s private  good i s a horizontal  summation of individual demand curves, where the consumption of one individual  leaves  less  f o r others a t a given supply.  The t o t a l  demand f o r a public good i s i l l u s t r a t e d i n Figure 7. To has  adopted  shadow if  compete i n the p o l i t i c a l market place cost-benefit analysis  price  the good  investigator (Davidson, their  the guise  of  simulating the market demand p r i c e -a  measuring how much consumers would be w i l l i n g to pay was knows  marketable -even that  no  f o r public goods, where the  efficient  market  price  can e x i s t  1967; 355). The problem of getting consumers to reveal  true willingness to pay f o r 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 pay,  than not, a consumer will underestimate willingness to  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 w i l l 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 f u l l employment of inputs (Davidson, 1967; 346).  costs  can  alternative include  be  thought  actions  a l l the  of  as  (McFarland,  costs  the  real  1972;  opportunity  10).  The  Social  costs  social  2  of  costs  borne by firms (private costs); the costs  borne by society including disposal or reclamation (transportation, reprocessing, markets  (e.g.  etc.) and the costs that tend not to be reflected in 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 1972;  inflicted  upon  society  by  the wastes themselves (Auld,  private  firm  decided  to introduce a resource recovery  8)  If  a  facility  to recycle o i l , for example, concern would be to maximize  profit.  The  of  the  third What  facility party  the  e.g.  costs of increased p o l l u t i o n due to the introduction would  not  be borne by the firm but rather by a  (society) and do not enter the firm's cost functions.  firm f a i l s to take into account are 'external' e f f e c t s -  air  and  water p o l l u t i o n -which are possible by-products of  the recovery process. The  establishment  function  requires  society's costs  of  that  social the  net  price  benefit  attached  as  the objective  to the costs r e f l e c t  valuation of the f i n a l goods and resource involved.  must  include  shadow  prices  The  which w i l l r e f l e c t the s o c i a l  opportunity cost associated with using the resource i n the proposed project.  Shadow prices should r e l f e c t marginal s o c i a l cost rather  than marginal private cost. costs failure of  may  be a t t r i b u t a b l e to market f a i l u r e .  have provided  public  Divergences between private and  services  social  Instances of market  t r a d i t i o n a l j u s t i f i c a t i o n s for the provision (Canadian  Treasury  Board Secretariat,  1976;  37.  13).  Shadow p r i c e s simulate what users would pay for the services  of these outputs i f a market was present and the goods were sold i n a p e r f e c t l y competitive market. Difficulty  arises  government projects. consumption political  goods, system  in  the  valuation  of  shadow  p r i c e s from  An example i s i n the valuation of c o l l e c t i v e such  as  determines  defense the  and  the l e g a l system.  The  required payment i n the form of  taxes for the support of such services. Clearly that  can  social  be  costs  appears would  there i s no one figure for the s o c i a l cost of any  that be  proved are  to be correct.  based  This i s due to the f a c t that  on e t h i c a l judgements.  29).  Discount Rate  Since net  research  to resolve the issue, there being no a l t e r n a t i v e  but a case-by-case approach (pearce, 1978;  IV.  In each case, i t  a mixture of value judgements and empirical  needed  item  most projects have future costs and future revenues, the  benefits  discount  for  each  time  period  are  rate to y i e l d a net present value  discounted (NPV).  at a chosen  The sum of each  38.  of these values i s the NPV of the project. The the  choice  anticipated  value  can  government diverted  marginal  cost  of  (Winch, 1971; 161).  from  or  other  bonds  the  private  sector.  I f c a p i t a l i s to be  i s representative of the rate of return (ROR) on  government expenditure, then the use of that rate w i l l be  investment  series,  The opportunity cost of the  government projects and the interest rate of  opportunity cost of the project.  sector  the c a p i t a l investment and  d i f f e r depending on whether the project i s within the  sector  government  the appropriate discount rate w i l l depend upon  opportunity  judgements  project  the  of  may  On the other hand, a private  be financed through the issuance of a bond  then the interest rate attached  to the bond w i l l  represent  the opportunity cost of c a p i t a l . One  conventional  opportunity rate  of  capital  use  a  measure  of  (Canadian  the  (Anderson and S e t t l e , 1977; 85) .  i t has been documented that the private opportunity  inappropriate  projects  i s to  i n the private sector as a discount  for public sector a c t i v i t i e s  However, is  cost  practice  cost  for discounting the future e f f e c t of government Treasury  Board  Secretariat, 1976; 25) .  viewpoint i s held, for individuals are considered  This  to be "myopic" i n  their  consumption  adequately  and  take  generations,  savings  into  therefore  decisions.  consideration  Society  the  welfare  saving less and consuming more.  does of  not future  The above  reasons have been presented by Anderson and S e t t l e (1977) for using a  social  discount rate that i s lower than the private opportunity  cost of c a p i t a l . There i s much controversy over what constitutes the appropriate discount rate (Anderson and S e t t l e , 1977; Canadian  Treasury  Pearce, 1971, Bohm, 1973;  Board Secretariat, 1976).  The l i t e r a t u r e leads  to the conclusion that there i s uncertainty and a lack of consensus in  attempts  to  Accordingly, recommends benefits social  determine  the that  Canadian the  and  e s t a b l i s h a s o c i a l discount rate.  Treasury  calculation  of  Board the  Secretariat net  present  (1976) value of  and costs incorporate a range of s o c i a l discount rates: a discount  analysis.  3  rate  Hartle  subjectiveness  in  of  10%,  and of 5% and 15% for s e n s i t i v i t y  (1974; 30) further expounds that the inevitable choice  of  a  s o c i a l discount rate provides an  3^ In the l i g h t of current interest rates, the discount rate would necessarily r i s e to accomodate the change i n rates for public and private lending and borrowing. A more appropriate discount rate would possibly be 20%, and 25% and 15% for s e n s i t i v i t y a n a l y s i s .  40.  instance where the use of s e n s i t i v i t y analysis may test  be advisable, to  whether the conclusions of an evaluation are affected g r e a t l y  by the choice of a p a r t i c u l a r discount rate.  Figure 8 i l l u s t r a t e s the e f f e c t of discount rate changes on the magnitude of As  the  NPV. discount  decreases.  The  rate  for  mathematical  the evaluation increases, the expression  for  the  NPV  NPV of future  income i s :  NPV = —  i (1+i) X  +  _*2— (1+i)  +  2  • • •  _  x n  (l+i)  x °  n  NPV = net present value XQ  = i n i t i a l capital  X-|y X . . . 2  i  The  above  = discount rate  formula,  discount  rate  presented  in  = p o s i t i v e cash flows i n years 1, 2 ...  and Figure  illustrates NPV. 8  When that  the  r e l a t i o n s h i p between  i = 0, NPV = X + X„+X -X . i f the X's are p o s i t i v e , NPV  the It is  always  FIGURE 8 THE EFFECT OF DISCOUNT RATE CHANGES ON THE MAGNITUDE OF NET PRESENT VALUE  f a l l s as discount rates arise. By of  estimating the net benefits of projects at different levels  discount rates, i t is possible to ascertain the extent to which  project  outcomes are  (Bohm, 1973;  110).  sensitive  reduces  the  differences  in this respect  Costs will typically exceed benefits at f i r s t  while benefits exceed costs later. rate  to  Thus, increases in the discount  NPV of the future costs and benefits, causing a  lower benefit-cost ratio or lower NPV.  V.  Uncertainty and Risk  The  establishment  involves which is  risk  and  of  a  project's  uncertainty.  future benefits and costs  Risks refer to the situations in  information about the probability of an outcome's occurrence  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  statistical  errors  in  estimation  the measurement of variables and errors in of  relationships  (Freeman,  1979;  30).  Further, much of the data associated with the costs and benefits of  a  proposed resource recovery f a c i l i t y inherently is not quantified  due  to the limited knowledge of the relationships. For example,  when dealing with the relationship between pollution and quality of life,  estimates  of benefits  pollution  from  solid  waste  Therefore  judgment must  attributable disposal  to reduced levels of  are not readily available.  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 attach to i t , or exactly how polluters would respond to a given change in costs. In economic 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 internalized, are usually ignorant of the marginal control cost curve for polluters as a whole and even for the specific pollutors in a speci 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 d i f f i c u l t , 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  indicate the  the  sensitivity  discount  example.  sensitivity  rate  This  and  analysis.  S e n s i t i v i t y analysis would  of the cost/benefit model to changes in future  technique  estimated benefits and costs, for  aids  in  the  evaluation  of  specific  assumptions i n the analysis. Further,  three conventional  techniques have been suggested for  dealing with r i s k and uncertainty in cost-benefit analysis (a)  adding  calculating (b)  a  risk  premium  to  the  'pure'  rate of discount i n  present value.  raising  those  items  of  costs  or  reducing  those items of  benefits that appear to be uncertain, by a c e r t a i n percentage. (c)  using  a  project  l i f e less than the formal economic l i f e for  comparable but r e l a t i v e l y r i s k l e s s projects. A common technique for allowing for uncertainty i s the use of a risk  premium.  rate. in  A  risk  premium  involves increasing the  discount  The j u s t i f i c a t i o n of t h i s method i s to reduce the importance  the  analysis  of  data  forecast  Treasury Board Secretariat, 1976). (1972) example,  explain is  that  "what the  the  for the far future (Canadian  However, as Dasgupta and Pearce  risk-premium  extent  of  argument  underestimation  implies, of  for  costs (or  overestimation monotonically  of benefits) with  involved i n a project design  increases  time." In r e a l i t y , most project future outcome  i s either better or worse than anticipated. The a  second type of adjustment i s that of applying a premium or  discount  on  approximations project to  estimated  costs  and benefits.  In many cases,  of, or minimum/maximum l i m i t s to, the true value of  e f f e c t s may be quite s u f f i c i e n t for reaching a decision as  whether the project should be accepted or not (Bohm, 1973; 116)  •  The  third  a l t e r n a t i v e i s that of reducing the project's  life.  The  method has the e f f e c t of withdrawing the l a t e r year's benefits  and  costs and reducing the time period within which the project i s  to break/even. When  cost-benefit  systematic  manner  adjustment  techniques  196).  The  with  benefit/cost that  f o r a project i s undertaken i n a  relative  certainty,  could  unduly  might  above  three  a l t e r the decision-makers'  a proposed government project.  analysis  the  are not necessary (pearce & Dasgupta, 1972;  adjustments  choice regarding  outcomes  analysis  could arise  include  A l t e r n a t i v e l y , the  estimates  of  anticipated  i f circumstances a l t e r ( R i v l i n , 1972;  19).  This information provides the analysis with data to h i g h l i g h t  the  sensitivity  of the r e s u l t s to various decision makers, and on  how and what to avoid once the project has begun.  VI.  D i s t r i b u t i o n a l Considerations  Benefit-cost government  analysis  projects;  focuses  that  is,  on  the economic e f f i c i e n c y of  on  the  identification  quantification  of real benefits and costs of such a c t i v i t i e s .  basis  efficiency  of  project  the  criterion  and The  states that the gains of the  allow for p o t e n t i a l compensation to the "losers" and  still  leave a net increase i n the value of the production to society. Decision resource aspect  makers  allocation, of p o l i c i e s .  are but  not  concerned s o l e l y with e f f i c i e n c y i n  also  with the equity or r e d i s t r i b u t i o n  Thus, i n addition to providing information on  benefits,  information  pollution  and  on  who  i s being affected by environmental  who w i l l benefit from environmental improvements i s  necessary. Some of  of the most f a m i l i a r c l a s s i f i c a t i o n s used i n the analysis  distributional  considerations  are  income,  age,  region,  occupation  and sex.  However, i t i s extremely d i f f i c u l t and c o s t l y  to perform the estimation of the d i s t r i b u t i o n a l e f f e c t s of benefits and  costs  attributable  describing age  to a  the d i s t r i b u t i o n a l  groups,  five  numerous data.  regions  project.  For example,  a matrix  e f f e c t s of a project affecting ten  and f i f t e e n occupations would require  Further, i t s e f f e c t s i n decision making, i f a l l the  c e l l s were f i l l e d , would be n e g l i g i b l e for i t would be d i f f i c u l t to interpret. Consequently,  while  distributional  considerable  interest,  effects  the problems  and  detailed  effects  may  be of  the cost of identifying and measuring such associated  with  transmitting  highly  information suggest the analyst should normally work with  relatively  broad c l a s s i f i c a t i o n s (Anderson and S e t t l e , 1977; 107) .  I t i s common for d i s t r i b u t i o n a l assessments to be limited to simply identifying  whether  no  effort  serious  program's  p a r t i c u l a r groups are gainers or losers, with being  distributional  made  to measure  the magnitude  of a  consequences (Anderson and S e t t l e , 1977;  103) . The cost  integration of the d i s t r i b u t i o n a l e f f e c t s into the benefit-  analysis  can be undertaken by a change i n the discount rate.  48.  The  equity  higher  of  the p o l i c y  would mean discounting  or lower than current market interest rates.  would  be  etc.  aspects  policy  was  aimed  individual i n society and away from future inclusion  of equity considerations  i n s o c i a l cost/benefit  can be  analysis  and Goals - Achievement analysis. (1975)  distributional focuses who  and  discuss  by two methods: Planning Balance Sheet  the two  considerations.  L i c h f i e l d , Kettle and  approaches as they pertain to  planning  Balance  Sheet analysis  mainly on the costs and benefits f a l l i n g d i r e c t l y on those  produce  goods  achieved  a t the present poor  generations.  analysis  Whitbread  A higher rate  chosen i n the case of non-market goods - s o c i a l services,  - i f the government  The  rates  and  operate the project and on those who consume the  and services i t generates. benefits  comprehensive  of  the affected  set of  The analysis organizes the costs groups  s o c i a l accounts.  of  individuals  into  a  Where a q u a n t i f i c a t i o n of  the costs and benefits i s not possible, symbols are placed into the accounts to denote the l e v e l of cost or benefit associated from the activity. In  Goals  according  to  - Achievement some  criterion  analysis, that  individuals are c l a s s i f i e d  assesses  equity, i . e . income  levels.  Weights are assigned to the p a r t i c u l a r groups i n order to  represent  society's  distribution social  of  the  benefit.  preference  with  respect  to  alternative  costs and benefits which account for the net  Application  of the weights i s undertaken by  the  decision maker. Difficulty issue  of  equity  Considerations occurrence while  a r i s e s when a decision maker i s confronted considerations  with the  versus e f f i c i e n c y consideration.  of equity pertain to the fairness and j u s t i c e of the  of  costs and benefits on p a r t i c u l a r groups in society,  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  Validity ability  of  of  cost-benefit  Analysis  analysis  depends  largely  choices  and  evaluate, with the a i d of the welfare function, the and  the  the welfare function to c o r r e c t l y specify the value of  the  costs  on  to  society and on our a b i l i t y to c o r r e c t l y enumerate  benefits (Pearce, 1971).  associated  The s o c i a l worth of a project  i s judged by i t s net contribution to r a i s i n g the l e v e l of aggregate  50.  consumption they  are  of  bought or sold ( L i c h f i e l d , K e t t l e , Whitbread, 1975;  Nevertheless, are  these items of value, regardless of whether or not  heavily  intangibles  59).  for the most part, environmental-protection programs loaded  with  aesthetic  considerations  and  other  (benefits that are real and important to society) but  that are not automatically quantified i n the market economy (Hines, 1973;  117) .  Limits policy data  to the a p p l i c a b i l i t y of cost-benefit analysis to public  decision making needed  improvement policy of  to  arise  evaluate,  (Pearce,  in  1976;  monetary  97) .  A  terms,  environmental  major obstacle to e f f e c t i v e  decision making aimed at resource conservation i s the lack  understanding  and  quantitative data on environmental  (Purcell and Smith, 1976; Benefit-cost Rather  because of limited information and  93).  analysis  i t should  be  impacts  is  not  considered  simply a decision-making as  a  framework  tool.  with a set of  procedures to a i d i n the organization of available information.  It  is  of  a  tool  for  information on a Ultimately,  organizing  and  expressing  certain  kinds  range of alternative courses of action. due  to  the  many  inherent  difficulties  i n the  accurate  assessment  regarding  resource  than  economic  about  of  total  benefits  and  costs,  decisions  development are often made on p o l i t i c a l  bases  environmental  (Coomber, quality  1973; 3).  objectives  rather  Because p o l i c y choices are made i n 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  f o r which  commensurate will  be  there i s no data or methodology to e s t a b l i s h  market-price  only  a  partial  values,  monetary benefit and cost data  determining factor of the acceptance or  rejection of a p a r t i c u l a r project.  This factor does not negate the  importance  formulation as one form of data  of benefit  and cost  presentation. The having benefits  case before  f o r benefit/cost analysis rest on the importance of the decison  maker  and costs of a l t e r n a t i v e s .  quantifiable  information  on the measurable  In addition, l i s t i n g s of non-  benefits and costs are important so that the decision  maker can make an informed decision.  52. CHAPTER 4  I.  Introduction  Chapter pertains  4  to  will  present  a  cost/benefit  case analysis as i t  the evaluation of the economic e f f i c i e n c y of resource  recovery u t i l i z i n g used l u b r i c a t i o n o i l . Concern stimulus  f o r environmental p o l l u t i o n has been c i t e d as a major  f o r the recovery of used l u b r i c a t i o n o i l (Pearce, 1975;  Irwin, 1975; Barton, 1979; Weinstein, in  1974) .  Further, the increase  petroleum product prices has stimulated the current interest i n  recycling.  Any or a l l motivations are representative of the equity  objective, or some i n d i c a t i o n that shadow input price diverges from market p r i c e .  II.  Waste O i l Inventory  In order to discuss the costs and benefits associated with used o i l r e c y c l i n g , s p e c i f i c a t i o n of the system i s necessary. oil  The waste  inventory i l l u s t r a t e s the inventory of the o i l from production  through  the economic  sectors  residual -the environment.  to  the f i n a l  destination of the  In  order  various  to  determine  volumes  of  used o i l associated with  disposal practices, a survey of used o i l sources and major  oil  c o l l e c t o r s was conducted i n the four regions which account for  75  percent of t o t a l o i l sales i n B r i t i s h Columbia: Lower Mainland;  Prince  George;  1980) . the  The  four  George  Okanagan;  and  Southern  Vancouver  Island (King,  survey was primarily limited to the largest c i t i e s i n  regions: Vancouver; Penticton; Kelowna; Kamloops; prince  and  Victoria.  Information  was  gathered during  personal  interviews, telephone interviews and mail questionaires. Major  of  lubricating  o i l are  automobile  dealerships,  government,  transit  companies,  the  industry.  Being the major consumers of lubricating o i l , the above  are  consumers  construction  consequently  Additionally, percent  of  the  the total  and Oldham, 1979; Figure  9  major  industry,  sources  do-it-yourself  service  stations,  services, transport  the mining and the forest  of  used  o i l changer  lubricating o i l . amounts to 15  -20  l u b r i c a t i o n o i l sales i n B r i t i s h Columbia (King 14).  presents the waste o i l inventory for the Province of  B r i t i s h Columbia. In  British  Columbia,  over  23  million  Imperial  gallons of  SALES 2 3 . 3 I  CRANKCASE O I L 14.5  INDUSTRIAL O I L 8.8  4  RECOVERABLE O I L 11.8  NON-RECOVERABLE O I L 11.5 ~f  Re-refining 3.0  Road o i l 2.3  Fuel 3.0  1  Other 3.5  Waste I  runoff to adjacent fields  FIGURE  air pollution  pollution t o l a n d and air  9"  WASTE O I L INVENTORY (millions  of  imperial  gallons) SOURCE:Data i s t a k e n from King,1980  lubricating account  o i l were  in  1978.  Crankcase lubricants  for 14.5 m i l l i o n Imperial gallons or 62%, while i n d u s t r i a l  lubricants total  purchased  account  for 8.8 m i l l i o n Imperial gallons or 38% of the  o i l sales.  Of the 23.3 m i l l i o n Imperial gallons of l u b r i c a t i n g o i l sold i n British 50%,  Columbia,  are  approximately  potentially  percentage  of  63%  recoverable.  or  available for recovery. Canada 30%  is  figure,  11.8 m i l l i o n Imperial gallons, or  9.1  million  For  crankcase lubricants, a  Imperial  gallons  should be  On the basis of analyses conducted i n both  and the United States (Skinner, 1974), a recovery factor of applied to i n d u s t r i a l uses of l u b r i c a t i n g o i l . the  recoverable  volume  in  B.  C.  Using t h i s  would be 2.6 m i l l i o n  Imperial gallons. As  Figure 9  indicates, the current p r i n c i p a l end uses of used  o i l i n the province are: 1)  re-refining;  2)  disposal into the environment;  3)  dust control agent on roadways;  4)  f u e l i n greenhouse heating systems, b o i l e r s and asphalt plants;  5)  d i r e c t re-use as a lubricant.  Of the approximately 11 m i l l i o n Imperial gallons of p o t e n t i a l l y recoverable 9  used o i l a r i s i n g from a l l sources i n B r i t i s h Columbia,  million  under  Imperial  review.  gallons wide  of  The  used  gallons  are concentrated  present  end  oil  uses of t h i s 9 m i l l i o n imperial  i s summarized i n Figure 10.  basis, i t i s currently estimated  million for  Imperial  re-refining.  i n the four regions  On a Province-  that approximately 25%, or 3  gallons of used o i l i n the Province i s c o l l e c t e d The  remainder of the o i l i s disposed of as  (1)  fuel i n greenhouse heating, (2) f u e l for asphalt dryers, (3) a dust suppressant, and  (4) a l u b r i c a n t .  I I I . Environmental E f f e c t s of Used O i l  The  improper  problem tends may  for several reasons. to  be  runoff, 1977;  disposal of used o i l s i s a serious environmental  introduce lead and other toxic substances, some of which carcinogenic, to  702).  inherent  F i r s t l y , the disposal of o i l on land  contaminate  into  the  s o i l and through percolation and  surface  and groundwater supplies (Irwin,  Used o i l s are not r e a d i l y biodegradable  thermal  because of the  and oxidation s t a b i l i t y of the hydrocarbons, and  Disposal Method  Volume of O i l (millions of gallons)  Burning - f u e l i n asphalt plants and fuel in greenhouse heating  Road O i l i n g (government)  2.7 -2.45 asphalt - .25 greenhouse  Percentage of Total  30%  .6  7%  Re-Refining a) Acid/Clay and b) PROP (re-refining to begin 1980)  2.6  29%  Unknown End Use  3.1  34%  Total  9.0  100%  FIGURE 10 USED OIL DISPOSAL PRACTICE (FOUR REGIONS UNDER REVIEW) Source: King (1980)  4. The category "unknown end uses" i s expected to include private road o i l i n g , d i r e c t re-use as a lubricant, fuel i n b o i l e r s and d i r ect disposal into the environment.  58.  the resistance of c e r t a i n o x i d a t i o n - i n h i b i t o r s intended to minimize oxidation  during  organisms  i n the  hydrocarbons. road  use  (Walter  soil  are not  Evaporation  oiling,  and  contributes  Maltezou, 1974; 436) .  able  Micro-  to e a s i l y decompose these  from used o i l disposed on the land i . e . hydrocarbons  to  atmospheric p o l l u t i o n  (Irwin, 1977 705). Secondly, unimproved Varying  the  roads  used  o i l applied  as  a  dust  suppressant to  does not necessarily remain on the road surface.  degrees  of  used  o i l migration  occur  due  to  dust  transportation and runoff, v o l a t i l i z a t i o n , adhesion to vehicles and biodegradation, composition adjacent  of  depending road  fields  contaminants  Used  such  or  toxic  surface.  and  crops  the o i l has  machinery.  on  rate  of  The runoff pollutes surface water, with  o i l , additives,  -trichlorophenol  (Irwin,  and  other  as a dust suppressant does contain chemical contaminants as 2, 3.7, 8 -  tetrachlorodibenzodioxin, polychlorinated biphenyl 5  application and  accumulated through use i n engines and  o i l applied carcinogenic  the  1977;  703).  (PCB), and 2, 4,  Further, the amount of  polynuclear  aromatics  (tetrachlorodibenzodioxin  and  trichlorophenol)  i n lubricating o i l has been found to increase i n  used  automative o i l , causing used o i l to be p o t e n t i a l l y more toxic  than v i r g i n 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 o f f ; b) 25 to 30 percent i s l o s t by v o 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 from  the  treated an  and  other  road into nearby water sources.  with  milligrams  oiled  per  by  Areas adjacent to roads  used o i l can receive m e t a l l i c contaminants,  environmental  carried  heavy residues contained i n used o i l s migrate  wind  hazard. kilogram to  The of  EPA indicates that as much as 200  originally  contaminate  creating  deposited  lead,  can be  f i e l d s or crops adjacent to the  roads.  The  amount  of  waste  o i l disposed  of  i n B r i t i s h Columbia  60.  represents  a  threat  to  the  environment as well as a waste of a  potentially  re-usable  10  million  Imperial  gallons  recoverable  oil - 3  m i l l i o n imperial gallons of o i l used for r e -  refining  +  .75  refining  process)  to  dispersed,  may  systems.  It  widely support the  analysis,  resource.  Annual disposal of approximately  (11.8  million  Imperial gallons of  m i l l i o n Imperial gallons of residual from the re-  that  the environment i n B r i t i s h Columbia, a l b e i t have  a  cumulative  effect  on v i t a l  life  i s appropriate, therefore, at t h i s stage of  waste  o i l be  re-used  to  conserve  energy  resources and to reduce environmental p o l l u t i o n .  IV.  I d e n t i f i c a t i o n 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  i n p o l l u t i o n caused by d i r e c t disposal into the  environment; 3)  reduced  demand for land for disposal purposes releasing i t for  61.  alternative s o c i a l uses. The fact  extension  that  i n resource  l i f e tends to be small due to the  the present value of the gain i n resource l i f e  the  use of a discount factor (see Chapter 3, pages 37  for  a  discussion  of  the e f f e c t  of discount  requires  through 42  rates on present  values). The  reduced  demand for land for dumping i s i n s i g n i f i c a n t , for  oil  being a l i q u i d , requires no s p e c i f i c acreage for i t s disposal.  The  waste  o i l i s generally disposed of as a road o i l , not on land  specifically  allocated  f o r o i l disposal as i s the case for s o l i d  wastes, i . e . domestic garbage. The  benefit  of  abatement  stemming  from resource  recovery  of  damage.  Thus, the primary source of benefit i s the expected l e v e l  of  used  pollution  reduction  l u b r i c a t i o n o i l i s the reduction i n p o l l u t i o n  i n environmental  damage as a r e s u l t of the project  being undertaken. Oil crops),  damage  can be  divided  into  i t s e f f e c t s on land ( i . e .  water, a i r and therefore, causing e f f e c t s on human health.  It  i s d i f f i c u l t to quantify even the d i r e c t benefits a t t r i b u t a b l e  to  the avoidance of p o l l u t i o n to the environment.  There i s l i t t l e  agreement  as  recycling.  This i s due to the substantial number of variables  enter  into  their  relative  to  the  the evaluation effects.  evaluating  the amount  undertaken  on  environmental value air,  of  effects  on  the environment  economic damage.  the o v e r a l l  relationships  No  between  damages  pollution  and  study has yet determined the economic  damages suffered  significant  o i l levels  of o i l  that  Research needs to be  from d i f f e r e n t l e v e l s of  and land p o l l u t i o n s p e c i f i c a l l y related to o i l . no  of  as well as the d i f f i c u l t y i n weighing  of  quality.  that  lubrication  effect  Further d i f f i c u l t i e s are encountered i n  the material  water  likely  relative  relationship  exists  between  It is used  and damage to water, a i r and land i n that are  relatively  small i n comparison to  p o l l u t i o n l e v e l s from other sources. Lave  and  Seskin  (1970)  report the problems of measuring the  effects of changes i n a i r p o l l u t i o n l e v e l s .  S c i e n t i s t s s t i l l disagree on the quantitative e f f e c t of p o l l u t i o n on animals, plants, and materials. Some estimates of the cost of the s o i l i n g and deterioration of property have been made, but the estimates are only a step beyond guesses. We conjecture that the major benefit of p o l l u t i o n abatement w i l l be found in a general increase i n human happiness or im-  provement i n the "quality of l i f e " , rather than in one of the s p e c i f i c , more e a s i l y measurable categories. Nonetheless, the "hard" costs are real and a t l e a s t t h e o r e t i c a l l y measurable.  A  major  less  polluting  Pearce into  concern i s whether recycling technologies are more or  (1975)  than the disposal of " v i r g i n " waste.  and Irwin (1975) the p o l l u t i o n from d i r e c t disposal  the environment  recycling  According to  process, do  and the disposal of the by-product from the not constitute similar p o l l u t i o n concerns.  Re-refining  mimimizes  environment  by recycling i t and concentrating the contaminants for  managed into  disposal.  The  the amount  hazards  of  used  oil  entering  the  created by discharge of used o i l  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 i n the  used o i l or by-product from the recycling process. Re-refining lubrication  i s one  means  of  solving  the problem  of used  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 p o l l u t i o n problem.  V.  I d e n t i f i c a t i o n of Costs  The used  costs  associated  lubrication  disposal,  with  o i l are those of c o l l e c t i o n , residuals handling,  transportation  (transportation  a program of resource recovery of  and  and  re-refining).  environmental  degradation  These costs are determined by  the market and, thus, are r e a d i l y available i n p r i n c i p l e . Total arise  costs for delivery of used o i l to a re-refining  from  the l o c a l  transportation refinery. location  facility  c o l l e c t i o n and storage costs and long-haul  from the various regions of the province to the r e -  The costs of such c o l l e c t i o n w i l l be a function of the of the r e - r e f i n i n g 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 British  re-refining  processes  are employed  i n the Province of  Columbia; one, the acid/clay process and two, the PROP r e -  refinery  process.  Mascetti  and White  In the report (1978)  "Utilization  information  factors of various re-refining processes.  of Used O i l " by  i s presented on the cost The acid/clay process i s  discussed, but no data i s available on the PROP process.  The acid-clay process has high chemical costs,  high waste disposal costs, and a low y i e l d . These factors are s u f f i c i e n t to o f f s e t i t s low process energy requirements and r e s u l t i n high production costs. The below  data, to  give  associated employed dollars 1978  as an  with  a  in  the above-noted report, i s presented  indication resource  of  would  potential  range process  of pertinent costs that i s presently  The costs for t h i s province i n 1981  be s i g n i f i c a n t l y d i f f e r e n t than those found i n t h i s However, presentation of the data does i l l u s t r a t e  profits of  the  recovery  i n B r i t i s h Columbia.  document.  mention  found  of  the  one  r e - r e f i n i n g process.  There i s no  cost data pertaining to environmental degradation from  transportation or r e - r e f i n i n g 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 i n the Mid-West) and v i r g i n lube o i l ($1.47 -$1.85/gallon on the West Coast) indicates the potential p r o f i t of resource recovery by the  the  acid/clay process, and the potential for further p r o f i t i f  price  differential  between  r e - r e f i n i n g and v i r g i n lube o i l s  disappears." (Mascett and White, 1978; Skinner  (1974)  process i n Canada.  prepared  a  3 -17)  cost break-down for the acid/clay  These costs were i n the following range:  Cents/gal.  By  C o l l e c t i o n costs  4-5  Storage costs  0-11/2  Re-refining costs  24 - 26  TOTAL COST on re-refined base o i l stock  28 - 32  comparison,  $.53/gallon  virgin  (August,  base  1973  stock  price)  had  before  a  1/2/gal.  market the  value  addition  of of  additives. As  the  two  differentiation  illustrations between  indicate,  virgin  Canadian base  case,  stock  created  o i l per  per  $.28  i s a substantial  the t o t a l cost of re-refined o i l and that  of v i r g i n base stock ( i . e . $.83 for  there  gallon  for re-refined o i l and $1.27 -$1.85  in  the  U. S. case, whereas, i n the  -$.325 for re-refined o i l and $.53  gallon).  for v i r g i n  Recent v i r g i n o i l price increases have  a continued divergence between v i r g i n o i l and recycled o i l  stock p r i c e s . Resource because disposal  recovery  of  i t conserves of  the  waste  a  used  o i l s i s environmentally desirable  valuable products  resource. can  However,  improper  cause contamination of the  environment  i n the same  Depending  on  produced,  the disposal  way as d i r e c t disposal of used o i l can.  the recycling  process,  several  by-products  are  of which may be p o t e n t i a l l y hazardous to  society, causing a s o c i a l cost. Carcinogens, are  heavy  metals and other toxic agents such as PCBs  i n the used o i l and as a consequence are concentrated i n the  wastes  from  contains  the re-refining process.  polynuclear  aromatics,  The EPA found that used o i l  some  of which are c l a s s i f i e d as  carcinogenic agents, can be found i n used o i l s . are  Other toxic agents  also found within used o i l s and re-refining wastes, due to the  concentration  e f f e c t of r e - r e f i n i n g . Table I presents a l i s t i n g of  these toxic agents. The acid/clay r e - r e f i n i n g process, used by three re-refiners i n the from  Province, generates approximately 35 percent waste (by volume) used  o i l collected.  process  contain  listing  of  sulfuric  The acid sludge and spent clay from the acid  and  lead.  Table  II provides a  the average metal content i n acid sludge.  At present  the re-refiners i n Vancouver and V i c t o r i a dispose of the by-product in  the c i t y  dumps,  while the re-refinery i n Winfield stores the  waste product for l a t e r use as a f u e l i n 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)  - N a p h t h a l e n e (16282) TXDS o " r l - r * t  LD50-2200 a g / K g  i-pr-aui  LDLo»150  U.S.O.S.-»lr Xylene  nj/Kj  rERTAC 37.22139.81  (24890)  •CCDS:  l h l - h s n TCLo-200 F p n TTX-I?-1 crl-rat LD50-4 300 =g/Xg C. S . O . S . - a i r FFJIEAC 37,22139,72  Toluene  (23467) TCLo-500 ? ? D T 7 X - C S • LD50-3000 c g / K ^ LDSO-1640 = g / K j FE*1AC 3 7 , 2 2 i 3 9 ; 7 2  TXDS:  ihJ-h=i orl-rat l?r-rat D. S . O . S . - a i r  Fhrnanthrene  (1R120) LD50-700 = g / K 3 TDLO-2160 =g/Kg 13'JI TFX-NFO  TXDS: o r l — L U »k=-=us Eeniene. :  Ethyl  (3039)  TXDS: occ-h=r, orl-r»t  te.-,it-it, TXDS: Ctiniia.  rTopvl orl-rat  LE50-4H30 K g / K ^ (4793)  LDSO^BB =g/K^ TDLo-2.2 eg/Kg  T7X-CAR  c h l o r i d e (1412S)  TXDS: o r l - g p g U.S.O.S.-*ir Zlnt  (3076)  as c h l o r i d e  TXDS: o r l - r a t icu-r»t ai  TDLo-200 ?pn Tr.C-IXS LD5O-3500 =g/Kj  LDLo - 2000 n g / . » ^ FEPX/kC 37,22139,72  as c h l o r i d e (24994)  /TXDS:  Jvn-rar. par-ck-n U.S.O.S.-alr  LDLo - 75 = g/Kg TDLc - 1 =g/K.g TTX - KEO TVSS.C 37.;2139,72  TABLE I SOURCE:Weinstein,1974  69. KETA.I. CONTENT Or  E l cment  ACID SLUDCi  Gasoline'  Diesel  E.P.A.  1  2  19,000  Lead  Pb  20,000  1.000  Calcium  Ca  - 6,400  12,000  Phosphorus  P  4,300  1,000  Sod jirr.  Ka  4,000  200  -  Zinc  Zh  2,100  200  2.10C -  1 .700  Silicon  Si  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  -  Tin  Sn  30  35  -  Silver  A*  0  14  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  Be  -  •  0  Beryllium  0.  Other A n a l y s i s * Sulphur \ Ash  SO^  4..45  A c i d \ (as  Sulphur  S  TitrBtable  Acid  Ash Combustib)es  40.E  Additional  1 r.f c j x s t i on  13.5  -  14.S'.  40  -  45.  S  -  15",  30  -  42i  4,000,000  Viscosity  f]GS°r  475,000  Viscosity  €12S°F  150,600  C  11.26  47. .5  f 7S 'F  Viscosity  14.1  14. .9  pH  Oil  Veirht  12-16/£8l  SOURCE:Skinner,1974  cenTistoVes  NOTES: (1) A n a l y s i s obtained  TABLE I I  frtn  re-refinery - private  12) ITU R r p c r t " V t s t e O i l Study P r e l i m i n a r y Congress. A p r i l  1973".  Kepcrt  corrcspcnder.ee t o the  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 i n a l k a l i n e s o i l i s f i n a l l y converted to s u l f a t e s a l t s , entering the groundwater or nearby streams. Some other sulfates i n the sludge probably end up i n the same way, but lead, barium, calcium, s i l v e r , arsenic, molybdenum, titanium, strontium, and other heavy metal s a l t s may remain i n the l a n d f i l l . The  PROP plant located i n 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 d i s t r i b u t e d as an asphalt extender to be used i n asphalt growth that  manufacturing;  as a  coating  on shingles to i n h i b i t the  of moss; and for l a n d f i l l d i s p o s a l .  Koch (1977) indicates  the use of o i l i n asphalt paving may contain phenols which  could leach from the asphalt. Although quantitative  externalities data  on  can  the e f f e c t s  be  identified,  of p o l l u t i o n  there from  i s no  used o i l  disposal and re-refining waste disposal. VI.  Summary  Some  attempt  has been  made  i n t h i s chapter to estimate the  71.  benefits  and  the  absolute  The  major  pollution  costs of used o i l recovery. volumes  benefit damage.  Imperial  gallons  Province  of  refined. available  of  of  The estimates deal with  used o i l disposed into the environment.  resource  recovery  i s the reduction  in  Figure 9 indicates that there are 11.8 m i l l i o n of  which  Therefore  3  potentially million 8.8  for r e - r e f i n i n g .  recoverable  Imperial  million The  used  o i l i n the  gallons i s presently r e -  Imperial  gallons  are  still  benefit associated with the r e -  refining of these 8.8 m i l l i o n Imperial gallons i s as follows:  8.8 m i l l i o n Imperial gallons of Q.il Available for recovery x Recovery y i e l d .8 = 7mlg of recovered o i l 8.8 - 7 = 1.8 mlg of residual product The costs a t t r i b u t a b l e to the resource recovery process are the 1.8 m i l l i o n Imperial gallons of residuals produced. The  above formulation i l l u s t r a t e s that the benefit of used o i l  5. The .8 represents an average of the y i e l d from the acid/clay process (60 to 70%) and the PROP process (90% or more) i . e . + 70% = 160 -2 = 80%.  recovery the  i s s i g n i f i c a n t i n absolute  environment  gallons  would  (residual  be  at  product  a  terms.  Used o i l disposal into  maximum of 1.8 m i l l i o n Imperial  disposal)  in  disposal of 8.8 m i l l i o n imperial gallons.  comparison to a present Thus, the net benefit i s  7 m i l l i o n Imperial gallons of recovered o i l . A  major  obstacle  environmental  to  protection  effective is  aimed  at  of data on the impacts of  in  discussion  on the costs and benefits of recycling used l u b r i c a t i o n  it  available.  and  lack  policy  resources  oil,  production  the  resource  disposal.  Given  the  preceding  i s evident that cost and damage functions are not r e a d i l y Therefore,  the benefits and costs associated with the  resource recovery of used o i l were only  identified.  The benefits and costs i d e n t i f i e d with the use of o i l residuals are  primarily  analysis,  environmental  market  prices  do  issues. not  As  include  is the  presented social  benefits of recycling a c t i v i t i e s i . e . non-market costs and such as a i r , water and land p o l l u t i o n l e v e l changes.  in  the  costs and benefits  73. CHAPTER 5 I.  Introduction  Increases resulted  i n production  in  the  and  consumption of commodities have  problem of increased quantities of residuals.  A  d i r e c t consequence of the volumes of i n d u s t r i a l and urban wastes i s the  public  cost  of  society. to  expenditure on solutions to handle the wastes.  maintaining  As the  wastes increases, there i s a welfare loss to  Threat to the environment i s documented as a major reason  analyze  the  impact  of  resource  recovery  on  lessening the  quantities of residuals and wastes no longer u t i l i z e d .  II.  Economics of Resource Recovery  Historically, and  disposal costs have been close or equal to zero,  because of t h i s 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 a i r resources stems from the f a c t that these resources have not been  regarded  as  r e l a t i v e l y scarce. waste  disposal  economic  goods  -  that  i s , goods which are  Our natural resources, as convenient avenues of  have  been  zero-priced  as  far as the individual  manufacturing has  been  placed  However, waste  firm  was concerned. on  the environmental impacts of waste disposal.  society i s  disposal  environmental  U n t i l recently, l i t t l e concern  slowly  are  quality.  realizing  significant  that the external costs of in  terms  of  maintaining  Use of wastes to produce economic goods i s  one method of arresting p o l l u t i o n . In  order  recycling,  a  to  make  judgements  consideration  of  the  about  the  expected  desirability  costs of p o l l u t i o n  control i n comparison to the anticipated benefits i s required. framework  of  The  chosen herein to i d e n t i f y benefits and costs i s benefit-  cost analysis.  III.  Benefit-Cost Analysis and the Case Study  The the  role of benefit-cost analysis i n t h i s study i s to consider  economic  basis for reaching decisions about p o l l u t i o n control  through r e c y c l i n g . decision-making framework , with information.  Benefit-cost analysis i s not a one-step, simple  tool. a  set  Rather of  it  should  procedures  be  considered  as  a  to help organize available  Limits  to  pollution needed The  the  applicability  problems  to  case  arise  study  information  availability  from  entirely  being  calculating  the  the  of  to  because of limited information and data  project.  void  activity. has  input.  of  in An  the  control.  concerning  This i s due to the d i f f i c u l t y of costs  of  environmental p o l l u t i o n  Despite the volume of l i t e r a t u r e on the waste  disposal,  there s t i l l remains a  research on the exact repercussions of  examination  indicated  Complexities  have prevented the benefit-cost analysis  completed.  effects  considerable  data  benefits and  a  environmental  recycling  analysis  of l u b r i c a t i o n o i l reveals the p r a c t i c a l problems  with  this  benefit-cost  evaluate, i n monetary terms, environmental improvement.  associated  features  of  the  of  the  benefits and costs from  need for more research on p o l l u t i o n  damage  and  More s p e c i f i c a l l y , with respect to p o l l u t i o n  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 l o s s . Determination example,  of  requires  the the  socially  optimal  availability  of  re-use hard  ratio,  data.  for  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 - e x t e r n a l i t i e s of both market and  non-  market nature associated with production, re-use and disposal. Thus  the  major l i m i t a t i o n of the case study i s the absence of  on  the  interrelationships  data  activities.  This  determination  for  Nevertheless,  an  lubricating inventory  void each  the  benefit  and  pollution research cost  and  fails in  recycling to  monetary  allow  a  terms.  evaluation of the net benefits of recycling used  o i l can for  in  of  the  be  interpreted with  province  of  aid  of the waste o i l  B r i t i s h Columbia.  That analysis  allowed the examiner to calculate the absolute volumes of o i l to be recovered recovery  from  the  project. The net benefit attributable to the  of used l u b r i c a t i o n o i l equals 7 m i l l i o n Imperial gallons  for the Province of B r i t i s h Columbia. As i n the case study of l u b r i c a t i o n o i l , when q u a n t i f i c a t i o n of major  benefits and costs i s not possible, a detailed discussion of  the  unquantifiable  appraisal accompanied  of  the by  items  i s prepared.  recovery  a  of  used  For example, benefit-cost lubricating o i l  is  here  discussion of the environmental impacts of used  o i l on a i r , land and water. Presentation decision-maker, fact  that  social  of not  the  costs  and  benefits  a substitute for i t ; due  is  an aid for the  i n large part to the  existing p r i c e s generally do not r e f l e c t a l l associated  costs and benefits.  The  information available i n each case  must be reviewed by the decision-maker as to the expected e f f e c t of the  non-quantifiable  value.  data  on  the c a l c u l a t i o n of the net  As Dodgson (1981) emphasizes  Despite the considerable d i f f i c u l t i e s i n volved i n applying benefit-cost analysis in p r a c t i c e , the a l t e r n a t i v e may be public decision-making which i s a r b i t r a r y and i l l informed, and which i s more l i k e l y to be based on pressure from individuals who stand to gain f i n a n c i a l l y from p a r t i c u l a r Government investment schemes, on factors such as perceived l o c a l pride and prestige... or on vague and unsubstantiated statements of the expected development or " m u l t i p l i e r " e f f e c t s of projects.  IV.  Suggestions for Further Research  present  78.  The  shortcomings  of the research are evident.  The thesis has  only i d e n t i f i e d the benefits and costs attributable to lube o i l rerefining.  No monetary determination of the costs and benefits  attempted. numerous of  In  order  was  to prepare a complete cost/benefit analysis  assumptions must be made.  Figure 11 w i l l i l l u s t r a t e some  the important areas where assumptions are required, in order to  aid future research.  The nature of the decision-making can be seen  c l e a r l y in the diagram.  Stage 1 encompasses those assumptions that  must be made before any q u a n t i f i c a t i o n of costs and benefits can  be  made.  be  For  chosen, for  a  alternative  even  though  a  particular  s i t e may  not  locations can be i d e n t i f i e d and data acquired  v a r i e t y of decisions.  course  To i l l u s t r a t e t h i s point, during  the  of the Synergy West (1974) study on the recovery of o i l for  Alberta, costs  example,  a number of assumptions were made i n order to develop the  of  a recycling system.  re-refineries;  number  of  The assumptions included: number of  c o l l e c t i o n d i s t r i c t s ; types of storage  facilities;  and,  determined  recoverability  collecting,  transporting  and  alternative  locations was  calculated at 5-year i n t e r v a l s , up to 20  processing  the  rate. used  The  cost of  o i l at three  79.  STAGE 1 1)  number of f a c i l i t i e s to be located i n the province  2)  location of f a c i l i t i e s  3)  type of recovery process  4)  s i z e of f a c i l i t y i . e . capacity  STAGE 2 1)  cost of c o l l e c t i o n  2)  cost of transportation v i a 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  computer  the  future.  program  was  To  aid  adopted  in that  the  analysis of the data, a  could  store and compare the  numerous data. Further  to  the  considerations cost/benefit seemingly oil  of  major Stages  analysis  decisions of Stage 1, and repercussive 2  and  3,  there  are  areas  that require further research.  in  the  Despite the  extensive knowledge on the environmental impacts of used  disposal,  the  environmental e f f e c t s w i l l vary with d i f f e r e n t  concentrations of impurities i n the o i l and d i f f e r e n t environmental conditions.  For example, the extent to which o i l i s used as a road  dust  suppressent  the  residuals  environment, to  from  cannot  determine  and  affects a  the environment and the extent to which resource  recovery  be e a s i l y compared.  process  pollute  the  I t would require a study  the associated environmental degradation of used o i l  re-refining  wastes  disposed  of  into  the environment, with  p a r t i c u l a r reference to B r i t i s h Columbia. As there the  indicated is  costs  in  the  case  study of l u b r i c a t i o n o i l , usually  no market price for the benefits of p o l l u t i o n control or of  associated  p o l l u t i o n due to p o l l u t i o n control i . e .  environmental degradation due to disposal of re-refining residuals,  81-  because  the good i s a public good.  "simulation" willing  to  of  the  market,  pay  for  the  knowledge  that  some  activity,  even  though  price.  As  profit  to  Future research could e n t a i l a discover  benefit  of  what  people would be  p o l l u t i o n control with the  p o l l u t i o n would be produced by the recycling they w i l l never be asked d i r e c t l y to pay a  estimation of how much people would gain i n income and  i f the services were provided, can be used an an indication  of how much they ought to be w i l l i n g to pay, as a maximum. Household concerning attempts  surveys,  their to  in  which  willingness  measure  individuals are asked questions  to  demand  pay for environmental amenities for  environmental  quality.  An  estimation of demand for environmental q u a l i t y on a broad scale, i s initiated  by  surveys.  The  survey  will  the  hypothetical  measurement probably  environmental  of  situations contained i n household demand as indicated by a household  indicate  that  there  i s a real demand for  q u a l i t y , measured i n terms of willingness to pay for  these amenities.  The evaluation  analyst of  can  incorporate  environmental  a ranking system to aid i n the  quality  factors.  The procedure of  82.  ranking  is  undertaken  until  all  the  factors  i.e.  costs  and  benefits, have been given an imputed range of values.  The range of  values  in  would  be  subject  to  a  sensitivity  check  order to  determine at what l e v e l s of monetary value the analysis indicates a Met  Social  method  Benefit.  of  the  Maniate and Carter  above  approach  (1973) discuss a general  that can aid i n the evaluation  environmental q u a l i t y factors in Benefit-Cost  of  analysis.  F i n a l l y , the thesis has lead to the insight that the Government must of the  decide to what extent they are to be concerned with the used  lube o i l .  re-refining  where  profits  disposal determine  of the  As private industry i s the only participant i n  process, are  issue  the  l e v e l of recycling i s at the point  maximized.  The s o c i a l value of avoided waste  into the environment must be investigated in order to 'optimal'  recycling l e v e l i . e .  the point at which  the extra costs of recycling outweigh the extra benefits.  83.  BIBLIOGRAPHY Abert, J.G., H. A l t e r and J.F. 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