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Harnessing the End-of-Life Formula

May 21, 2015 by Bo Weidema

The so-called End-of-Life formula has received a lot of attention lately. Currently, public commenting is open for the first “Environmental footprint” pilot drafts that use the 50:50 End-of-Life formula of the EU PEF Guideline (EU 2013).

The End-of-Life formula is an attempt at dividing the benefit of recycling between the suppliers of scrap and the users of scrap. The 50:50 formula divides this benefit equally between the two.

The main criticism of the formula is that this does not reflect how recycling markets work in real life, and the use of the formula therefore leads to misleading information and perverse incentives to the market actors:

• The PEF 50:50 End-of-Life formula implies that demanding scrap will result in an increase in the amount available for recycling corresponding to 50% of the demanded scrap, and will give the user of scrap an equivalent credit for reducing the need for virgin material. The only way this can reflect real life is by assuming that a demand for scrap stimulates a marginal change in market price for scrap, leading to exactly 50% increase in supply.
• Likewise when sending scrap to recycling, the PEF 50:50 End-of-Life formula implies that only 50% of this will be recycled. Again, the only way this can be understood is by assuming that the increased supply of scrap leads to a marginal decrease in price, causing exactly a 50% reduction in supply of scrap from other actors on the market.

The problem with the 50:50 EoL formula is that it tries to combine two distinct market situations into one formula:

• The first part of the EoL formula (involving R1: the amount of scrap demanded) is relevant in a market situation where there is a surplus of scrap available. In this situation, an increase in demand for scrap will lead to more recycling (equivalent to the entire additional demand and not only 50%), while supplying more scrap will only increase the need for disposal of the surplus.
• The second part of the EoL formula (involving R2: the amount of scrap supplied to recycling) is relevant in a well-established recycling market where all collectable scrap is already recycled, and increase in demand for scrap therefore cannot cause any increase in the amount of scrap available, while sending material to recycling will lead to an equivalent (not only 50%) increase in recycling.

The attempt to place both situations into one formula is what causes the problem.

But the problem has a solution: An alternative, more realistic approach is already provided in the PEF Guide (EU 2013) since it requires that “wherever possible, subdivision or system expansion should be used to avoid allocation. (…) System expansion refers to expanding the system by including additional functions related to the co-products”, corresponding to the normal consequential modelling as described in ISO 14044/49. System expansion corresponds to using the first part of the End-of-Life formula (with 100% credit to the user of scrap) in a market situation where there is a surplus of scrap available and the second half (with 100% credit to the supplier of scrap) when all collectable scrap is already recycled. In this way, system expansion provides an incentive for using scrap when the market for the material in question is decreasing, and for supplying scrap when the market is expanding, which is exactly what is needed to increase recycling in these two respective situations. When the recycling rate is below its environmental optimum, the system expansion procedure furthermore gives credit for specific actions that increase recycling capacity. For details on this modelling and its rationale, see Chapter 5.7 in Weidema (2003).

Since allocation can always be avoided by subdivision or system expansion, as demonstrated in the ecoinvent system model ‘Substitution, consequential, long-term’, the quoted PEF Guide requirement actually makes superfluous the more elaborate End-of-Life formula for recycling allocation. Using system expansion only for some by-products and the End-of-Life formula for what is seen as situations of recycling would create an inconsistency in the system models, and can therefore not be intended (furthermore, no definition is given in the PEF Guide as to when when the use of a by-product should or should not be seen as a case of recycling).

The good news is that on an EU workshop on the topic, held on October 6^th 2014, Michele Galatola, team leader of the PEF pilots, stated that “During this part of the pilot phase (1^st wave pilots screening studies) we want to gather as much knowledge as possible on the pros and cons of using the “single formula” approach. If the results gathered from the screenings convince us that the single formula will never work, then we might consider to test in the second part of the pilot phase an alternative approach…”

Another good news is that Wolf & Chomkhamsri (2014) have succeeded in elegantly re-formulating the most important parts of the above-described long-term consequential modelling principles into a new encompassing formula that they call “The integrated formula”, and that this has already been recommended by the PEF pilot on metal sheets (Eurometaux 2015).

It looks like the stray End-of-Life formula is slowly being reined in.

References:
EU (2013). Product Environmental Footprint (PEF) Guide. Published April 9th as annex II to the Commission Recommendation on the use of common methods to measure and communicate the life cycle environmental performance of products and organisations.

Eurometaux (2015). Product Environmental Footprint Category Rules (PEFCR) for
 “Metal Sheets for various applications”. Revision 0.4 29/04/2015

Weidema B P. (2003). Market information in life cycle assessment. Copenhagen: Danish Environmental Protection Agency. (Environmental Project no. 863) https://lca-net.com/p/1078 Chapter 5.7. on Recycling.

Weidema B P. (2013). Guide to interpret the EU product environmental footprint (PEF) guide. Aalborg: 2.‑0 LCA consultants. https://lca-net.com/p/235

Wolf M-A, Chomkhamsri K. (2014). The “Integrated formula” for modeling recycling, energy recovery and reuse in LCA. White Paper. Berlin: maki Consulting & P.P.P. Intertrader.

Party spoiler

April 23, 2015 by Bo Weidema

In what was announced as a celebration of the first 3 LCA guidelines for feed, small ruminants and poultry (http://www.fao.org/partnerships/leap/en/ ) of the FAO LEAP Partnership, I had to play the role of the party spoiler. Practically all the speakers talked about how these new guidelines would allow the identification of hotspots and options for improvement. At the same time it was made quite clear that the guidelines are for attributional LCA, explicitly excluding consequential modelling. Therefore I had to point out that as long as you limit yourself to an attributional approach, where you cut-off (e.g. by allocation) a part of the affected systems, these guidelines cannot be used to consistently identify improvement options. For example, if you by allocation isolate the milk from dairy farming from the meat, you may reach the conclusion (as one presenter showed) that intensification of dairy farming is environmentally beneficial. With a consequential approach, that includes all the real-life effects in the system, you are likely to reach the opposite conclusion, because of the important role of the displaced meat production. So if you really want to take serious all the fine words used to present the 3 guidelines (science-based, consistent and focussed on continuous improvement), your guidelines should support consequential modelling.

Luckily, my caustic words were met by broad agreement to the current limitations of the FAO guidelines, and a promise that there will be a second round that will look at the possibility to provide guidelines that address the LCA methods needed for decision support for improvements, in accordance with the ISO 14040 series of standards.

See also my blog on FAO LEAP from July 2014.

Disentangling E P&L and Natural Capital Accounting

March 4, 2015 by Bo Weidema

Results from lifecycle based environmental assessment are increasingly being expressed through the use of economic terminology. Every second year a new buzzword takes the stage. In this blog-post I try to provide some clarification on two recent buzzwords: E P&L (Environmental Profit & Loss account) and NCA (Natural Capital Accounting).

In 2011, PUMA (the shoe-maker) launched their E P&L, a practice that was followed by several others, including Novo Nordisk and the Danish Fashion Industry. The intention is to complement the company’s normal Profit & Loss account (the financial statement of the income and costs) with an account of the monetarised external benefits and costs related to the life cycle of the product portfolio of the company. Formally, an E P&L should thus be called a ‘Product portfolio E P&L’, which could more lengthily be described as a ‘Product portfolio environmental life cycle assessment with monetary valuation of impacts’. Except for the monetary valuation of the impacts, an E P&L is thus equivalent to what the European Commission calls an Organisation Environmental Footprint (OEF).

In 2013, September 27th, The Guardian had an article stating: “If you are looking for the next big thing in sustainability, you needn’t look much further than natural capital accounting”. Last year, in December, the European Commissions Business and Biodiversity Platform published a guide to NCA (Spurgeon 2014), in which E P&L is mentioned as one possible Natural Capital Accounting approach.

However, capital is essentially a synonym for resources, i.e. those things that enable us to produce goods and services. Natural capital thus covers abiotic natural resources as well as ecosystem resources that provide us with ‘ecosystem services’ – another buzzword that now has been around for 10 years. As such, natural capital only has instrumental value and the term cannot sensibly be used to cover the intrinsic value of nature, i.e. the value that we place on nature in itself and not for what it can produce.

And even more obviously, natural capital cannot sensibly be said to cover the value of the non-natural areas of protection, whether intrinsic (human wellbeing and cultural heritage) or instrumental (man-made and human capital) and thus NCA should never be able to aspire to cover all impacts on these areas of protection.

The below table clearly shows how impacts on natural capital are only a (small) part of the whole picture of environmental impacts. In the table, the different areas of protection are related to the popular “people, planet, profit” concepts.

The NCA guide (Sturgeon 2014) is actually aware of the terminology problem it creates, since immediately after having presented the definition of NCA as “Identifying, quantifying and/or valuing natural capital impacts, dependencies and assets, as well as other environmental impacts and liabilities, to inform business decision-making and reporting”, the guide goes on to say: “To be more technically correct, the definition for NCA for business should only include impacts and dependencies around ‘natural capital’ and not ‘other environmental impacts’.”

Now we can only hope that the readers come as far as this caveat and do not take the definition out of its context. For my part, I will continue to say that we do ‘Product portfolio E P&L’s and that NCA in its more narrow definition is a part of this.

Reference

Spurgeon J P G. (2014). Natural Capital Accounting for Business: Guide to selecting an approach. Brussels: EU Business and Biodiversity Platform.