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Operational Eco-efciency
Comparing Firms Environmental Investments in Different Domains of Operation
Roland W. Scholz and Arnim Wiek

corporate investment policy environmental operations environmental decision support tool environmental assessment industrial ecology trafc impact compensation

Summary Eco-efciency has been established as a crucial concept for corporate environmental management. Most approaches deal with eco-efciency on the level of the company or the product. However, given that companies have special budgets earmarked for environmental operations or investments, the question arises as to which operation within which domain is the most eco-efcient. This article presents an approach to supporting these decisions by calculating eco-efciency on the operational level. The procedure is demonstrated using a case study of the Swiss National Railway Company. Investments and operations in the domains of energy production, landscape and nature conservation, noise protection, and contaminated soil remediation are assessed and compared. Decision-makers seeking an eco-efcient corporate investment policy will nd, in this concept, a guideline for prioritizing various domains of operation as well as the operations within a domain.

Address correspondence to: Professor Roland W. Scholz Swiss Federal Institute of Technology Zurich Institute for Human-Environment Systems Natural and Social Science Interface ETH Zentrum HAD 8092 Zurich, Switzerland <> <> 2005 by the Massachusetts Institute of Technology and Yale University Volume 9, Number 4

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The concept of eco-efciency has been discussed in the environmental management discourse for more than a decade (Schaltegger and Burritt 2000, 49ff). On the institutional level, the World Business Council of Sustainable Development (WBCSD) has strongly promoted ecoefciency as a concept for businesses to pursue ways of reducing their impact on the environment while continuing to grow and develop (WBCSD 2000; cf. Verfaillie and Bidwell 2000; DeSimone et al. 1997). The guiding principle of eco-efciency approaches is to optimize the ecological-economic ratio of desired output and necessary inputs (Schaltegger and Burrit 2000, 49ff.). Thus, ecoefciency is considered to be an additional economic success criterion, like productivity, cash ow rate, or cost-effectiveness rate. However, there are two distinctions to consider, with which it has not always been easy to cope. The rst concerns the distinction between effectiveness and efciency. Effectiveness can be dened as a target-related output value, whereas efciency denes a relation between input and output. This implies, as Hukkinen (2003, 15) points out, that high eco-efciency does not ensure appropriate eco-effectiveness. A second, related confusion pertains to the relationship between eco-efciency and sustainability. In various articles, eco-efciency is considered to be a key to sustainability (Tyteca 1998; DeSimone and Popoff 1997, 1-22; Laws et al. 2004). Yet, on the contrary, high ecoefciency is neither necessary nor sufcient for the attainment of sustainability (Figge and Hahn 2004; Jalas 2002; Sharma and Ruud 2003). Thus, to implement comprehensive environmental or sustainability management, eco-efciency needs to be linked to a set of complementary indicators. From the very beginning, eco-efciency has focused on the micro level, that is, on products, production processes, and companies. Thus, it is compatible with the major concepts of industrial ecology, such as environmental product design, integrated product policy, dematerialization of processes, and life-cycle assessment (Lifset 2001). Within this focus, management sciences
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differentiate between eco-efciency on the company, product, and functional levels (Schaltegger and Burritt 2000, 50). On the company level, the economic performance of a rm is related to the totality of environmental impacts, which aims at benchmarking among companies (Verfaillie and Bidwell 2000). On the product level, the prices and environmental impacts of various products are combined to inform consumers which of products similar in price and function is most eco-efcient (WBCSD 2000). Eco-efciency calculations on the functional level refer to the concept of functional units, for example, a serving of food, a transportation service, or a tourism service. Functional units can be provided by different agents with different eco-efciency values. One prominent approach to determining the environmental impacts of functional units is taken from life-cycle assessment (Heijungs et al. 1992). In this article, however, we introduce the operational level of eco-efciency. If we assume that large companies have special budgets earmarked for environmental operations or investments, the question arises as to which operation within which domain is the most eco-efcient. Domains of operation are distinct action elds that are differentiated from the decision makers or the rms perspective. Examples of domains are noise protection or energy saving measures. This article presents an approach to supporting these decisions by calculating eco-efciency on the operational level. In a long-term business perspective, the compensation and internalization of external costs have to be integrated into these decisions (Coase 1960). This perspective ultimately aims at a coherent and efcient environmental operation management (Angell and Klassen 1999). The challenge in terms of scientic feasibility is to develop a tool that allows one to compare operations differing in reference, extent, and function and to accurately assess and deal with uncertainties. From the viewpoint of practical feasibility, companies face the challenge of making good investment decisions that meet environmental criteria based on appropriate data on environmental and economic utilities. After introducing the conceptual and methodological bases, we demonstrate the


procedure of calculating operational ecoefciency using a case study of the Swiss National Railway Company, which dealt with energy production and savings, landscape and nature conservation, noise protection, and contaminated soil remediation.

The Concept of Operational Eco-efciency

In calculating operational eco-efciency, we focus on an environmental operation or investment, Ak , such as the construction of a noise protection wall or the remediation of a contaminated site. We dene the environmental utility of this operation, u 1 ( Ak ), as the sum of (1) the benets gained from environmental improvements (positive utility value) and (2) the environmental costs of the negative side effects caused by the operation (negative utility value). One could assume that an environmental operation, by definition, provides environmental improvements. However, environmental operations also generate unintended environmental damages, which potentially could negate the benets (this is sometimes called the rebound effect) (Berkhout et al. 2000; Dyllick and Hockerts 2002).1 We assess the environmental utility on the macro level (externalities). Let k = 1, . . . , K denote the number of different operations; then the environmental utility, u 1 ( Ak ), is:
2 u 1 ( Ak ) = u 1 1 ( Ak ) + u 1 ( Ak )

offs, and operational cost for the lifetime of each operation (Scholz et al. 2001). It is obvious that for a comprehensive application in an enterprise, the annual costs per alternative operation have to be calculated and that, nally, the choice of alternatives is constrained by the total annual amount of money available for environmental investments in a given period of time. From a theoretical viewpoint, indirect economic benets that might result from the environmental operation could also be taken into account. For instance, noise protection walls alongside railway tracks might stabilize embankments, thereby reducing the maintenance costs. Moreover, in a comprehensive approach, the opportunity cost of the invested capital should be taken into account. However, we use a simplied approach focusing on the direct economic costs, which are assessed on the micro level, that is, the company level. The equation for the economic utility, u 2 ( Ak ), is u 2 ( Ak ) = u 1 2 ( Ak ) (2)


where Ak = an environmental operation, action alternative or investment (k = 1, . . . , K ), u1 1 ( Ak ) = the direct environmental benets from operation Ak (positive utility value), and u2 1 ( Ak ) = the indirect environmental costs of operation Ak (negative utility value). The economic utility of an environmental operation or investment, u 2 ( Ak ), is primarily determined by the economic costs. In accounting, there are degrees of freedom with respect to the time-span of write-off, the allocation of maintenance costs, and whether the processed products have different lifetimes. With respect to operational eco-efciency and the applications presented in the case study, the assessment of the economic costs include investment costs, write-

where u 1 2 ( Ak ) = companys costs of operation Ak . Consequently, we dene operational ecoefciency as the relationship between the environmental utility and the economic utility of environmental operations, which is to a certain extent compatible with the denition proposed by Schaltegger and Burritt (2000, 49ff) and Fet (2003). We calculate operational ecoefciency as a difference; that is, the operation under consideration is examined in comparison to the business-as-usual alternative. Thereby, we restrict the calculation to increments, that is, intended improvements of the status quo. This procedure is compatible with incremental budgeting or investment appraisal methods (Dayananda et al. 2002). The equation for calculating operational eco-efciency is ee( Ak ) = = ee( A0 , Ak ) = u 1 ( Ak ) u 1 ( A0 )
1 u1 2 ( Ak ) u 2 ( A0 )

u 1 ( A0 , Ak ) u1 2 ( A0 , Ak ) (3)

This equation cannot be applied to the comparison between the business-as-usual and an alternative having identical costs (division by 0),

Scholz and Wiek , Operational Eco-efciency


and also the sign of the numerator and denominator is important and leads to different constellations. With respect to possible unintended side or rebound effects of environmental operations, we differentiate between two constellations of ecoefciency. The rst and regular constellation results in a positive eco-efciency value; that is, if the operation leads to environmental benets and economic costs. The second constellation results in a null or a negative eco-efciency value; that is, the operation creates no environmental gains or leads to environmental costs (rebound effect), although still having economic costs. Operations belonging to the second constellation of ecoefciency are evaluated indeed, but are omitted from further consideration and elaboration because of the intention-to-improve in conducting environmental operations. This cutoff condition is formulated in the following equation:
2 u1 1 ( Ak ) + u 1 ( Ak ) > 0

National Railway Company (Scholz et al. 2001) presented in this article. Environmental Assessment Model and Methods A matrix algebraic model served to represent the assessment chain from operations to environmental utilities (gure 1). The model referred to the structure of specic environmental assessment methods, such as environmental impact assessment (EIA) and life-cycle assessment (LCA) (Goedkoop and Spriensma 1999). However, it also assisted in representing different assessment methods in a common framework. The model begins with the allocation of the impacts from operation, Ak , to a set of impact categories (inventories). If there is an appropriate transfer matrix, that is, (substance) ow matrix, F, that assigns the consequences of Ak to a set of L impact categories, then one obtains a K L dimensional matrix of environmental impacts, I. The other steps can be modeled analogously: from impacts to effects when dening a second transfer matrix, that is, pressure matrix, P; from effects to damages/improvements when dening a third transfer matrix, H; and nally, from damages/improvements to utilities when dening a fourth transfer matrix, that is, utility valuation matrix, V. The last of these matrices is an


Quantifying the Components of Operational Eco-efciency

Table 1 lists the methods of environmental assessment and valuation that were applied in the operational eco-efciency study of the Swiss

Table 1 Overview of the methodologies and methods of environmental assessment and valuation applied in the four domains of operation in the study of the Swiss National Railway Company Environmental valuation Environmental assessment LCA: EcoIndicator 95 X X Expert panels: Construction of environmental utility functions (A) Valuation of environmental utilities using valuation factors Monetizing damages X X Willingness to pay (B) Valuation of effects

Domains of operation Energy production and saving Landscape and nature conservation Noise protection Contaminated soil remediation

Hedonic pricing




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Figure 1 1999).

Assessment chain from operations to utilities with transfer matrices (Goedkoop and Spriensma

Mx1-dimensional matrix, if a one-dimensional utility score is targeted, or an MxR-dimensional matrix, if a multidimensional utility score is targeted for each alternative. First, for standardized operations, such as the construction of a noise protection wall, Eco-Indicator 95/99 (Goedkoop 1995; Goedkoop and Spriensma 1999) was used as a representative method of LCA. The functional unit to be assessed was the environmental operation. The chemical compounds (e.g., chlorouorocarbons [CFCs] and polycyclic aromatic hydrocarbons) and materials used or caused by the operation were inventoried (impacts, I). The environmental consequences of the inventoried elements were allocated to effects, E, on various environmental systems (e.g., greenhouse effect, eutrophication). The effects were then assigned to the caused damages/improvements, D (such as resource depletion/restoration, health impairment/healing, and ecosystem impairment/remediation). The damages/improvements were assessed with respect to a set of targets derived from scientic surveys. According to a distance-to-target approach, the damages were weighted and aggregated to yield an overall utility value (U). Second, expert panels were used to assess environmental operations that required site-specic, local knowledge and could not be related to the standardized unit processes available in LCA databases. Examples for such environmental operations include nature conservation and landscape change (Oliver 2002). The experts assessed these operations according to the procedural framework (shown in gure 1). As a prerequi-

site they determined damage/improvement categories with respect to vegetation, soil functions, landscape quality maintenance, and so forth. Second, they quantied the effects for each damage/improvement category using utility scores. Third, based on a multicriterion assessment procedure, the experts weighted the damage/improvement categories. Finally, the scores were aggregated to yield a composite utility score. Environmental Valuation Methods The environmental valuation methods applied in this study are differentiated into two approaches (table 1). One group of methods (A) monetizes environmental utility scores using valuation factors; the factors were determined using damage valuation or contingent valuation methods. The other group (B) monetizes effects using the hedonic pricing method (Garrod and Willis 1999). Environmental damage valuation that monetizes damage, replacement, and substitute costs (Johanson 1990) has been applied in LCA-related valuation studies (Hellweg et al. 2003, 11ff.). We used a valuation factor based on a macroeconomic valuation approach (Frischknecht 2000, 87; Frischknecht 1998, 125ff.). The approach assessed overall environmental damages in Europe using Eco-Indicator95 and conducted a survey on the related total external costs. On this basis, a valuation factor per Eco-Indicator point was determined. The willingness-to-pay method (Carson 2000) was applied to nature and conservation operations, which had been assessed by expert

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panels. As these services are at present not traded in the marketplace, the contingent valuation approach was applied to calculate their subjective and hypothetical economic values. This valuation method is called contingent, because people are asked to state their willingness-to-pay contingent on a hypothetical environmental service. The assessed utility score of the Swiss Landscape Conservation Strategy (SLCS) (BUWAL 1999), the total area of Switzerland, and willingness-topay data from Swiss inhabitants related to SLCS served as references for the valuation of these operations. The hedonic pricing method (Brookshire et al. 1982; Palmquist 1999) was applied to noise protection, as the effects of these operations are valuable with respect to market price changes (Theebe 2004; Wilhelmsson 2000). In this method, we estimated the nancial impacts of noise protection by comparing the remediated state of the location with a similar location whose market price was known.

transport (on a passenger-km basis) and of 90% in cargo transport (on a tonne-km basis). In 2000, the SBB was a joint stock company owned by the Swiss Confederation, with about 30,000 employees and a turnover (revenue) of 4.4 billion Swiss francs.2 The daily transport volumes were 750,000 people and 140,000 tonnes of goods.3 This corresponds to approximately 12,000 million person-kilometers/year (p km/yr) and 10,000 million tonne-kilometers/year (tonne km/yr).4 The SBB owned 3,000 km out of a total of 5,000 km of Swiss railway tracks. Environmental issues were managed by the Railway Environmental Center (BahnUmwelt-Zentrum) of the SBB, a small specialist team, which reports directly to the CEO. Selecting the Domains of Environmental Operations The aim of the transdisciplinary case study (Scholz et al. 2001) was to develop a tool that allowed priority setting among environmental investments in specic domains, such as noise protection, but also between different domains that had previously not been compared. The following domains of operation were selected according to the priority setting of the SBB (H ubner and Kuppelwieser 1997): Energy Production and Saving This domain covered a broad range of operations such as types of engines and methods of energy production and energy transformation. The most critical issue in this domain was the ownership of the hydroelectric power stations, which was intensely discussed because of the high price of hydroelectric power compared to cheaper energy available on the market. Landscape and Nature Conservation The investigation was guided by the assumption that railways might have a high impact in terms of landscape fragmentation, habitat segregation, and corridor effects, which should become the subject of environmental operations. Noise protection Noise has always been a subject of major importance, and legal compliance has been placed

Data Sources and Calculations All calculations were based on published studies and a few original surveys, which are documented in a report by Scholz and colleagues (2001). We used data for the reference years 1999/2000. Analyses and calculations were performed by a team of 15 scientists and 50 advanced masters students of environmental sciences. Experts from the Swiss National Railway Company accompanied the entire project and checked all results in a transdisciplinary discourse.

The Case Study of the Swiss National Railway Company (SBB)

The Company The SBB is the Swiss national railway company and operates all major intercity connections and most trains in the urban agglomerations as well. Another 40 railway companies, all of which are owned by communal and/or cantonal public entities, operate trains in Switzerland. They all cooperate closely with the SBB, which in the year 2003 had a market share of 87% in passenger
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at the top of the agenda of most transportation companies (Leth 2003). Contaminated soil remediation For historical reasons, the SBB was the real estate owner with the greatest number of contaminated sites in Switzerland. At the time of the study, there was much uncertainty regarding the way in which soil remediation operations would provide return on investments to both the company and the Swiss environment. The following applications are restricted to selected operations from the rst three domains of operation in order to reasonably point out the spectrum of starting positions, applied methods, and generated results. Assessing the Eco-efciency of Environmental Operations Landscape and Nature Conservation The SBBs operations in the domain of landscape and nature conservation, ALN k , were supposed to compensate for the environmental impacts of infrastructure, such as tracks and railway embankments. The alternative operations (table 2) were examined in comparison to the business-as-usual alternative (nullalternative), ALN 0 . The layout of table 2 illustrates the structure of the comparison.

Table 3 displays the results of the ecoefciency calculations in the domain of landscape and nature conservation. The environmental utility scores of the operations in this domain, u 1 ( ALN k ), were obtained by an expert panel for each operation (Scholz et al. 2001). For the valuation of the utility scores, a willingness-to-pay of 30 SFr per person and month was assumed for nature and landscape conservation, based on research by Egger and colleagues (1999). This resulted in 360 SFr per person year, or 2.5 billion SFr for a Swiss population of 7 million. To calculate a valuation factor, the willingness to pay was combined with a general reference amount of environmental utility points. This amount represents the environmental benets that would result if the Swiss Landscape Conservation Strategy (SLCS) covering Switzerland (41,300 km2 ) were realized. Thus, a valuation factor of 25,000 SFr per km2 , utility point, and year was obtained. Combining (i) this valuation factor with (ii) the utility score and with (iii) the size of the area affected by the operation yields the monetized utility score. The economic utility score of these environmental operations, u 2 ( ALN k ), reects the accumulated costs for materials, machines, labor, energy, and so forth. The calculated results show that all operations would have generated environmental benets,

Table 2 The three operations in the domain of landscape and nature conservation (Hitzke et al. 2001, 209f.; Egger et al. 1999) No. 0 1 Term ALN 0 ALN 1 Operation Business as usual Elongation of the tunnel to reduce disturbances of the sensitive habitat on the surface Construction of a crossover for game animals Reafforestation, hedge planting, and extension of nature protection areas Compensation Impacts of tunnel building Location (CH) Hersiwil/Islerenh olzli/ Wilderswil-Zweil utschinen Hersiwil


Impacts of building a bypass railway Impacts of double track extension

Islerenh olzli

Wilderswil-Zweil utschinen

Note: CH = Switzerland.

Scholz and Wiek , Operational Eco-efciency



Table 3 Eco-efciency calculations for three operations in the domain of landscape and nature conservation Landscape and nature conservation 1 2 3 Environmental utility Economic utility Size of the affected area Utility Monetized utility Monetized utility Ecoscore score in 1,000 SFr. score in 1,000 SFr. efciency (km2 ) 1.94 18.0 0.9 0.51 0.31 0.87 24.8 170.0 19.5 773.0 235.0 27.4 0.03 0.72 0.71

Location Hersiwil Islerenh olzli WilderswilZweil utschinen

but would have broadly differed with respect to the investments required. The most expensive operation in terms of economic costs proved to be operation 1 ( ALN 1 : elongation), a fact that is traced to the high costs of underground construction engineering. Due to its relatively small environmental utility, leading to an eco-efciency value of only ee = 0.03, operation 1 is ranked in last position. In contrast, operation 3 ( ALN 3 : nature care measures) would have had the smallest economic costs. However, it would have generated only a relatively small monetized environmental benet. Thus, the eco-efciency of operation 3 (ee = 0.71) is of roughly the same magnitude as that of operation 2 (ee = 0.72), whose economic costs and associated environmental benets would have been much higher. Energy Production For the alternative operations in the energy domain, two subdomains were chosen in the case study, production and transformation of energy, EV AEP k , and transportation vehicles, Ak . We focus here on the alternatives of energy production and transformation, AEP k , and summarize the other results in the last section. Alternatives in energy production had been controversially discussed over many years with respect to their strategic importance for the SBB. The SBB requires 16.7-Hz rail current to run its trains. In 2000, approximately 90% of the required 16.7-Hz rail current was produced in the hydroelectric power stations owned by the SBB; the rest was imported as 50-Hz current and transformed to 16.7-Hz rail current with a loss of approximately 8%. The costs of the homemade current (0.07 SFr/kWh) seemed extraordinarily high when compared to the costs of the European mix provided via the Union for the
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Coordination of Production and Transmission of Electricity (UCPTE): 0.03 SFr/kWh. Thus, selling the hydroelectric power plants had become a reasonable alternative to discuss. Four alternative operations were assessed in the case study: business as usual, AEP 0 , selling the hydroelectric power stations, AEP 1 , expanding the hydroelectric power stations, AEP 2 , and ecoenergy production, AEP 3 . The calculations were based partly on data from all SBB hydroelectric power stations, and partly on extrapolated data from a study of a specic hydroelectric power station owned by the SBB in Ritom, Switzerland. The following detailed calculation is restricted to the business-as-usual alternative, AEP 0 (nullalternative), versus the alternative of selling the hydroelectric power stations, AEP 1 . The calculation of eco-efciency required the determination of the level of demand for current. The business-as-usual option comprised a high percentage of self-produced 16.7-Hz rail current and a small percentage of imported 50Hz current. The calculation was further differentiated by import-export balances due to annual spillovers and shortages (Hitzke et al. 2001, 212ff.). The energy mix after the hydroelectric power stations were sold, that is, for operation AEP 1 , showed the opposite balance because the required current would have to be totally imported by the SBB (see table 4, columns Amount). The environmental utilities, u 1 ( AEP k ), were assessed using Eco-Indicator 95 and were monetized using a valuation factor calculated by Frischknecht (2000, 1998). The calculation resulted in a difference of 21.4 million 109 EcoIndicator 95 points per year between the utilities EP u 1 ( AEP 0 ) and u 1 ( A1 ). With the valuation factor 9 of 5.6 SFr per 10 Eco-Indicator 95 points, selling the hydroelectric power stations would incur


Table 4 Comparison between the two alternatives of business as usual and selling the hydroelectric power stations with respect to the components of current, transformation, capacities, and eco-taxes (based on data from 1999/2000; Scholz et al. 2001). Alternative 0: Business as usual Alternative 1: Selling the hydroelectric plants

Amount Price Cost Amount Price Cost Balance (GWh/yr) (SFr./kWh) (106 SFr.) (GWh/yr) (SFr./kWh) (106 SFr.) (106 SFr.) 16.7-Hz current 1,750 50-Hz current 0 Additional current 270 Transformation 270 Capacities 0.015 Eco-taxes 270 Total 0.07 0.03 0.07 0.03 150 0.03 122.50 0.00 17.55 6.75 2.25 9.18 158.23 0 1,890 270 2,160 0.55 2,160 0.07 0.03 0.07 0.03 150 0.03 0.00 56.70 17.55 54.00 82.50 73.44 284.19 122.50 56.70 0.00 47.25 80.25 64.26 125.96

Notes: One gigawatt-hour (GWh) = 106 kilowatt-hours (kWh) = 3.6 terajoules (TJ). One Swiss franc (Sfr) 0.65 Euro 0.78 US$.

environmental costs of about 120 million SFr more per year (20052025) than the businessas-usual alternative. Assuming constant costs and capacities, the economic costs for the required 2,000 gigawatt hours/year (GWh/yr)5 of 16.7-Hz rail current, EP u1 2 ( Ak ), were calculated by equation (5). In a prospective full-cost calculation, eco-taxes of 0.03 SFr/kWh were assumed with reference to judgments of SBB experts:
EP EP EP = u1 + u1 u1 2 Ak 2,1 Ak 2,2 Ak EP EP + u1 + u1 2,3 Ak 2,4 Ak

worst possible constellation with respect to ecoefciency, ee( AEP k ). The operation would have resulted in environmental costs (negative utility), which, according to equation (3), yield a negative eco-efciency score. Referring to the guideline that the operations under consideration were supposed to create environmental gains, the cutoff condition (The Concept of Operational Ecoefciency above) excluded this option. Noise Protection The SBBs operations in the domain of noise protection, ANP k , comprise direct and indirect measures. As usual, the alternative operations were examined in comparison to business as usual (null-alternative), ANP 0 . The selected cases were (1) renovation of wheels and chassis construction, ANP 1 ; (2) construction of noise protection walls, ANP 2 ; and (3) noise protection windows, ANP (Hitzke et al. 2001, 205ff). We re3 strict the following to four alternative small noise protection wall projects. Table 5 displays the results of eco-efciency calculations for noise protection wall projects. The environmental utility, u 1 ( ANP k ), was calculated with reference to the Swiss Noise Protection Decree (Swiss Federal Council 1986), which differentiates between various noise classes. Therefore, an impact matrix I = (i kl ) was constructed, whose cells i kl denote the changes (compared to the status quo) of oor size in noise class l if operation k were applied. The


EP where u 1 2,1 ( Ak ) = costs of 16.7-Hz railcurrent or 50-Hz current (to be transformed), EP u1 2,2 ( Ak ) = costs for transformation of 50-Hz EP current, u 1 2,3 ( Ak ) = costs of contracted curEP rent capacities (for peaks), and u 1 2,4 ( Ak ) = eco-taxes. The results are shown in table 4. The last column presents the annual difference. Compared to the business-as-usual alternative, selling the hydroelectric power stations ( AEP 1 ) would lead to economic costs of about 125 million SFr more per year (over the years 2005 to 2025). This can be traced to the additional costs for transformation capacities and ecotaxes that negate the savings realized by changing current supply. Calculating the environmental and the economic utility of this operation resulted in the

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Table 5 Eco-efciency calculations for four operations in the domain of noise protection Environmental utility Noise protection walls Operation 1 Operation 2 Operation 3 Operation 4 Monetized environMonetized Overall monetized mental benets environmental environmental utility in 1,000 SFr. costs in 1,000 SFr. in 1,000 SFr. 0.0 60.2 55.2 49.9 0.0 1.9 1.2 1.7 0.0 58.3 54.0 48.2 Economic utility Monetized utility score in 1,000 SFr. 1.8 78.0 42.0 78.0

Eco-efciency 0.0 0.75 1.29 0.62

hedonic pricing method permitted the valuation of the denoted changes of oor size per noise class. In this calculation, both the direct environmental benet from a noise protection operaNP tion, u 1 1 ( Ak ), and the indirect environmental NP costs resulting from an operation, u 2 1 ( Ak ), were assessed explicitly. The latter costs reect the environmental impacts of fuel and of construction parts made out of concrete, steel, and other energy-intensive materials. The economic utility score of these environmental operations, u 2 ( ANP k ), reects the accumulated costs for materials, machines, labor, energy, and so forth. The calculated results show that all operations would have generated environmental benets, with the exception of operation 1. Referring to the guideline that the operations under consideration were supposed to create environmental gains, the cutoff condition (The Concept of Operational Eco-efciency above) excluded this option. The eco-efciency values for operations 2 and 4 differ not because of economic utilities, which are the same, but because of different monetized environmental utilities. Operation 3 is ranked in rst position with an eco-efciency value higher than 1 because it would have generated more environmental benets than economic costs.

in table 6 and visualized in an eco-efciency portfolio in gure 2 (Ilinitch and Schaltegger 1995). From an overall assessment point of view, operations in the domain of noise protection were the most eco-efcient due to their large environmental benets. The eco-efciency of contaminated soil remediation was also high (best single placements), given that groundwater sheds were endangered (operations 4 and 5). The energy sector received the lowest rank when compared to the remaining domains. In the case of rail coaches, it would not have been benecial to exchange the current coaches because of environmental reasons.

The proposed procedure for calculating operational eco-efciency combines environmental assessment and valuation. Relying on the tools of life-cycle assessment (LCA) and environmental impact assessment (EIA), the matrix algebraic framework could be used to provide a representational tool for exhibiting the chain from actions through impacts, effects, and damages/improvements to environmental utilities in a exible and transparent manner. The valuation refers to these environmental utilities from a macroeconomic viewpoint, but additionally integrates damages that are caused by the environmental operations themselves. Analogously, the approach is expandable by taking into account indirect economic benets that could result from an environmental operation, such as image gains. In this article we focused on investments aiming at the maximization of environmental utility or the reduction of environmental impacts, given a certain investment budget. From the

Summary Apart from the eco-efciency calculations for three of the four domains of operation, which served as illustrative examples, additional calculations were performed during the SBB case study (Scholz et al. 2001). The results are summarized
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Table 6 Eco-efciency of selected domains of operation in the SBB study Overall environmental utility u 1 in 1,000 SFr. 119,840 1,528 564 1,996 25 171 20 0 58 54 48 1,492 159 196 51,610 5,480 1,255 Overall economic utility |u 2 | in 1,000 SFr. Energy production 125,960 Energy performance (coaches) 195,200 760,000 261,200 Landscape and nature conservation 773 235 27 Noise protection Operation 1 Operation 2 Operation 3 Operation 4 Operation 1 Operation 2 Operation 3 Operation 4 Operation 5 Operation 6 2 78 42 78 Contaminated soil remediation 16,000 13,000 4,000 13,000 4,000 24,000 0.000 0.744 1.286 0.615 0.093 0.012 0.049 3.970 1.370 0.052 Overall eco-efciency ee = u 1 /|u 2 |

Operation 1 Operation 1 Operation 2 Operation 3 Operation 1 Operation 2 Operation 3

Negative 0.008 Negative 0.008 0.032 0.728 0.741

Note: Best performances (ee > 1) and worst performances (ee negative or zero) are in bold type.

viewpoint of conventional investments, the situation would be different, aiming at the maximization of the economic utility per environmental impact added (Schaltegger and Sturm 1990). A general approach applicable to all types of investment should take into account the four possible constellations of eco-efciency, that is, positive/negative environmental utility combined with positive/negative economic utility, as well as the different underlying management strategies. With respect to the scientic feasibility of the proposed approach, uncertainties are a critical issue. A rst aspect of uncertainty relates to the estimation of the data. Although the basic data on environmental impacts (Hofstetter 1998) and environmental external costs (Sundquist and S oderholm 2002; Friedrich and Bickel 2001) are subject to many assumptions and ambiguities (Werner and Scholz 2002; Diamond and Hausman 1994), these uncertainties may nevertheless be quantied. In the case study, data uncertain-

ties were calculated for the domain of landscape and nature conservation (Hitzke et al. 2001, 219). The analysis showed an approximate uncertainty factor of 2 for estimates of the components of ecoefciency. However, for comparisons of the utility scores of different domains, this uncertainty factor is negligible. The reason is that the variance among the scores of the domains is much larger than the variance induced by the uncertainty factor. Yet comparing scores of single operations would require the calculation of data uncertainty in detail. The second aspect of uncertainty refers to the issue of whether or not the relevant variables, that is, damages/improvements and causal relations, have been appropriately modeled. One critical issue with respect to the variables is the neglect of opportunity costs. The implementation of noise protection measures takes years and the amounts of money invested are considerable. How opportunity costs of capital and discounting

Scholz and Wiek , Operational Eco-efciency


Figure 2 Eco-efciency portfolio represented by the overall environmental utility and the overall economic utility of selected domains of operation in the SBB study (Ilinitch and Schaltegger, 1995). The lines EV EP circling the dots refer to the ve domains of operation. Three operations (ANP 2,1 and A2 and A1 ) are treated as special cases because of having an eco-efciency value equal to or less than 0.

can be incorporated into an assessment of noise protection measures has been shown by Lenders and Tietje (2002). In interpreting table 6 and gure 2 this aspect has to be considered. Another critical issue might be the linearity of many allocation and modeling assumptions. Yet, the robustness of linear models has been repeatedly demonstrated (Dawes et al. 1989; Kleindorfer et al. 1993). Finally, when appraising the validity of the results, one should have in mind the uncertainties inherent in the comparison of fundamentally different environmental operations relying on different methods of environmental valuation. The equal treatment of different operations reects the situation of the corporate decisionmakers having a certain budget available for all operations. The equal treatment of different valuation methods reects the necessity of coping with different situations for data collecting and qualities of available data.
166 Journal of Industrial Ecology

The third aspect of uncertainty refers to the system borders and mainly concerns the relation between the monetized economic utility on the company level and the monetized environmental utilities on the macro (e.g., national) level. We suspect that 1 SFr that is invested on the company level might be different from 1 SFr that is accounted for on the GNP level as external cost. The question is how adequate the exchange rates among these currencies are. A possible answer could be based on retrospective and prospective research focusing on the internalization of external costs (Tolmasquim et al. 2001) that analyzes this transition from the macro to the micro level. A second issue of scientic feasibility concerns the evaluative reliability of the approach and refers to the introductory statement that high eco-efciency does not ensure appropriate ecoeffectiveness. Thus, in addition to application


of the rst cutoff condition (The Concept of Operational Eco-efciency above), which is justied by the intention to improve, a second cutoff condition, that is, a target-related output value, could be introduced following overall impact appraisals and threshold concepts. This would ensure that each operation achieved a certain quantity of environmental improvement. An appropriate calculation of this cutoff condition would have to take into account a variety of parameters, such as total impact volume, buffer capacity and resilience of affected eco-socio-systems, societal preferences, and economic and political restrictions (Reijnders 1998). The presented approach supports the prioritizing of different environmental investments. Moreover, it prepares decision-makers for the need to adjust their strategies concerning the internalization of external costs, something that gradually takes place in all relevant domains of investment. However, from the viewpoint of practical feasibility, it remains to be seen just how efcient an eco-efciency assessment is for a company. Limiting factors are the availability of data, the access to computerized information, and the size and organization of the company, as well as the lack of motivation in many departments. Illustrative eco-efciency calculations, in particular for environmentally signicant projects, provide reasonable decision support for attractive and less attractive environmental investments. At the very least, with respect to a set of reference projects, the requirement of manageability seems to be feasible, as the economic data from accounting and nancial controlling should be available and usable (Schaltegger and Burritt 2000, 56f.). The presented assessment framework allows user-friendly updating because it can be supplemented by new (sub)categories of impacts, effects, and damages while leaving the remaining data unchanged. Matrix algebra matches spreadsheet representations in standard accounting and calculation computer programs. Thus, the expenditure during the usage phase depends mainly on the number and complexity of investments to be assessed and incorporated into a reference data bank. Finally, we reect on the practical impacts of the presented case study. The major practical impact was a change in decision-making with

respect to the sale of hydroelectric power stations. The comprehensive calculation, which realistically took into account the low retail price, the penalties for canceling long-term energy supply contracts, and the prospective dynamics of energy taxes and prices, led to an unambiguous economic evaluation. But, interestingly enough, the threat of the SBB losing its advantage in environmental performance compared to road trafc seems to be more critical (Mieg et al. 2001, 30). Moreover, the study conrmed the SBBs priority setting on noise protection, on the necessity and efciency of soil remediation in cases of endangered groundwater (but not necessarily in other cases), and on the value of landscape and nature conservation operations. Finally, the calculations showed that an exchange of rail coaches solely for environmental reasons seems to be inappropriate.

This article presents a procedure for calculating eco-efciency on the operational level. The proposed denition incorporates direct and indirect (external) environmental costs and benets. A large-scale case study of the environmental operations of the Swiss National Railway Company (SBB) demonstrated that the procedure is applicable to energy production and savings, landscape and nature conservation, noise protection, and contaminated soil remediation. The proposed procedure provides a concise guideline to decision-makers for prioritizing domains of operation, as well as operations within one domain, in the search for an eco-efcient corporate investment policy. The critical issues discussed, for example, coping with uncertainties and data availability, point to the challenges of implementing this tool in a scientically accurate and practically cost-efcient way.

The authors would like to thank two anonymous reviewers and the editors for helpful comments. We would also like to thank our colleagues Daniel Lang, Claudia Binder, and Peter de Haan from Swiss Federal Institute of Technology Zurich for technical support, and Peter Loukopoulos for editorial support.

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1. Editors note: For a discussion of the role of the rebound effect in industrial ecology, see the recent article in this journal by Hertwich (2005). 2. One Swiss franc (SFr) 0.65 Euro 0.78 US$. 3. One tonne (t) = 1 megagram (Mg) = 103 kilograms (kg, SI) 1.102 short tons. 4. One kilometer (km) = 103 meters (m, SI) 0.621 miles (mi). 5. One gigawatt-hour (GWh) = 106 kilowatt-hours (kWh) = 3.6 terajoules (TJ).

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About the Authors

Roland W. Scholz is a professor and Arnim Wiek is a postdoctoral research fellow at the Natural and Social Science Interface research group, in the Institute for Human-Environment Systems, at the Swiss Federal Institute of Technology, Zurich, Switzerland.


Journal of Industrial Ecology