By Douglas Mitten, PE, CVS, CCP
In case you missed it, humanity is in trouble: we are on track to not meet the climate goals of the Paris Agreement wherein the world agreed to limit global warming to less than 2ºC and make best efforts to limit warming to 1.5ºC. The consequences of sea level rise, intense storms, wildfires, drought, and other impacts will be disastrous. So, one should ask, how can Value Engineering (VE) help?
Add Carbon to Life Cycle Cost Analysis
There is no need to extoll here the effectiveness of the collaborative VE problem solving methodology applied to the climate change problem, which is a critical concern for this generation and future generations! However, I have yet to see life cycle costing by either VE teams or design teams that includes carbon costs that would measure the impact and damage from emissions.
Life cycle cost (LCC) analysis takes a proposal’s initial capital costs (CAPEX) and adds other LCCs (annual OPEX) such as energy, maintenance, and replacement. Adding the cost of carbon makes environmental impact part of the LCC and adds this dimension to the decision as to whether to accept a proposal. For example, if we were to consider building a coal fired power plant in parts of the world, a traditional LCC might support it. However, if we consider the cost of carbon, other options may become more attractive. This carbon cost enables us to measure the proposal’s impacts on society and improves the competitiveness of zero- and low-carbon proposals.
What Do Carbon Emissions Cost?
There is little international consensus on the cost of carbon. According to a 2018 World Bank report, 51 nations or substantial jurisdictions currently or soon will price carbon and tax certain users. (The United States is not one of them). The European Union free market emissions trading recently priced carbon at 79.86 Euros/tonne ($81.18).
In directing his administration to consider the social cost of carbon, a Biden policy set the price at a discounted $51.00/ton, but others believe the price should be higher with prices ranging from $100 to $220. Anthony Patt, a climate policy researcher at ETH Zürich believes it should be thousands of dollars per ton if the objective is to force transition to low carbon or low emitting sources. The Biden administration gave a working group one year to develop a cost leading to increases in the social cost of Carbon impacts (refer to The Biden Administration Increases the Social Cost of Carbon (undark.org).
Shadow Carbon Pricing
Carbon dioxide (CO2) pricing includes the cost of emissions, such as sea level rise, health care from heat waves and droughts, agricultural impacts, property damage from storms, flooding and sea level rise. Often called shadow carbon pricing by international development banks, it incorporates this carbon impact on the public into decision making. Adding the cost of carbon to a VE proposal is analogous to cost avoidance estimates, which measure the impact of a VE proposal upon projects external to the study project. Shadow pricing incorporates carbon costs that do not necessarily leave the organization or impact the customer. Since it is not a tax subject to the political process, it is easier to implement.
Yale University, for example, has implemented an internal carbon charge that affects more than 250 buildings and nearly 70% of campus carbon dioxide emissions. Yale set a carbon charge at the social cost of carbon at a discounted $40 per ton and selected a revenue-neutral scheme for the new carbon charge. It works this way: If a building reduces its carbon emissions more than historic emissions level, then the building receives funds from the carbon charge pool. If the building performs worse than Yale as a whole, then it pays into the carbon charge pool (refer to Yale launches carbon charge for campus buildings and departments in the YaleNews).
Shadow pricing of VE proposals supports organizations to achieve their Net Zero or carbon reduction objectives, examples include
- Corporations, such as Microsoft and Walmart that have carbon reduction objectives, such as achieving net zero.
- The new $5.4 Billion Carbon Reduction Program (CRP), created under the President’s Bipartisan Infrastructure Law, will help states develop carbon reduction strategies and address the climate crisis facing our nation.
- Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis January 21, 2021, although energy producing states have challenged this in court and it is currently enjoined.
- The new rule that requires federal agencies to scrutinize the climate impacts of major infrastructure projects under the National Environmental Policy Act (NEPA), a 1970 law that required the government to assess the environmental consequences of federal actions, such as approving the construction of oil and gas pipelines (refer to Biden finalizes NEPA regulation, reversing Trump in The Washington Post).
If we do not meet carbon reduction goals the climate could reach a tipping point where irreversible acceleration and damage from phenomena such as polar melting and drastically shifting weather patterns. We all need to do whatever we can to address this–there is not much time (in fact we are out of time), and we are in a hurry! VE can improve value by focusing carbon reduction alternatives and measuring carbon impact in life-cycle cost estimates.
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