Economic versus Natural Capital Flows in Industrial Supply Networks - Implications to Sustainability

It is widely recognized that consideration of economic criteria alone is not adequate to build sustainable industrial enterprises, but environmental and social criteria must also be incorporated in business decisions. It is understood that such a comprehensive perspective is essential to develop sustainable businesses that are lean, resilient, cost effective and add value to the stake holders. However, one of the biggest impediments in incorporating environmental and social considerations in decision-making is the lack of an accounting technique that can appreciate the contribution of a wide variety of ecological resources. Existing techniques such as Material Flow Analysis (MFA) and Exergetic Analysis do appreciate some of the ecological resources consumed by industrial activity, but have fundamental limitations to include others. For instance, MFA can only appreciate material flows but not energetic flows like sunlight and tidal waves. Exergy Analysis also fails to acknowledge various ecological products and services. Thermodynamic Input-Output Analysis (TIOA), theoretical aspects of which have been discussed in previous AIChE conferences, overcomes many of the shortcomings of the aforementioned techniques for environmentally conscious decision making. TIOA successfully incorporates contribution of ecological products and services to industrial processes by appreciating the underlying economic and ecological linkages. A thermodynamic approach provides a common currency or a way to deal with a diverse set of units, as any system – economic or ecological, can be considered a network of energy flows. TIOA is based on the concept of Ecological Cumulative Exergy Consumption (ECEC). This approach is closely related to emergy analysis but does not rely on its controversial claims. This presentation will illustrate the use of TIOA as a practical tool for environmentally conscious decision making. It will demonstrate how conventional economic analysis can be used in conjunction with TIOA to determine economic and natural capital requirements of industrial processes. Such analysis uses a rigorous multiscale data fusion framework to compile Life Cycle Inventory, and in general follows the principles of Hybrid LCA. TIOA can also be used to develop simple-to-calculate and hierarchical sustainability metrics. This presentation will demonstrate the application of hybrid TIO analysis to compute sustainability metrics for alternative electricity generation systems, and illustrate their use for decision making. Furthermore, this presentation will discuss how TIOA can be used to determine economic and natural capital flows in Industrial Supply Networks, and how such insight may be used for appreciating the relationship between supply chains and sustainability. Supply networks of basic infrastructure industries will be shown to have natural capital consumption disproportionate to their addition to economic capital. These results have important implications to on-going debates on sustainability and outsourcing, and may be used for “greening the supply chain” and to adjust international trade policies. Sustainability of human activities requires that the productive capital base available to society in the future must be at least as large as that inherited from its past (1). The productive capital base consists of economic capital that includes assets such as buildings, machinery, and infrastructure, natural capital that includes environmental functions that provide natural resources to production activities, and dissipate and absorb emissions from them (2,3,4), and social capital that consists of human resources, value systems and social organizations through which contributions of individuals are mobilized and coordinated. The criterion of weak sustainability assumes that different types of capital are substitutable, implying that sustainability may be maintained by converting one type of capital into another. In contrast, strong sustainability rejects the notion of complete substitutability since many ecosystem goods and services cannot be replaced by human-made capital. It requires preservation of natural capital in itself, in addition to other capital stocks (5). Since natural capital usually lies outside the market, many efforts have been made for quantifying its importance. These include monetary valuation (6,7) and analysis of the material and energy flows (8,9,10). A variety of methods and metrics have been devised for evaluating sustainability at different spatial scales. These range from national measures of genuine investment which account, at least partially, for the three capitals (11) to corporate measures of sustainability and eco-efficiency that are being used in annual sustainability reports for evaluating socially responsible investments (12,13,14). Estimating the quantities of different types of capital and their relative importance remains a formidable challenge facing these methods and is an active area of research. We have recently combined existing data and methods in systems engineering, systems ecology and life cycle assessment to quantify the contribution of ecosystem goods and services to industrial activity (15). This approach treats industrial and ecological systems as a network of energy flow, and estimates the contribution of natural capital to an industrial product or process by the ecological cumulative exergy consumption (ECEC) of the corresponding supply network. Exergy represents the maximum energy available for doing work and captures the first and second laws of thermodynamics. It is the only truly limiting resource on the planet, and provides a scientifically sound common currency for analyzing industrial and ecological systems. Unlike claims made by others in the past (16,17), this approach is not meant to replace preference-based valuation of natural capital, but rather to strengthen it with a sound biophysical basis. Exergy analysis has already found wide use for improving process efficiency (18) and assessing ecosystems (19). ECEC is closely related to the concept of emergy and uses some of its transformity values (10), without relying on any of its controversial claims such as the energy theory of value or the maximum empower principle (20). The transformity values are simply the reciprocal of the cumulative degree of perfection (18), and permit representation of the contribution of ecosystem goods and services in consistent thermodynamic units. We quantify the contribution of ecosystem goods and services to sectors of the U.S. economy with data from various public sources (21), and their transformities (10). The cumulative exergy embodied in natural capital entering a sector is propagated through all sectors of the U.S. Economy. Due to the absence of comprehensive material or energy-based transaction matrices for the U.S. economy, data about monetary exchange between sectors from the economic input-output model are used to propagate the ecological cumulative exergy consumption through the economic network. The resulting thermodynamic input-output analysis (TIOA) considers the integrated economic-ecological system as a single network of energy flows allowing use of a common currency to evaluate the flow of ECEC in various sectors. It successfully accounts for variety of ecosystem products such as coal, petroleum, timber and atmospheric oxygen; ecosystem services such as sunlight, wind and fertile soil, human resources employed in the form of labor and impact of emissions on human and ecosystem health. TIOA applies the allocation algorithm of ECEC analysis to study exergy flows through partially-known ecological networks and input-output analysis for the well-known economic networks. Similar approaches have been used by Costanza to study energy intensities of industry sectors (17) and Hannon to study energetic interactions in ecosystems (22). However, these studies are not as comprehensive as the work presented in this paper. These studies only comply with conservation of energy, but do not account for the quality differences between energy streams. In this article, we use TIOA to evaluate the reliance on natural capital of sectors in the 1997 benchmark model of the U.S. economy (23). We use the ratio of ECEC to money as a measure of the natural capital needed to generate a dollar of economic activity, and study the change in this ratio in the economic network. This ratio may provide a unique insight into the discrepancy between natural capital needed to produce a product or service and willingness of people to pay for it. Activities with a high ECEC/money ratio may not even satisfy the criterion of weak sustainability since the amount of economic capital generated from the consumed natural capital is relatively small. Analysis of the ECEC to money ratio of industrial sectors and their supply chains can provide useful insight into their sustainability and help identify alternatives for greening the supply chain. 5 10 15 20 25 10 11 10 12 10 13 10 14 Major subdivisions of U.S. economy (ref. Table 1) R at io o f N at ur al C ap ita l T hr ou gh pu t t o E co no m ic C ap ita l T hr ou gh pu t f or T ot al R es ou rc e C on su m pt io n (E C E C /m on ey r at io ) (s ej /$ ) Figure 1. Subdivisions of U.S. Economy organized in ascending order of median ECEC/$ ratios The 491-sector 1997 U.S. economy may be aggregated into 28 major subdivisions as listed in Table 1. These subdivisions are defined by the Bureau of Economic Analysis (23), and have been used in economic input-output life cycle assessment (24). This aggregation scheme is preferred in this analysis as it provides a more concise overview of the economy than the 3digit NAICS codes, and yet is more detailed than the 2-digit NAICS codes. The trend and general conclusions are similar for alternate methods of aggregation. The median ECEC to money ratios for these aggregated sectors is plotted in Figure 1 along with the distribution of the constituent sectors in each aggregate category. The resulting organization of the “economic food chain” resembles the hierarchical organization commonly observed in ecosystems, wherein primary producers constitute the base of the hierarchy and carnivores constitute the top. For the economic hierarchy, median ECEC/money ratio decreases from the base to the top. Basic extractive and infrastructure subdivisions such as Mining and Utilities, Plastic, Rubber and Nonmetallic Mineral Products and Ferrous and Nonferrous Metal Products constitute the base, whereas more specialized subdivisions such as Finance, Insurance, Real Estate and Professional and Technical services constitute the top. Table 1. 28 Major subdivisions of U.S. Economy as defined in EIOLCA and their corresponding NAICS codes Position Subdivisions of U.S. Economy Corresponding NAICS In Figure 1 (1997 U.S. Industry Benchmark Model Definitions) Codes 1 Mining and Utilities 21, 22 2 Government and special S00101-S00500 3 Plastic, Rubber and Nonmetallic Mineral Products 326, 327 4 Ferrous and Non-ferrous metal production 331, 3321