Industrial Ecology in Policy Making: What is Achievable and what is not?

Industrial Ecology is a relatively new, interdisciplinary field of research, analysing the interaction between industrial activity and nature. Within this field, a multitude of instruments has been developed. Two of the most important are Life Cycle Assessment (LCA) and Material Flow Analysis (MFA). Life Cycle Assessment records the environmental consequences caused by a product throughout its whole life cycle, from cradle to grave. Material Flow Analysis measures the input and output of materials of an economy in tonnes. Especially LCA has recently been gaining importance in European environmental policy. This development raises the question, if political measures can be developed and evaluated based on LCA and MFA. For this being the case, the instruments must be able to capture the complex consequences caused by regulatory action. Environmental intervention triggers a multitude of effects. These include benefits and costs of measures. It has to be emphasised that in this case costs go beyond monetary costs borne by directly affected firms. Opportunity costs and costs of indirectly affected stakeholders need to be accounted for. The environmentally important rebound effect has to be covered as well. Redistributive outcomes triggered by the regulatory act are also important. LCA and MFA as independent tools do not consider these effects adequately. LCA is able to include some of the results of environmental regulation, especially when they are directly connected to the product. Effects that only occur on the economy-wide level, however, are captured insufficiently. The MFA does measure all material flows in tonnes. The connection between weight and environmental effects remains unclear. Specific regulatory acts cannot be developed using MFA. LCA alone as a tool to evaluate environmental policy is not sufficient. At the same time, the approach to assess the impacts of products throughout the whole life cycle appears to be promising. Therefore, a Life Cycle Based Computable General Equilibrium Model (LCBCGE) is proposed. This model represents the whole economy at industry level, while implementing the advantages of life cycle thinking. This tool could be used to evaluate political measures ex ante.

Pothen, Frank (2010), Industrial Ecology in Policy Making: What is Achievable and what is not?, ZEW Discussion Paper No. 10-067, Mannheim.