Environ. Sci. Technol. 2010, 44, 4409–4415
Energy Implications of Product Leasing KOJI INTLEKOFER* School of Mechanical Engineering, Georgia Institute of Technology, Suite E, 800 West Peachtree Street N.W., Atlanta, Georgia 30308 BERT BRAS School of Mechanical Engineering, Georgia Institute of Technology, Georgia Institute of Technology, 813 Ferst Drive N.W., Atlanta, Georgia 30332-0405 MARK FERGUSON College of Management, Georgia Institute of Technology, 800 West Peachtree Street N.W., Atlanta, Georgia 30308
Received December 4, 2009. Revised manuscript received April 8, 2010. Accepted April 14, 2010.
A growing number of advocates have argued that leasing is a “greener” form of business transactions than selling. Leasing internalizes the costs of process wastes and product disposal, placing the burden on the OEMs, who gain from reducing these costs. Product leasing results in closed material loops, promotes remanufacturing or recycling, and sometimes leads to shorter life cycles. This paper provides two case studies to quantitatively test these claims for two distinct product categories. Life cycle optimization and scenario analysis are applied, respectively, to the household appliance and computer industries to determine the effect that life spans have on energy usage and to what extent leasing the product versus selling it may influence the usage life span. The results show that products with high use impacts and improving technology can benefit from reduced life cycles (achieved through product leases), whereas products with high manufacturing impacts and no improving technology do not.
1. Introduction An operating lease is a contract between a lessor and lessee for the use of a specific asset where the lessor retains ownership of the asset. The lessee has possession and use of the asset and makes payments, over a prespecified period of time (1, 2). Historically, leasing has proliferated primarily for financial reasons (3). More recently, however, a growing number of researchers have argued that leasing has environmental benefits as well, claiming that the practice of leasing products, rather than selling them, increases resource productivity by moving to a pattern of closed-loop material use by manufacturers (4-6). By maintaining ownership of the product, the manufacturer can potentially put in place a service strategy consisting of reuse, remanufacturing, and recycling to preserve end-of-life value. The impact of leasing products (versus selling them) on the environment is not clear-cut, however. Several contradicting statements have also been made, and much of the research is untested and qualitative. We provide a quantitative * Corresponding author phone: (303) 894-9667; fax: (303) 8949342; e-mail:
[email protected]. 10.1021/es9036836
2010 American Chemical Society
Published on Web 05/14/2010
analysis to investigate the viability of leasing to reduce environmental impact by focusing on two product categories with distinct characteristics. In section 2 we provide a literature review on work advocating leasing for reduced environmental impact. Several contradictions will become clear and provide the context for the case studies examined here. In section 3 we focus on how varying life spans affect product energy consumption. The affect leasing has on life spans and its potential for optimizing life spans will also be discussed. In section 4 we use the computer industry to show how some product characteristics make leasing for environmental benefits difficult.
2. Existing Research Work 2.1. Leasing and Environmental Impacts. A primary argument for the environmental benefit of leasing focuses on the leasing firm’s ability to promote extended producer responsibility (EPR). EPR motivates manufacturers to “take back their products when consumers discard them, manage them at their own expense, and meet specified recycling targets” (4). Leasing internalizes the costs of process wastes and product disposal, placing the burden on OEMs, who gain from reducing these costs (7). A report by INFORM proposes that leasing acts as a promoter of EPR; making manufacturers responsible for the end-of-life processes of their products as businesses often attempt to regain value from returned items through remanufacturing (4). Stahel argues that a leasing economy can lead to higher resource efficiency, that recycling alone does not “reduce the flow of material and energy through the economy” but, instead, what is needed is the reduction of resource flow through the economy. Leasing, it is claimed, effectively closes the resource loop (8). A report by Gray and Charter claims remanufacturing reduces carbon emissions and landfills and increases skilled employment by “recapturing the value added to material when a product is first manufactured” (9). Sutherland et al. find that diesel engine remanufacturing reduces costs and saves significant resources and energy (10). Similarly, two papers on Xerox copier remanufacturing by King et al. and Kerr and Ryan show significant environmental savings from remanufacturing (11, 12). In all cases, remanufacturing required significantly less energy to produce a reusable product compared to recycling or manufacturing with virgin materials. 2.2. Leasing and the Case for Longer Life Spans. Today, most businesses rely on the selling and consumption of goods for profitability, with emphasis placed on the volume of items sold. Studies have shown that durable goods have decreasing life spans, a possible result of designed obsolescence aimed at increasing product turnover by manufacturers (13). If the focus is shifted from products sold to services rendered, it becomes advantageous to have reliable and long-lasting equipment, especially where research and development costs are high. With a service-focused business model, the manufacturer has more to gain from improving product performance and reducing the number of units delivered (13). In-use factors can be minimized with maintenance, whereas efficiency improvements and manufacturing burdens can be improved with product take-back and remanufacturing. Agrawal et al. find that leasing has a direct effect on the total volume of products produced, which influences the overall environmental impact (14). When disposal costs are high or production costs are low, volumes under leasing VOL. 44, NO. 12, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
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TABLE 1. Replacement Scenarios scenario
product life span
product purchase basic lease optimal with disposal optimal with remanufacturing
full life span 75% of full life span calculated optimal replacement intervals for minimizing energy consumption with disposal and replacement at the end of life calculated optimal replacement intervals for minimizing energy consumption with remanufacturing at the end of life
TABLE 2. Product Characteristics product
trend curve
R2
av full life span (years)
manufacturing energy (kWh)
remanufacturing energy (kWh)
dishwasher clothes washer refrigerator
energy (kWh) ) -1012.5e(-0.046t) energy (kWh) ) -1367.9005e(-0.0526t) energy (kWh) ) -941.95e(-0.045t)
0.91 0.87 0.89
13 14 14
470 750 1182
24 20
are less than with selling, reducing the industry’s relative environmental impacts. Regular maintenance can also increase a product’s functioning lifetime, reducing the frequency of disposal (13). When leasing, the lessor is generally obliged to perform maintenance on leased items (15). This is advantageous because the lessor retains special knowledge of its products and is in the best position to make repairs and upgrade components, which provides an opportunity for improved technologies to be installed on existing machines (3, 16). 2.3. Leasing and the Case for Shorter Life Spans. The Tellus Institute found that consumers of durable or semidurable goods tend to expect relatively new equipment, causing the average product age to decrease over time as companies cannot lease older equipment (17). This can result in faster turnover of products, effectively increasing the number of units that are cycled through the market. Unless a used product market exists to absorb the end of lease products, more waste will be generated with leasing. Leasing may also lead to increased product replacement because lease terms are shorter than a product’s expected useful life. According to U.S. tax regulations, the maximum term for a lease to qualify as an operating lease must be no more than 75% of a product’s expected lifetime (4). Simultaneously, some research argues that increased volume and turnover may actually benefit the environment when paired with life cycle optimization (LCO). Replacing older products with new, more efficient, models can be environmentally beneficial as inefficient models are removed from the market. Many consumer products incurr the greatest environmental burden during the usage phase of their life cycle (18-22). Electrolux, a Swedish appliance manufacturer, estimates that 80% of a product’s total energy usage occurs during the use stage (23). Studies have found that leasing has the potential to significantly reduce these in-use impacts by incorporating improved maintenance, recycling, and part reuse (23). Lease agreements can also outline regular product replacements that align with optimal life spans. Remanufacturing can be used to upgrade appliance components, which can be re-leased, avoiding landfill disposal. However, one must take into account the additional energy and material resources required to produce the newer products, as it could negate any advantage gained from efficiency improvements (24). The consensus among existing LCO studies performed on products with high usage energy and improving efficiency is that shortening product life spans could reduce energy consumption over time (18-22, 25-27). Unfortunately, users of these goods rarely upgrade the products at the optimum 4410
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intervals, preferring to keep the less efficient model in service until repairs become too costly or parts failure forces replacement (21). This may occur because the capital cost for replacing the product by purchasing a new unit is too high. Thus, leasing could lower the upfront financial burden on the consumer, allowing more frequent product replacements. If shorter life spans reduce environmental impacts, there may be an opportunity for product leasing to regulate lease terms to match the optimal life cycles.
3. Optimum Life Span Calculations How do shorter life spans under lease agreements impact energy usage? To gain a better understanding we examine products that exhibit high usage impacts and improving energy efficiency technology. Dishwashers, clothes washers, and refrigerators are used as examples. Four replacement scenarios are calculated, and the total product energy consumption over numerous life cycles is evaluated. Table 1 outlines these scenarios. Our base case assumes a consumer uses a product for its full life span. Life span values are taken from the Association of Home Appliance Manufacturers (28). The next scenario uses the maximum allowable lease term; 75% of a product’s intended life. These are then compared to two optimized life span calculations, one that assumes products are disposed at the end of life and one that assumes remanufacturing. Table 2 shows the significant product characteristics. We calculate the optimum life span of products following the method developed by Chalkley et al., which does so by “comparing the environmental impacts associated with continued use of an existing product and that associated with replacement by a new product” (20). Annual energy consumption values are used to evaluate a product’s environmental impact. The historical data of annual energy consumption form the trend line that is used to determine how much energy a product consumes and when it should be replaced. The energy differences between two model years are compared to the energy required to produce a new unit. The need and frequency for product upgrades is dependent on the slope of the fitted curve, with steeper slopes indicating more rapid improvements and therefore more rapid replacements, and vice versa. The optimum life span is then the difference in model years that results in the lowest total energy consumption. Appliance energy usage trend information comes from a report from the Canadian Department of Natural Resources (29). Data collected between 1990 and 2005 wee used, and the trends are shown in Figure 1. Although appliance trend
FIGURE 1. Appliance energy trends (29).
data are available only until 2005, the trends are extrapolated until 2020 to provide a long enough time frame for relationships to emerge. 3.1. Assumptions. The following three assumptions were made for all cases. Because current practice shows consumers possess appliances for their full life span (28), it is assumed that no updated styling is required and manufacturing energy remains constant. Only energy consumption is examined in this study. No consideration is made for global warming potential, greenhouse gases, wastewater, and other emissions. Hazardous chemicals such as toxic refrigerant fluids are also not accounted for. Energy usage provides an adequate approximation of negative environmental impacts, especially when the use phase contributes the majority of the emissions (20). Transportation is not included in the calculations for energy consumption. Transportation impacts are insignificant compared to the manufacturing or usage phase of products (20, 24, 30). Much of the literature claiming leasing to be “green” cited the promotion of EPR, which often results in closed material loops. When an LCO is performed with remanufacturing, the following assumptions are made. The first product purchased is assumed to be manufactured from raw materials, and the full manufacturing energy is included. All of the following replacements are remanufactured, and each unit replacement adds only the remanufacturing energy cost. Remanufacturing the same product can occur as many times as necessary for the remaining time frame, and remanufactured efficiency is assumed to be equivalent to the current model year’s manufactured products. Table 2 compares the energy requirements for manufacturing and remanufacturing. Remanufacturing values for washers and refrigerators were calculated by Hilden et al. (24, 31). No remanufacturing energy requirements were found for dishwashers, so this product is not included in this comparison. Re-leasing products without remanufacturing is not considered. Although potentially possible with many durable goods, it is uncommon in practice. 3.2. Results. The results from the LCO calculations are shown in Table 3. The replacement periods indicate how long a product should be used before being replaced, starting in 1990. Energy use values are the total accumulated energy consumption for the products in each scenario at the end of the period investigated. Refrigerators were the only appliance in this study assumed to undergo significant performance degradation over time. Studies have found that even with regular maintenance, refrigerators experience degrading efficiency over time (21, 25). To account for this decreasing efficiency, a model derived by Johnson and also used by Kim et al. is followed (22, 32).
The decreasing efficiency over time coupled with the rapidly improving efficiency of new models causes the dramatic sawtooth-shaped graph shown in the bottom graph of Figure 2. Each dip occurs when an old model is replaced with a new unit. The new model is initially more efficient, but begins to degrade, causing a steeper slope than seen with other appliances. The total energy consumptions for all three scenarios were unexpected, with leasing and optimized replacement both having slightly higher values than the base case. Leasing consumed 405 kWh more and the optimized replacement rate consumed 142 kWh more than full-life ownership. For both clothes washers and refrigerators, the remanufacturing energies were small enough to promote a yearly remanufacturing schedule to benefit from efficiency improvements for much of the 30 year period. Refrigerators were most improved when remanufacturing was implemented, with a 38% reduction in energy consumption. These savings are due to the frequent efficiency improvements made in refrigeration technology. This demonstrates the importance and potential of efficiency improvements in common appliances. Table 3 shows that without remanufacturing, the reductions in energy usage are underwhelming despite optimized life spans. Only when remanufacturing is included do significant energy reductions appear. If leasing were to truly drive firms into closed material loops, the use of remanufacturing is required for significant energy savings. The argument that shorter life spans driven by leasing alone can reduce energy use is true, but the overall impact is small.
4. Computers In the previous section we showed that for appliances, shortening the average life span to take advantage of improving technology could be beneficial. Computers, however, offer a different life cycle energy usage profile for which this may not be the case. Thurston and de la Torre found that longer lease periods are associated with improvements in cost and environmental impact, contradicting earlier claims (33). Whereas appliances exhibited significant usage impacts relative to manufacturing and improving technology, computers differ in these cases. First, computers have an extremely short user-preferred life span, between two and four years (27, 34). The actual functioning lifetime of a computer is much longer, but due to rapid technological improvements, consumers choose to replace their computers frequently, well before their functional lifetime is reached. In addition, the average life cycle of a computer has been decreasing steadily through the decades (35). This shortened life span also reduces a unit’s use energy, decreasing usage impacts compared to the manufacturing processes. Second, computers do not necessarily exhibit a trending improvement in efficiency. Over the years there have been some improvements, motivated by government action such as the Energy Star program (36). Although power management software has become more common in recent years, no trending data on the availability or use of power management is available, nor is there any way to ensure its proper use in the office or home (37). Additionally, even as computer components have become more efficient, they also have become more powerful, negating any energy savings. Determining a trend in computers energy efficiency is also difficult because of the large variety of computers available to consumers: there are computers with both very large and small power demands. We next perform some scenario analyses to illustrate how these product characteristics make the concept of the environmental benefits of leasing more difficult to achieve. VOL. 44, NO. 12, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
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TABLE 3. Life Cycle Optimization Results product
replacement periods (years)
scenario
dishwasher
clothes washer
% savings
full life 75% of life span optimized life spans
13, 13, 13 10, 10, 10 4, 4, 5, 6, 6, 7
22827 22346 20220
2 11
full life 75% of life span optimized life spans
14, 14, 14 10, 10, 10 4, 5, 6, 6, 7, 9 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 2, 2, 2, 2, 2, 2, 2, 2
28218 27810 25695
1 9
15230
46
14, 14, 14 10, 10, 10 7, 8, 10, 12 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 2, 2, 2, 2, 2
27003 27408 27145
-1 -1
16695
38
optimized w/remanufacturing refrigerator
full period energy use (kWh)
full life 75% of life span optimized life spans optimized w/remanufacturing
TABLE 4. Energy Requirements for Computer Processes source Williams (2003) (38) Aanstoos (1998) (40) Kuehr and Williams (2003) (37) Atlantic Consulting (1998)(41) Williams (2004) (39) Williams (2006) (42) Gotthardt (2005)(43) Williams (2002)(44) av
manufacturing (kWh)
use (kWh/year)
recycling (kWh)
upgrade (kWh)
1556 2500 2130 1400 1009 2033 1778
126 127
1478 1178 1600
486
1772
185
1419
486
4.1. Background. Table 4 is a compilation of the energy requirements for the various stages of a computer’s lifecycle as identified through an extensive literature search. These values include both a computer and CRT monitor in the calculations. Much of the data used here have been collected by Neto et al. (34). The originating sources have been cited
FIGURE 2. Energy usage scenarios. 4412
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233 176 242 208
in Table 4, but not all of the documents could be verified, making it difficult to ensure consistency for factors such as usage time and computer wattage. Work conducted by Williams consistently assumes usage of 3 h a day for 365 days and combined computer and monitor usage wattage between 114 and 128 W (38, 39). All of the sources produce
FIGURE 3. Accumulated energy trends. values within the same magnitude and with fairly consistent results, so average values are used in our calculations. It should be noted that several other works have found computer usage energies to be greater than manufacturing energy in certain cases, particularly Babbitt et al. and reports by the IVF Industrial Research and Development Corporation and EPIC-ICT (45-47). However, for the purposes of demonstrating the impact that usage and manufacturing energy have on leasing strategies, only the values shown in Table 4 were considered. 4.2. Computer Impacts/System Boundaries. The four processes considered in the computer case study are manufacturing, recycling, upgrading, and use. For a more detailed explanation of these processes, please see the Supporting Information. 4.3. Scenario Analysis. The left graph in Figure 3 shows what can happen when usage impacts are greater than manufacturing impacts. It is assumed that energy efficiency remains constant with each new model, resulting in a constant slope indicated by m1. Assume a computer is purchased and used for some time until it is replaced at time t1. A new computer is built, resulting in a jump in energy consumption, which occurs again when replaced once more at time t2. Obviously, there is no environmental advantage to replacing the computer if usage efficiency does not improve. The energy consumption remains the same, but there is additional manufacturing energy that significantly increases the environmental impact with each new purchase. Without efficiency gains, it can clearly be seen that there is no environmental motivation for replacing equipment. What efficiency gains would be necessary to make purchasing a new computer a worthwhile environmental choice, and could these be realistically obtained by manufacturers? The slope m2 in Figure 3 indicates the improved efficiency necessary to offset the manufacturing energy of a new computer for a single lifecycle, compared to continued use of the older model without replacement. To calculate this break-even efficiency slope, we use the following simple two-period model. From the standard form y ) mx + b, a comparison of total energy consumption is made between using a computer for two life cycles versus replacing it after the first period t1 with a new model having a different efficiency rate until t2. The manufacturing energy required to make the product is defined as b and annual usage energy as m. m1t2 + b ) m1t1 + b + m2t2 + b m1t2 - m1t1 - b ) m2t2 m2 )
m1(t2 - t1) - b t2
Using the average values from Table 4 and assuming that a computer life span is three years, the cases of disposal
TABLE 5. Break-even Usage Energy Requirements scenario
manufacturing recycling upgrade
process energy (kWh) 1772 (for each replacement) 1419 486
usage energy required to offset process energy over 3 years (kWh/year) -406 -288 23
(with a new computer being remanufactured), recycling, and upgrading are calculated to determine the required usage energy needed over three years to offset the energy used for manufacturing. The results are shown in Table 5. Disposal with new manufacturing and recycling results in negative slopes, indicating that for the manufacturing energy to be offset during the usage phase, the computer would actually have to generate energy, rather than consume it, as illustrated on the right graph of Figure 3. Upgrading the computer can break even with a positive slope, but only if the usage energy is extremely low. The required usage energy to achieve this was found to be 23 kWh/year, significantly lower than the average use-phase energy calculated by Williams of between 114 and 128 kWh/year (38, 39). If the upgraded components include a power supply with greatly reduced power consumption, this has the potential to be the most realizable scenario. Unfortunately, it is complicated by the fact that computers are seldom upgraded for efficiency reasons but rather for increased computing power. This usually involves installing a faster processor or more RAM, items that require more power and may therefore need a larger power supply rather than a more efficient one. Thus, upgrading can extend computer lifespans, but at a net increase in energy consumption. Although requiring computers to generate net power is unrealistic, this shows just how large of an impact the manufacturing energy has. Because consumers usually use computers for a short lifespan of two to four years, the usage energy consumption is relatively small compared to the energy consumption from manufacturing (37, 38). Even significant improvements in energy efficiency therefore cannot offset the large amount of energy required to manufacture the product. Computers, therefore, appear to be ill-suited for achieving environmental benefits from a leasing strategy.
5. Discussion The viability of combining leasing and remanufacturing policies with LCO in an effort to reduce environmental impacts has not been previously explored. In this study, we examine two distinctly different types of products: appliances, which have much larger usage-phase energy impacts comVOL. 44, NO. 12, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
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pared to manufacturing and large improvements in energy efficiency with progressing model years, and computers, which have significantly larger manufacturing energy impacts compared to usage and small improvements in energy efficiency with progressing model years. Clearly, improving efficiency is a necessity for LCO to have value. Thus, using product leases to influence life cycles alone has little environmental advantage. Only when remanufacturing is utilized at the end of life are larger energy savings obtained. The magnitude of the savings also depends heavily on the rate of efficiency improvements achieved between new product generations. Because leasing transfers the responsibility of replacement to the manufacturer, allowing them to optimize replacement rates compared to consumers’ voluntary replacement rates, the flexibility offered in leasing can be used to set the replacement intervals that are optimal for remanufacturing. Compared to appliances, computers do not gain significant energy efficiency between product generations, making the case for leasing more complicated. In this industry, shortening life spans only increases the total energy impact. If leasing were to be used to reduce the environmental impact of the computer industry, it would need to do so by extending the life cycle of the product, a claim supported by Thurston et al. (33). Unfortunately, current consumer preferences run counter to this strategy, with consumers preferring to buy new products after only a few years of use. Until recovery processes improve to better meet consumer preferences with remanufactured products, there may be little incentive, both financially and environmentally, to lease products with the product characteristics of computers. Even when new technology is introduced, such as the transition from CRT to LCD monitors, the energy savings pale in comparison to the manufacturing energy. Kiatkittipong finds that even replacing an existing CRT monitor with an LCD monitor to achieve savings in the energy usage phase may not be adequately justified due to the short life spans of most consumer computer purchases (48). Overall, the claims of leasing being “green” may be premature for this industry as product characteristics have a significant impact on the potential for reducing energy use.
ACKNOWLEDGMENT We gratefully acknowledge NSF CMMI 0620763 for financially supporting this project.
Supporting Information Available Additional details on the end-of-life processes for computers. This material is available free of charge via the Internet at http://pubs.acs.org.
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