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Forthcoming work in Environmental Engineering and Management Journal Copyright © 2015 Ferrón Vílchez, V., De la Torre Ruiz, J.M., Ortiz de Mandojana, N

HOW MUCH WOULD ENVIRONMENTAL ISSUES COST? THE INTERNALISATION OF ENVIRONMENTAL COSTS IN THE EUROPEAN TRANSPORT INDUSTRY Vera Ferrón-Vílchez1∗ José Manuel de la Torre-Ruiz2 Natalia Ortiz-de Mandojana3 1 University

of Granada, Business and Management Department, Economics and Business School, Campus Cartuja S/N. 18071, Granada (Spain) 2 University of Valencia, Department of Management ‘Juan José Renau Piqueras’, Economics School, Avenida de los Naranjos S/N. 46022, Valencia (Spain) 3 University of Islas Baleares, Department of Management, Edificio Gaspar Melchor de Jovellanos, Carretera Valldemossa. 07122, Palma de Mallorca (Spain)

Abstract Environmental issues have over the last few years become an increasing concern for both the public and for companies, but, less is known about how companies could internalize the negative effects of environmental issues. Public regulators are taking a tougher stance with regards to environmental regulations. As regulations become stricter, firms will have to pay the cost of compliance. In this paper, we attempt to shed some light on how firms could internalize these environmental effects and what the benefits of early internalisation could be. We do this by using a qualitative analysis, elaborating a case study in the Spanish road freight transport industry (i.e., international transport of goods by road) to compare the environmental behaviour of the analyzed company in 2009 and its current environmental approach. By conducting interviews in two differentiated periods, the main conclusion of this study is that, as regulation becomes more stringent, environmentally proactive firms will be more capable of facing the challenge of an accurate internalisation of environmental effects and consequently they could reinforce sustainable development and simultaneously reduce negative environmental impacts. Key words: environmental costs, cost internalisation, stringent regulation, environmental proactivity, transport.

∗

Corresponding author. Email: [email protected]; Phone: (0034) 958 249 596; Fax: (0034) 958 246 222

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HOW MUCH WOULD ENVIRONMENTAL ISSUES COST? THE INTERNALISATION OF ENVIRONMENTAL COSTS IN THE EUROPEAN TRANSPORT INDUSTRY 1. Introduction

The environment is affected by business activity through the consumption of materials and utilities and the generation of waste and emissions. As a consequence, several environmental problems have arisen, which have increased public concern and firms’ interest in environmental issues over the last few years (Weinhofer and Hoffmann, 2010). For instance, climate change has been reflected mainly in temperature increases derived from higher greenhouse gas (GHG) stock in the atmosphere. As an example, the global annual emission of carbon dioxide (CO2), an important GHG in the anthropogenic climate change, grew between 1970 and 2004 by about 80%, from 21 to 38 gigatonnes, mainly due to the consumption of natural resources, general industry and transport (IPCC, 2007). Apart from their obvious harmful consequences on the natural environment and human life, environmental problems may also have negative effects on business activity and economic growth. Further, companies’ consumption of resources and the generation of waste represent significant negative externalities and costs for society. For instance, the price of the negative impacts of climate change has been borne by society in general, rather than by the actual polluters. As such, some have argued that, in some cases, regulators must force polluters to pay for these costs. Therefore, in anticipation of stricter regulations, the reduction of these environmental costs and its related internalisation by firms has acquired increasing importance in the current business context. Specifically, the transport sector, which generates negative environmental impact, has been addressing this matter (EC, 1995). Several studies analyse the environmental costs generated by this industry (Arimura and Iwata, 2008; Eriksen, 2000; Haller et al., 2007; Lemp and Kockelman, 2008; Mayeres et al., 1996; Quinet, 2004; Sælensminde, 2004). Consequently, there is a large range of research projects and literature about the internalisation of environmental costs of transport.

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In the environmental management literature, environmental costs are often considered as those expenses directly related to the control and prevention of pollution (e.g., Hart, 1995; Chirstmann, 2000). However, a more advanced analysis of environmental costs exists in the transport sector compared with other sectors. Using the environmental cost estimate proposed by the “Handbook on estimation of external cost in the transport sector” (Maibach et al., 2008) at the request of the Transport and Energy General Directorate (DG TREN) of European Commission, this work attempts to shed some light on this concept by quantifying both the air pollution costs (APC) and climate change costs (CCC) of a Spanish road freight transport firm as well as calculating the extent of other environmental costs that the company must pay to face the environmental challenge. A better understanding about the effects of internalizing environmental costs of transportation is essential because organizations ought to anticipate these negative effects given the increasing importance of environmental issues. Indeed, in the last years strong efforts are being taken by European authorities in order to determine a specific and homogenous regulation for the internalisation of environmental effects of transportation (e.g., EP, 2006; EC, 2008). The necessity that transport companies internalise the environmental impact might imply an increase in costs that may even compromise the future of firms that operate in this sector. These costs may even become a source of opportunities for organisations that anticipate changes in regulation. In this sense, Porter and Van der Linde (1995) proposed that more stringent environmental regulations may trigger innovations that improve firms’ operative efficiency. Through these cost savings, firms could offset the price of complying with environmental regulations. This “win-win” situation has been empirically supported by studies in other industries. For instance, Böhringer et al. (2012) analyzed German manufacturing sectors and showed that firms’ environmental investment had a positive influence on their productivity. Further, Rennings and Rammer (2011) showed that German firms with innovations caused by environmental regulations related to recycling or waste management are able to be more cost efficient. Drawing on a resource-based view of the firm, the literature on environmental management has made important contributions in showing that 3


taking into account environmental issues may generate certain organisational capabilities for firms (Hart, 1995; Hart and Ahuja, 1996; Nehrt, 1998; Christmann, 2000; Aragón-Correa and Sharma, 2003; Darnall and Edwards, 2006). For instance, proactive environmental management enables firms to reduce internal costs by optimising the productive process (Christmann, 2000). Similarly, being environmentally proactive may help firms avoid additional costs derived from penalties and fines (Sharma and Vredenburg, 1998). Thus, to the extent that firms are able to anticipate more stringent environmental regulations, they may be more able to gain competitive advantage (Porter and Van der Linde, 1995; Rugman and Verbeke, 1998). In sum, environmentally proactive firms will be more capable of facing the challenge of internalising environmental costs. The main objective of this study is to analyze how transport companies are internalizing the cost of facing the environmental challenge from a management point of view. Thus, contrary to other studies, this work does not try to calculate estimates and potential taxation related to the environmental costs of transport, but to evaluate potential future consequences of stricter regulation with respect to the internalisation of environmental effects by firms. In doing so, this work is focused on qualitative analyses, elaborating a case study of a Spanish firm that operates in the road freight transport sector at international level. By conducting interviews in two differentiated periods (2009 and 2012), we compared the situation of this firm over the last three years, showing how its environmental response pattern has varied as a consequence of the increasing stringency of environmental regulation and the hardening of the economic conditions due to the international financial crisis.

2. Theoretical review

2.1. The importance of addressing the internalisation of environmental effects by firms

Environmental problems, such as the depletion of the ozone layer, air pollution in big cities and climate change, have increased public concern about environmental issues. For instance, global warming may have several negative 4


impacts that directly affect economic activities. Thus, it is not surprising that in the last few years this issue has garnered a great deal of social as well as regulatory attention. Regarding the direct link between environmental concern and business activity, firms are increasingly taking into account environmental issues at all organisational levels (Banerjee, 2001; Weinhofer and Hoffmann, 2010). In this context, organisations must understand the effects that environmental problems may have on their activity (Kolk and Levy, 2004; Levy and Kolk, 2002). For instance, scholars have pointed out how the effects of climate change may lead to higher costs for firms (Kolk and Pinkse, 2008; Proost et al., 2009) as they face complying with environmental regulations by investing in, for example, pollutionpreventing technologies, as well as making corresponding organisational changes (Kolk and Pinkse, 2008). Similarly, more stringent environmental regulations may increase costs for firms in the form of penalties and fines for noncompliance (Sharma and Vredenburg, 1998; Rugman and Verbeke, 1998). However, on the other hand, organisational activities related to the prevention of the negative impacts have also been seen as a potential way of gaining competitive advantage (Banerjee, 2003). Drawing on a resource-based view, several studies have analysed reductions in costs by means of improvements due to the generation of environmentally proactive capabilities (Christmann, 2000; Darnall and Edwards, 2006; Hart, 1995). For instance, the seminal work of Stuart Hart (1995) argued that environmental strategies related to activities aimed at preventing pollution generate some organisational capabilities that can be linked to cost minimisation. Specifically, cost savings arising from pollution prevention can avoid the expense of pollution control technologies (Hart, 1995) and can increase productivity and efficiency because less waste is translated into a better use of inputs (Hart and Ahuja, 1996). Pollution prevention activities are not the only source of diminished costs. Costs can be minimised by avoiding legal sanctions such as fines and penalties imposed for noncompliance with environmental regulations (Sharma and Vredenburg, 1998; Rugman and Verbeke, 1998). As a consequence, more stringent environmental regulation cannot be understood as a threat, as this stringency may provide a great opportunity for those organisations with environmental commitments that go beyond legal requirements (Aragón-Correa, 1998; Aragón5


Correa and Sharma, 2003; Christmann, 2004; Porter and Van der Linde, 1995) and that anticipate future changes in regulations (Hoffman, 2005). Note that proactivity is defined as a “firm’s tendency to initiate changes in its various strategies policies rather than to react to events” (Aragón-Correa, 1998: 557). We consider that the more stringent a regulation is, the more advantageous will be the resulting proactive behaviour. For instance, in the hypothetical but probable case that regulators will force organisations to incur the costs of avoiding the negative effects of climate change, that is, the internalisation of environmental costs, the firms that have anticipated these costs will profit from already being in a better position to face this problem. In contrast, for those reactive organisations this internalisation could imply an important threat for several reasons. First, reactive organisations may not be able to quickly and effectively address stricter regulations. Second, reactive organisations will have to pass on increases in costs, for example, by raising the final price of their products or services to the detriment of their competitive position; such measures might result in the loss of sales and even clients. Finally, in general terms, this threat could have several economic impacts, such as unexpected increases in the inflation rate and job losses (Baum et al., 2008). Consequently, anticipating environmental costs might be able to engender the development of a rare, valuable, and inimitable capability (Wernerfelt, 1984; Barney, 1991) that enables firms to achieve sustainable competitive advantage. Therefore, we propose that proactive firms will be more able to simultaneously (1) comply with stricter regulations in the future, (2) manage environmental costs in a more effective way and (3) protect the environment.

2.2. The environmental cost in the European transport context

The European transport industry is relevant to the study of how companies could face the challenge of internalizing environmental costs for, at least, three main reasons. First, this sector is intimately connected to environmental issues not only because of the potential problems generated through air pollution and noise but also because of its non-renewable inputs (e.g., fuel treatment is an important key). Second, the transport industry must comply with increasingly strict regulations with regard to both safety and environmental requirements. 6


Environmental activists often target this industry, thereby increasing the chances of more regulation and governmental pressure in the future. Third, especially regarding the road freight transport sector, the great level of externalities generated by this industry is one of the main sources of criticism by activist groups, regulators, and society in general. For instance, the Green Paper from the European Commission argues that external costs caused by the road freight transport sector due to noise and pollution account for 0.6% of the EU’s Gross Domestic Product (EC, 1995). Prior academic literature on transportation and the environment has largely focused on the external costs caused by the transport industry (Eriksen, 2000; Mayeres et al., 1996; Janic, 2007; Beuthe et al., 2002) as well as the degree to which environmental effects of transport are being internalized by taxation (Browne et al., 2010; Piecyk and McKinnon, 2007). For instance, Quinet’s (2004) meta-analysis on Western European external transport costs showed that a wide range of measures and specifications exists to study this topic. The study of Beuthe et al. (2002) in the Belgium transport network showed that a significant cost saving is possible by internalising the marginal external cost of transport. With regards to European regulations on the environmental costs of the transport industry, the 1995 Green Paper introduced one proposal for the internalisation of these costs by noting that users must support environmental costs through increases in the prices of transport services; this is also known as the “Polluter-Pays-Principle” or “PPP”. The introduction of full tariff-setting in the use of these infrastructures was proposed in order to internalise the environmental effects of each transport mode (EC, 1995; 1998; ECMT, 2003). This principle recognizes that users must incur the entire costs of transport infrastructures and services (Nash and Matthews, 2005), thereby setting a general rule for pricing in this industry. However, there still is not a European policy that standardises charges. Moreover, practically speaking, a homogeneous and complete full tariffsetting has not been implemented in any EU Member States. For instance, the average charge for a heavy goods vehicle covering 100 kilometres varies between €12 and €24 (EC, 2001). Thus, the European tariff-setting policy is not fully and homogeneously defined in terms of its practical implementation.

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Several studies have pointed out that the road freight transport sector generates environmental costs higher than the charges and taxation that are currently collected (e.g., Proost et al., 2002). These circumstances highlight the necessity for stricter regulations at EU level in order to standardise charges and taxes among EU Member States. In doing so, this study argues that transport companies play an important role in achieving this objective. The internalisation of environmental costs of the transport industry must be carried out by firms involved in the industry, and as such, environmental cost management must become a priority for transport companies. This is particularly relevant as European regulators continue to develop a more stringent legal framework for internalising the environmental costs of the transport industry. The most recent advances related to environmental costs concern the intermodal use of transport, the combination of at least two transportation services, including road freight transport plus another means (e.g., rail). Several studies have analysed the effects of intermodal and road freight transport (Beuthe et al., 2002; Janic, 2007; Wolf and Fridell, 2009). For instance, Janic (2007) has considered two hypothetical freight scenarios: the first is composed only of road transport and the second is bimodal, combining rail and road freight transport. He found that bimodal transportation is an environmentally friendly mean of transport compared with road freight transportation alone (Janic, 2007). Further, the International Union of Railways and the Community of European Railways, as representatives of the railway sector, pointed out that, on average, road freight implies five times greater external costs than rail (UIC/CER, 2004; Wolf and Fridell, 2009). This situation reveals an important threat for road freight transport companies to the extent that only those that effectively face the internalisation of environmental costs will be able to survive the hypothetical scenario in which they have to share the service with other transport means. Consequently, there is urgency for road freight transport firms to face the environmental challenge with the objective of becoming more competitive over other transportation modes in terms of cost in general and in terms of environmental costs in particular.

2.3. Classification of environmental cost of transport

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Despite several studies have classified the external environment-related costs in the transport sector with regard to different criteria (e.g., Eriksen, 2000; INFRAS/IWW, 2004; Mayeres et al., 1996; Lemp and Kockelman, 2008; Sælensminde, 2004), there is no broadly-accepted delimitation about what causes the transport sector’s environmental costs. In order to delimitate the concept, our study draws on the classification of environmental cost offered by the “Handbook on estimation of external cost in the transport sector” (Maibach et al., 2008). This guide was elaborated at the request of the Transport and Energy Directorate of the European Commission by a group of researchers of CE Delft, an independent research and consultancy that develops innovative solutions to environmental problems, in collaboration with several researchers of INFRAS, the Fraunhofer Institute for Systems and Innovation Research (ISI), the IWW as well as several researchers of the University of Gdansk (Poland). This guide was developed after the adoption of the 1999/62/EC Directive of the European Commission (also known as Eurovignette Directive) according to which all EU Member States were entitled to charge tolls on European roads. The Handbook introduces the “state of the art” and “best practices” related to the estimate of external costs in the European transport sector based on diverse reports elaborated by experts and researchers in the context of the European Union. The Handbook classifies external costs into six different categories, namely, congestion and scarcity costs, accident costs, air pollution costs, noise costs, climate change costs and other external costs. Even though the classification proposed by the INFRAS/IWW study is a bit different from the Handbook classification, several commonalities exist and, consequently, we opted for this last one. Table 1 shows a brief definition of each cost category according to the Handbook classification. Despite the extensive and exhaustive work by the authors of the Handbook, the guide is not exempt from criticisms. At the request of the European Automobile Manufacturers Association (ACEA), several researchers from the Institute for Transport Economics at the University of Cologne have elaborated a report that criticises several aspects of the Handbook. For example, three of the main criticisms argued by Baum et al. (2008) are as follows. First, the guide only took into account the external costs of transport, but it did not consider benefits generated by this sector. Second, the external costs estimate did not quantify the 9


taxes and charges currently paid by transport companies. And third, internalisation according to the guide definition of external costs would cause future job losses in the industry and potential increases in inflation in the European Union of 2% to 3% higher than the current level (Baum et al., 2008). Baum et al. (2008) also called into question the consideration of several cost categories of the Handbook. For instance, the congestion and scarcity costs and noise costs (in part) are supported by users, while accident costs are met by insurance companies. It is important to note that, at this specific point, the Handbook argued that accident costs are not fully covered by insurance companies (Maibach et al., 2008). In sum, according to Baum et al. (2008), air pollution costs, climate change costs and only a portion of noise costs and accident costs constitute the real costs of transport activity. These criticisms highlight that the debate about the internalisation of environmental cost remains still open.

Table 1. Categories of transport external costs (Maibach et al., 2008) Categories Definition and examples Congestion These arise from the mutual disturbance of users competing for limited and scarcity transport system capacity. These costs have an internal component which costs is supported by users and it is related to waste of time and vehicle damage (depreciation, increasing in oil expense, etc.), but also an external component related to decreasing social welfare. Accident costs Those social costs of traffic accidents that are not covered by riskorientated insurance premiums. Thus, the scope of this type of costs does not depend on the level of the accidents, but also the requirements of the insurance chosen by the user. Air Pollution Caused by the emission of air pollutants such as particulate matter (PM), costs nitrogen oxide (NOx), sulphur dioxide (SO2), and other volatile organic components (VOC) and consist of health costs, building/material damages, crop losses and costs of further damages for the ecosystem such as biosphere, soil, water. Noise costs These consist of costs for annoyance (transport noise imposes undesired social disturbances, which result in social and economic costs like any restriction on enjoyment of desired leisure activities, discomfort or inconvenience) and health (transport noise can also cause physical health damage such as stress, decrease of sleep quality, etc) Climate These refer to the negative impacts caused by transport activity due to Change costs the greenhouse gas emissions that contribute to global warming. Other external Costs for nature and landscape costs Costs for soil and water pollution External costs in sensitive areas Costs of up- and downstream processes Additional costs in urban areas Costs of energy dependency

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Since the objective of this paper is to analyse how transport firms are facing the challenge of the internalisation of environmental costs, we focused on those costs directly related to the environmental protection, specifically air pollution costs and climate change costs. In fact, both air pollution costs and climate change costs account for a significant figure in the total external cost generated by transport activity. For instance, Piecyk and McKinnon (2007) argued that 15% of the total external costs generated by transportation in the United Kingdom were attributable to air pollution and GHG emissions.

2.3.1. Air pollution costs

Air pollution costs (APC) are caused by the emission of air pollutants such as particulate matter (PM), nitrogen oxide (NOx), sulphur dioxide (SO2) and other volatile organic components (VOC) resulting from transport activity and also include health costs, building and material damages, crop losses and costs for further damages to the ecosystem in the biosphere, soil and water (INFRAS/IWW, 2004; Maibach et al., 2008). Research on this type of cost is more advanced than on other types of external costs mainly as a consequence of several estimations carried out by the ExternE Model (e.g., Bickel et al., 1997; Bickel and Friedrich, 2005), which was created through the cooperation of several European Union research projects. Table 2 shows several impacts related to APC. For road transport, the amount of vehicle emissions is the most relevant factor to estimate APC. Emissions may depend on vehicle characteristics, such as age, driving pattern, fuel type and combustion technology (including end-of-pipe exhaust gas cleaning technology, load factor and size), driving patterns and the geographical location of the road. APC are an essential category in estimating the environmental costs of the transport sector. Despite the several studies and methodologies developed to focus on this type of cost, we used the two most important research projects in the European context, namely, the “Developing Harmonised European Approaches for Transport Costing and Project Assessment”, also known as HEATCO initiative (Bickel et al; 2005; 2006), from the DG TREN of the European Commission, and the cost-benefit analyses elaborated by the “Clean 11


Air for Europe”, also known as CAFE CBA programmes (Holland et al., 2005; Hurley et al., 2005), programme carried out by the European Commission. Both projects analysed in monetary terms the harmful effects of the high level of air pollution due to transport activity in Europe and generated a unitary cost per tonne of pollutant air emission, but each one is based on different calculation methodologies1. Compared with HEATCO, CAFE CBA does not take into account material and building damage. To avoid the inconvenience of these differences, Maibach et al. (2008) recommended the use of a combination of the results of both projects. Specifically, the initiative TREMOVE (Proost, 2006) promoted by the Environment Directorate of European Commission provides an assessment model comparing the effects of different environmental policies in the European transport sector. TREMOVE provides APC estimates according to vehicle type and kilometre. In the next section, this study offers the calculation of APC estimates.

Table 2. Air pollution costs caused by transport activity (Maibach et al., 2008) APC types Health costs

Building and material damage

Crop losses in agriculture and impacts on the biosphere Impacts on biodiversity and ecosystems

Definition and examples Impacts on human health due to the aspiration of fine particles such as particulate matter of less than 2.5 microns (PM2.5), particulate matter of less than 10 microns (PM10), and other air pollutants. Impacts on buildings and materials from air pollutants. This has two main effects: the soiling of building façades mainly by particles and dust. The second, more important impact on façades and materials is the degradation through corrosive processes due to acid air pollutants like NOx and SO2. Crops as well as forests and other ecosystems are damaged by acid deposition, ozone exposition and SO2.

The impacts on soil and groundwater are mainly caused by eutrophication and acidification due to the deposition of nitrogen oxides as well as contamination with heavy metals (from tyre wear and tear)

2.3.2. Climate Change or global warming costs

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For instance, both projects used different sources and techniques to evaluate in monetary terms the toxicity of PM2.5/PM10 emissions. While, the CAFE CBA project showed that all particulates are equally aggressive, the HEATCO project differentiated particulates with regards to their level of combustion toxicity.

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The United Nations Framework Convention on Climate Change (UNFCCC, 1994) defines climate change as "a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods”. Climate change or global warming costs (CCC) due to transport are mainly caused by greenhouse gas (GHG) emissions, such as carbon dioxide (CO2), nitrous oxide (N2O) and methane (CH4), and to a smaller extent by emissions of refrigerants (hydrofluoro-carbons) from mobile air conditioners (Maibach et al., 2008). The main drivers of climate change costs are fuel consumption and the carbon content of the fuel. Table 3 shows several impacts of global warming that cause external costs.

Table 3. Key areas assessment in the social costs of climate change (Watkiss et al., 2005a) Damage type Rising sea levels Abusive Energy use impacts

Agricultural impacts Water supply impacts Health impacts Ecosystems and biodiversity impacts Extreme weather events Other major events

Definition and examples Sea level rise leads to costs for additional protection, or otherwise loss of dry land and wetland loss Since Climate Change implies a generalized augment of temperatures, the abusive energy use will depend on average temperatures and range, but there will be a combination of increases and decreases in demand for heating (both in terms of overall energy supplied, and to meet peak demands). Benefits from increased winter temperatures that reduce heating needs may be offset by increases in demand for summer air conditioning, as average summer temperatures increase. Agricultural impacts depend on regional changes in temperature and rainfall, as well as atmospheric carbon dioxide levels (and fertilisation). The key impacts will be crop changes in the cultivated area and yields. Water supply impacts depend on changes in rates of precipitation and evapo-transpiration and demand changes (ecosystems, climatic variability, humidity variability). Direct health impacts from temperature changes Ecological productivity and biodiversity will be altered by climate change and rising sea levels, with an increased risk of extinction of some vulnerable species. Heatwaves, drought, floods, and potentially storms, tropical cyclones and even super-typhoons are likely to increase. Loss of the West Antarctic ice sheet Loss of the Greenland ice sheet Methane outbursts (including runaway methane hydrates) Instability or collapse of the Amazon Forest Changes in the thermo-haline circulation Indian monsoon transformation Change in stability of Saharan vegetation Tibetan albedo change

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The estimate of CCC involves a high level of complexity due to the difficult valuation of the damage in physical units caused by global warning and its meaning in monetary terms. On the one hand, the valuation of damages caused by global warning has a difficult delimitation due to the fact that climate change impacts are long-term and global, and as a consequence, the appearance of risk patterns is difficult to anticipate or know accurately. For instance, the Handbook argues that “several negative impacts are rather certain and proven by detailed modelling, while other possible impacts, such as extended flooding or hurricanes with higher energy density are often not taken into account due to lack of information on the relationship between global warming and these effects” (Maibach et al., 2008: 74). Moreover, secondary impacts (e.g., regional conflicts) are even more difficult to assess. Thus, what are the estimated impacts in physical units for analysis? This question, among others, might be easily answered in the case of other environmental costs because of the existence of clear and accurate definitions and quantifications. However, in the case of CCC, there are numerous problems that must be addressed to evaluate damages. As such, an assessment is necessary that is based on an integrated perspective that includes both damages and strategies to them (Maibach et al., 2008). The monetary valuation of CCC might be controversial. Available damage cost estimations of GHG emissions vary by orders of magnitude because of theoretical valuation problems related to equity, irreversibility and uncertainty2 (Maibach et al., 2008). Related to the economic valuation of the CCC, there is a divisive debate among several studies. Some studies use the so-called “damage cost approach”, while other studies estimate costs based on so-called “avoidance or mitigation costs approach” (Maibach et al. 2008). The first method, the damage cost approach, quantifies in monetary terms already known irreversible damage. For instance, the “Social Cost of Carbon” project (Watkiss et al., 2005b) carried out by AEA Technology, a consultancy organisation specialized in energy and climate change, and the Stockholm Environment Institute has recently elaborated an assessment of damage costs based on this methodology. In contrast, the second 2 For instance, what should the time horizon be for analysis? What must be the discount rate? Must impacts be weighted differently in different regions? If so, how should the specific weights for each region be determined?

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method, avoidance or mitigation costs approach, which is the method used by the INFRAS/IWW project, evaluates costs of avoiding CO2 emissions by determining the least-cost option to achieve the required level of GHG emission reduction. In doing so, the reference limit can be used as a policy target at the national, European or, in the case of the Kyoto Protocol, international level (INFRAS/IWW, 2004). According to Maibach et al. (2008) this methodology has been used and recommended by several studies and research projects, such as UNITE (e.g., Nash et al., 2003; Bickel et al., 2003), ExternE (e.g., Bickel et al., 1997; Eyre et al., 1998; Bickel and Friedrich, 2005) and the Stern report (2006). Despite their differences in calculation and estimation approaches, both methods have advantages and disadvantages. In order to estimate the CCC, the Handbook has recommended the simultaneous use of both methods. For the short-term estimate, the Handbook used the avoidance and mitigation costs perspective, while for the long-term estimate, the Handbook used the damage cost approach. Given the lack of equity, irreversibility and uncertainty related to climate change impacts, the authors of the Handbook argued that the decision regarding the specific value of the CCC estimate to be internalised by firms is highly influenced by political decisions rather than the results obtained through research. Thus, it offers the values generated by the TREMOVE project, which provides a CCC estimate according to vehicle type and kilometre. In next section, we discuss the calculation of this CCC estimate.

3. Research Method: a mini case study

In order to highlight the practicalities of internalising environmental costs, we focused on a case study in Spain. Qualitative research methodology has been shown to be appropriate to study how firms are able to face several issues related to environmental problems such as climate change (e.g., Banerjee, 2001; Wittneben, 2007). The transport industry is a key sector throughout the world. The transport industry has particular strategic importance for the Spanish economy: the country occupies a geographical non-central position in the European market; it is a key

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supplier of agricultural products to other European countries; and transport has an impact on other sectors (e.g., tourism) as well as on the country as a whole.

3.1. Spanish regulation for road freight transport industry

With respect to the service sector in Spain, the transport industry accounted for 8.14% of Gross Domestic Product in 2007, occupying fourth place in the nonfinancial market services sector (SSI, 2008)3. Four sectors compose the linkedtransport services in Spain, namely, passenger transport, freight transport, postal and mailing activities, and annex-transport activities. Our mini case study is based on road freight transport for several reasons. First, road freight transport generates the highest revenue within its transport classification. For example, in 2007, more than half of transport activity companies belonged to the road freight transport sector (61.1% of total volume). Second, road freight transport generated the highest revenue (39.5%) and employed the greatest percentage of people among related industries (42.3%) (SSI, 2008). Finally, road freight transport is more than three-quarters of the total transported freight (SSI, 2008). The relevant monitoring authority that evaluates the competitiveness and efficiency of this industry in Spain is the General Department of Road Transport. In 2001, this agency approved a plan called the Strategic Plan for Road Freight Transport with a horizon of five years, also known as PETRA (based on its Spanish initials). The main objective of this plan is to build a reference framework in which the interconnected interventions of the whole sector can be delimited in order to modernise this sector and, through it, obtain a competitive position. Currently, the Strategic Plan for Road Freight Transport is on its second implantation horizon spanning from 2007 to 2012; it is called PETRA II, since it is merely a continuation of the initial PETRA plan. PETRA establishes environment protection as one of its cornerstones. However, while PETRA plans consider safety, training and quality in the road freight transport sector as topics of importance for improving competitiveness and efficiency in the transport industry, according to PETRA guidelines, policies related to environmental issues must be implemented based on 3

In 2009 the sectoral classification in Spain was changed. Consequently, the percentages offered in this work are the most up to date data about the different subsectors that make up the transport industry.

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a medium-term perspective. With regards to environmental costs that companies must currently pay, PETRA considers that the main factor that affects the entire sector in Spain is related to the investment in Euro-type vehicles. The Euro classification divides vehicles into groups depending on pollutant power; the “I” category is the most pollutant, while the “IV” and “V” categories are less so, since vehicles in these two classes use urea, a substance that reduces the emissions of pollutant gases, specifically NOx (nitrogen oxides). Ad-Blue (i.e., the commercial brand of urea) is the product used to reduce NOx in the exhaust system of heavy vehicles (only for vehicles type Euro IV and Euro V). Table 4 shows a comparison of the pollutant power of a non-ecological vehicle (e.g., type Euro III) and a lesspollutant vehicle (e.g., type Euro V).

Table 4. Comparison of the pollutant power of non-ecological and ecological vehicles Vehicle type Euro III Vehicle type Euro V

CO g/km 2.1 1.5

HC g/km 0.66 0.46

NOx g/km 5 2

3.2. General information about the analysed firm

This study focuses on the practical consequences of these initiatives by using a case study of Hermanos Aznar, a Spanish haulier company. The mediumsized business orientation and structure of Hermanos Aznar make this case a good representative of average companies in the Spanish road freight transport industry. In Spain there are more than 5,300 firms operating in the road freight transport sector. Some 96.44 % of them are small and medium-sized companies (fewer than 50 employees), while 2.91% have 50-200 employees and 0.65% employ more than 200. Hermanos Aznar is located in Vera, a coastal town in the province of Almeria (south-eastern Spain). Vera is an important centre of road freight transport because of its high level of agricultural exports to the rest of the European Union. In fact, Hermanos Aznar specialises in the international road transport of agricultural products. It has valuable relationships with commercial agents in the main Central European cities, where most trade transactions of this kind take place. Hermanos Aznar has 158 employees (79 primary drivers, 45 17


secondary drivers, 20 shipping employees, 7 mechanics, and 7 managers), a fleet of 79 trucks and a turnover of more than €3.5 million in 2007. Even though most of Hermanos Aznar’s competitors are smaller (i.e., by number of employees), the manager commented that, in the Spanish road freight transport sector, any competitor, whatever its size, could jeopardize the company’s survival. Consequently, the key issue at this point is to maintain its clients’ portfolio, especially in the current economic crisis. Three main information sources have been used in the mini case study. First, in prior sections several public guidelines have been summarized for the purpose of contextualising the environmental problems that the transport industry faces. Second, two in-depth interviews have been conducted with the manager of Hermanos Aznar in order to understand its internal processes. The first interview was conducted in January 2009 and the second in March 2012. Holding these two interviews at different times allowed a temporal comparison about how the environmental behaviour of the company has changed in the analyzed period of time (3 years approximately). Third, we had the opportunity to visit the firm's facilities and hold some informal conversations with employees from the garages as well as the administration department so as to contrast the previously obtained information.

3.3. Temporal comparison of the environmental behaviour of the analysed firm

Hermanos

Aznar

must

comply

with

the

above-mentioned

legal

requirements regarding environmental issues, just like the rest of its industry competitors. Based on these requirements, the three main environmental issues for the company are: (1) investments in ecological fleets (that is, type Euro IV and type Euro V vehicles); (2) the payment of environmental fees and taxes related to combustibles, tyres, and the use of infrastructure (i.e., expressways); and (3) waste management (withdrawal and treatment). Further, the company also considers other environmental measures with which it has to comply (i.e., the maintenance cost and the insurance cost of ecological vehicles).

18


3.3.1. The investment in ecological fleet

With respect to the investment in an ecological fleet, current Spanish regulations require that all new vehicles acquired must be less-pollutant. Thus, as companies update their fleets, the “green transformation” of vehicles takes place. In 2009, Hermanos Aznar had a fleet of 57 trucks, 13 of which were type Euro II vehicles, 21 were type Euro III, and 23 were type Euro IV. This means that, in 2009, approximately only 40% of the company’s fleet was ecological. In 2012, the company has a fleet of 79 trucks, 12 of which are type Euro III vehicles, 21 are type Euro IV, and 46 of are type Euro V. The 13 type Euro II vehicles have been sold and the type Euro III vehicles fleet has been drastically reduced during the last three years. Consequently, now approximately 85% of the company’s fleet is ecological. Therefore, an ecological update of the company’s fleet has taken place during the analyzed period. It is important to note that although it may seem that the company’s size has increased due to the significant rise in the total number of trucks, turnover (measured by net income or by the number of clients) has remained constant. Therefore, in the second interview, the manager reported that increasing the fleet has resulted in a lower usage rate of the trucks than in 2009; that is, the total number of kilometers traveled per truck has declined in those three years, from approximately 160,000 km/truck to 140,000 km/truck. This situation is a consequence of the tough situation that transport companies are suffering due to the deterioration of economic conditions. Three issues are related to the investment in a less contaminant fleet. First, the price of acquiring a less-pollutant truck (e.g., vehicle type Euro V) is around €100,000. In the Spanish new truck market, most of the dealers only sell ecological vehicles (i.e., vehicles type Euro IV or Euro V). It is therefore only possible to buy pollutant vehicles in the resale or second-hand market. In fact, according to the manager of Hermanos Aznar, when the company acquires a new truck, it offers a trade-off an old (pollutant) truck to the dealer. Most of the dealers will then attempt to re-sell the old trucks in emerging countries where environmental regulations in the transport sector are much less stringent than in Europe. Second, another important issue related to the investment on ecologically updating of the fleet concerns the consumption of urea (Ad-Blue) for vehicles type 19


Euro IV and Euro V. As mentioned previously, urea is a substance that reduces the emissions of pollutant gases from trucks. The reduction of NOx emissions has become a challenge for any transport operator. Consequently, the use of urea implies an increase in the final cost of the service because, on average, a truck consumes approximately one litre of Ad-Blue4 product per 100 kilometres. In 2009, the price and consumption of urea was not considered significant by managers because only 40% of the fleet used this component. However, the ecological renewal of the fleet over the last 3 years means that now 85% of the current fleet consumes this component. As a result of the fleet update, managers buy large volumes of this component, which has significantly reduced the cost of urea (from 0.5.€/litre in 2009 to 0.35 €/litre in 2012). The company therefore benefits from economies of scale in purchasing this component. Finally, we asked the manager about the motivations for investing in a lesspollutant fleet, specifically the case for acquiring a vehicle type Euro V instead of a vehicle type Euro IV. He answered that, apart from the mandatory nature of the legislation governing the acquisition of new less-pollutant vehicles, the company is more interested in buying the most ecological trucks because of reduced infrastructure taxes (i.e., tolls) and the lower Ad-blue consumption. Further, we asked the manager about the maintenance costs of less-pollutant vehicles compared with the cost of maintaining pollutant vehicles. The manager said there was not a significant difference between less-pollutant and pollutant vehicles of the same brand (e.g., Volvo). In fact, the manager commented: “maintenance costs do not depend on the ecological nature of the vehicle; what really makes maintenance and repair expensive is the vehicle’s age and total kilometres travelled”. We also asked the manager about the cost of insuring less-pollutant vehicles compared with pollutant vehicles. He responded that the average insurance cost per truck per year is around €1,300 and there is no significant difference between less-pollutant and pollutant vehicles. 3.3.2. The payment of environmental fees and taxes 4 According to the manager of Hermanos Aznar, the Ad-Blue could be purchased in gas stations, truck dealers and other specific transport retailers (e.g., associations of carriers that have joint deposits). Thus, a wide range of supply options exists: from mini-bulk tanks, IBC containers for 1000 litres (this is the Hermanos Aznar’s option) drums of 210 litres, 10-litre bottles (easy to use for short trips) and wholesale for large consumers of urea (i.e., carriers).

20


Several studies have highlighted how the internalisation of environmental costs of transport could be achieved by taxation (e.g., Browne et al. 2010; Piecyk and McKinnon, 2007). In fact, the payment of environmental fees and taxes related to the use of infrastructure and fuel consumption are the current mechanism for internalising most of the environmental effects of transportation in Europe. When it comes to the cost of using infrastructures, the more the vehicle pollutes, the higher the payment is. The 1999 Directive on charging heavy vehicles prohibited incorporating external costs in the calculation of tolls. Nevertheless, in 2006 the legislator asked the European Commission to develop a general model for determining toll rates depending on the environmental characteristics of vehicles (EP, 2006; EC, 2008). As a consequence, the system for accounting the toll differs between European countries. Several European countries have implemented a GPS radar system in which the total number of travelled kilometres is calculated at the moment in which the vehicle enters (and leaves) these countries, meanwhile in other countries the estimate of the toll cost does not depend on this GPS system. Due to its international character, Hermanos Aznar supports the cost motorway tolls. According to the manager Germany, Switzerland, the Netherlands, and Austria use this GPS radar system in which the toll cost is €0.15/km., €0.80/km, €8/day, and €0.35/km respectively. However, in France, Italy and other countries (even in Spain) the estimate of the toll cost depends on the tranch of each country’s infrastructure, attracting different toll prices (with some even being free). The toll price includes the estimate of environmental damage that transportation generates to the extent that those countries with regulations more concerned in environmental issues estimate a higher price for using their infrastructure (e.g., the most expensive tolls are in Switzerland). Consequently, these different systems and prices highlight the non-homogeneity in Europe for estimating what the general pattern concerning the internalisation of environmental cost of transport is. Regarding environmental taxes on consumption of fuel, Spanish transport companies usually buy fuel wholesale within the country to avoid paying the higher fuel tax that operates in other European countries. Hermanos Aznar hires a shuttle external tank (i.e., an independent supplier). This outsourced service is 21


responsible for acquiring the volume of fuel required by the company and for bringing it to its garages. According to the manager, the company tries to avoid refueling in transit countries. Thus, environmental taxes on fuel consumption imposed by other countries do not significantly affect the cost structure of the company. Hermanos Aznar practically supports only Spain’s eco-tax on the purchase of fuel that amounts to €0.05 a litre. Approximately 95% of fuel consumption tends to be in Spain through the company’s own tanks or, failing that, from refueling stations that are regular suppliers of the company. Consequently, as fuel tax represents a significant percentage of company costs, managers held a tight control on fuel consumption to avoid the higher environmental taxes imposed by other countries.

3.3.3. Waste Management

The value chain activity that is most important to the managers of Hermanos Aznar is waste management. Current Spanish legislation requires waste produced by transport companies’ garages (e.g., filters, aerosols, dirty clothes, etc) to be collected by specialists in waste removal and treatment. But this service is not always free. As a consequence, waste management implies an internalised environmental effects that the company supports in order to comply with environmental regulations. We asked the manager whether the cost of these removal and treatment services had risen, reduced or been maintained in the analyzed period. The manager confirmed that, in general terms, the cost of these services had been maintained during the last three years. We also asked manager about possible ways for reducing the cost of waste management. He suggested that the most effective way is to try to reduce the resources’ consumption. Further, an important issue related to the cost of waste management is the tyre eco-tax. Spanish regulations require the payment of a tax that amounts to €10.62 per tyre for the removal and treatment of each old tyre every time a new one is acquired. Hermanos Aznar consumes two set of new tyres per truck per year, and each vehicle uses 12 tyres (i.e., six tyres on the refrigerator trailer and six tyres on the tractor). Consequently, Hermanos Aznar’s total eco-tax bill for tyres each year amounts to €20,135.52. 22


3.4. Consequences of a potential internalisation of APC and CCC

Public regulators have shown an increasing interest in the internalisation of environmental costs (e.g., the “Handbook on estimation of external costs on transport sector” was elaborated at the request of the DG TREN of the European Commission). In fact, in the last three years Hermanos Aznar has suffered an increase in the charges that it has to support due to the progressive change. Consequently, more stringent regulations may imply that in few years’ time it is possible that transport firms will have to internalise APC and CCC. Similar to prior studies that have studied the external costs generated by European transport sector (e.g. Proost et al. 2009), we have taken into account the TREMOVE project for estimating and quantifying the environmental costs that Hermanos Aznar could internalise, regardless of whether environmental regulations become stricter concerning the internalisation of APC and CCC. In relation to APC, it is necessary to measure the tons of emission by kilometre covered by taking into account the type of vehicle (i.e., Euro classifications), size of vehicle (in tons) and the different modes of transportation (i.e., by road, by sea or by air). Regarding CCC, it is necessary to measure the tons of CO2 emitted according to the same prior mentioned parameters. Table 5 shows the amount of APC and CCC that Hermanos Aznar could internalise by taking into account its current fleet. According to these estimates, Hermanos Aznar could internalise €444,920 and €211,820 per year with respect to APC and CCC respectively. According to the polluter-pay principle, what would be the amount of environmental costs to internalize by Hermanos Aznar for an average freight if the regulation compelled it to internalize the APC and CCC? To answer this question, we also calculate APC and CCC in terms of price increases, considering the average freight of the analysed company from Almeria (Spain) to Amsterdam (Netherlands) (i.e., 2,250 kms approx.). Using a track-type Euro III, the internalisation of APC and CCC for Hermanos Aznar would imply an increase in €218.25 in terms of service prices. However, if the company uses a track-type Euro V, the service price will increase only by €105.75, implying a difference of €112.5 23


between the use of an ecological truck versus the use of a non-ecological truck. This result shows that a current internalisation of potential environmental costs may have a great effect on road transport firms if the consequences of future regulations are anticipated. The necessity of addressing these great additional costs may even make the survival of these companies rather difficult. More environmentally proactive firms may find an opportunity in such regulations. To the extent that these firms are ahead of regulatory changes, they may voluntarily reduce CCC and APC.

Table 5. Estimate of Hermanos Aznar’s current APC and CCC (Maibach et al., 2008; Price Base: 2000; Germany was the base to the evaluation) Vehicle type +32 tons Truck Type Euro III +32 tons Truck Type Euro IV +32 tons Truck Type Euro V

TOTAL

Number of trucks and average of kms covered

Average APC by km covered

Total APC

Average CCC by km covered

Total CCC

12 trucks * 140,000 kms

Cents.€ 0.077

€ 129,360

Cents.€ 0.02

€ 33,600

21 trucks * 140,000 kms

Cents.€ 0.046

€ 135,240

Cents.€ 0.019

€ 55,860

46 trucks * 140,000 kms

Cents.€0.028

€ 180,320

Cents.€ 0.019

€ 122,360

79 truck 11,060,000 kms/year

€ 444,920

€ 211,820

4. Results and Discussion

The results of our qualitative analysis show that, in general terms, the environmental behaviour of the analyzed company has varied significantly during the last three years. The ecological renewal of the fleet has been the main driver for this change because this factor has supposed an environmental cost decreasing as a consequence of the development of a stricter cost control of the consumption of urea (e.g., emergence and use of economies of scale) as well as the consumption 24


of fuel with the purpose of avoiding the higher taxes in transit countries. In 2009, Hermanos Aznar was characterised as an environmentally reactive company because environmental issues were not a priority for it. The company only took into account environmental costs when compelled to do so by regulation, and while it obeyed this environmental regulation it would not go beyond these legal requirements. However, by analysing Hermanos Aznar’s current environmental behaviour, we noticed that as a consequence of the internalisation of current (and future) environmental effects of transport, environmental issues are considered an important cornerstone in the cost composition of the company. In fact, managers are aware that, if they are interested in surviving amid the current crisis and the encouragement (by European regulators) of intermodal transportation, they should take into account not only the current internalisation of environmental effects, but also other potential costs to face the environmental challenge of the road freight transport sector. In fact, they recognize: “in the last three years, our company’s systems for control cost have been widely developed and improved”, agreeing that environmentally proactive firms are more prone to take advantage of the early internalisation of environmental effects. This paper also has important implications both for managers and public regulators. In terms of managerial implications, although some ethical motivators may induce managers to adopt proactive environmental initiatives, at the end the economic consequences of these activities play a fundamental role (Banerjee, 2003). In this sense, our study adds important information to managers by quantifying the economic consequences that may imply the internalisation of environmental effects by firms. Managers of transport firms must translate environmental challenges as an increase in operating costs, which has a negative impact on business performance. This situation is different from other industries, such as carmakers and food companies, where the ecological differentiation of products and services clearly reinforces the competitive position of the firm, allowing them to profit from the benefits of ecological differentiation strategies via an increase in sales. In terms of regulation, public regulators and institutions at large should continue creating more effective mechanisms and public measures (e.g. subsidies and fiscal incentives) to encourage firms to develop proactive environmental 25


strategies and to incentivise those firms that effectively internalise their environmental effects. For instance, Haller et al. (2007: 12) argued that “the shortfall or delay in assistance and promotion at the federal level limits severely the prospects for voluntary conversion of ‘un-mandated’ private and public fleets”. Thus, if managers perceive that public authorities give a relaxed importance to environmental issues, they do not have the willingness to anticipate regulatory efforts in the future. Consequently, the role of public regulators is to motivate firms to implement voluntary proactive environmental practices. This study also notes four limitations. First, the used methodology is based on qualitative research which seems specific and non-extrapolating. This paper is focused on the environmental behaviour of Hermanos Aznar, a medium-sized Spanish company that operates at international level. Consequently, it is important to be cautious about generalizing these findings. Anyway, the qualitative methodology greatly contributes to capturing business reality and explaining environmental approaches that firms develop to address environmental matters (Banerjee, 2001; Wittneben, 2007). Thus, taking this into account, future research can use quantitative data that incorporates different cases from different industries and includes regulations and institutions from diverse countries. In this way, a generalisation of the presented proposition can be tested via statistical or econometrical regression techniques. For instance, it could be interesting to analyze the relationship between the internalisation of environmental effects by means of cost reduction and the financial or business performance in a comprehensive sample of transport companies. Second, this study has used the TREMOVE proposal and is highly-dependent of the measures proposed by the “Handbook on estimation of external cost in the transport sector” (Maibach et al., 2008) to estimate APC and CCC. However, the TREMOVE proposal offered multiple measures to calculate transport external costs. Therefore, future studies on transport sector can address this aspect and thus obtain complementary environmental cost estimates. Third, our methodological approach is only applicable to the transport industry. Thus, future research should determine the degree to which the conclusions and implications of this paper can be extended to other industries and countries. Finally, future works can also analyse whether environmental costs are also influenced by other strategies. For instance, it would 26


be interesting to study whether firm innovation capability and firm-level innovativeness imply a reduction in environmental costs and whether these factors establish links between cost leadership strategy and the implementation of proactive environmental strategies. Current environmental problems and regulations aimed at improvements in environmental management associated with cost strategies reveal that these topics should have great relevance in the future.

5. Conclusions and Recommendations

The purpose of this work has been to analyse what constitute environmental costs in the transport industry and how proactive firms might profit from their anticipated internalisation of environmental effects. Our work suggests firms that anticipate environmental costs through early internalisation will be more able to successfully address future stricter regulation and the emergence of intermodal transportation. In order to investigate this issue, we have developed qualitative research focused on the Spanish transport company. The main conclusions of this paper are twofold. First, although until now environmental regulation has not considered the internalisation of several environmental effects, some recent signals made by European public regulators seem to indicate changes in the near future. For instance, the interest of the European Commission in obtaining an estimate to quantify environmental costs (e.g., Maybach et al. 2008: EP, 2006; EC, 2008) is a clear example of these upcoming advances in environmental regulation. Second, by using a temporal comparison of the environmental behaviour of a Spanish transport company, our mini case study reveals that several firms are switching their response pattern with regards to environmental issues, changing from a reactive environmental pattern whereby they tended to minimally comply with environmental regulations in order to avoid legal penalties and sanctions (Roome, 1992; Stewart, 1993; Vernon, 1992) to a situation in which these companies are more interested in considering the effects of environmental issues within their management. The potential international standardisation of environmental regulations is an increasingly pervasive phenomenon that has a direct and strong impact on the environmental 27


management of firms (Christmann, 2004; Rugman and Verbeke, 1998). For instance, European norms with respect to the transport industry clearly encourage firms within that industry to reduce their environmental impact, develop “green” processes, and use ecological substances, vehicles and renewable energies (EP, 2006; EC, 2008). Additionally, European regulators are focusing on encouraging firms to develop proactive environmental management programmes and practices that go beyond formal compliance with environmental requirements. Thus, in this work we attempt to highlight the potential benefits derived from anticipating to internalisation of several environmental effects on transport firms. This anticipation allows firms to reduce future increases in their operating costs. As such, only those firms that develop advanced environmental approaches for addressing environmental issues will be able to survive and maintain a sustainable competitive advantage.

Acknowledgments The authors are grateful to all the executive members and employees of the company Hermanos Aznar, and especially to Antonio Aznar Domínguez, for all his helpful collaboration. Further, this research has been co-funded by the research project ECO2009-09241 (Spanish Ministry of Science and Education) and the research project P11-SEJ-7988 (Regional Government of Andalusia). We want to thank members of the ISDE research group from University of Granada (Spain) for their insightful comments.

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