Environmental Cost Accounting

Environmental Perspective• Five core objectives for

the environmental perspectives:–  Minimize the use of raw or virgin materials

– Minimize the use of hazardous materials

– Minimize energy requirements for production and use of the product

– Minimize the release of solid, liquid, and gaseous residues

– Maximize opportunities to recycle

Environmental costs• These are costs connected with the actual

or potential deterioration of natural assets due to economic activities.

• Environmental Costs can include costs to – clean up or remediate contaminated sites, – environmental fines, – penalties and taxes, – purchase of pollution prevention technologies and – waste management costs

Environmental Accounting Disciplines

• Global Environmental Accounting (GEA)• National Environmental Accounting (NEA) • Corporate Environmental Accounting (CEA)

Corporate Environmental Accounting

• Further it can be sub-divided into: – Environmental Management Accounting

– Environmental Financial Accounting

– Environmental Audit

• It is about making environment related costs more transparent within corporate accounting systems and reports.

Environmental accounting• Environmental accounting, also called social

accounting, is a type of accounting that attempts to measure both the social and environmental impacts of business decisions.

• Environmental Accounting (EA) can be considered either a subset or superset of accounting proper.

• It aims to incorporate both economic and environmental information.

• It can operate at the company level or at the level of the national economy

Environmental Cost (EC) Accounting

'A company's attitude to the environment is likely to be seen as a benchmark of its commitment to innovation and good management. Companies setting the pace on environmental issues will be seen as the leaders of the corporate sector' (Lickiss, 1991).

Environmental Cost Accounting

The generation analysis and use of monetarised environmentally related information in order to improve corporate environmental and economic performance.

Classification of ECs• These are classified in four categories: – prevention costs

– detection costs

– Internal failure costs and

– external failure costs

Prevention Activities• Evaluating and selecting suppliers

• Evaluating and selecting pollution control equipment

• Designing processes

• Designing products

• Carrying out environmental studies

• Auditing environmental risks

• Developing environmental management systems

• Recycling products

• Obtaining ISO 14001 certification

Detection Activities• Auditing environmental activities

• Inspecting products and processes

• Developing environmental performance measures

• Testing for contamination

• Verifying supplier environmental performance

• Measuring contamination levels

Internal Failure Activities• Operating pollution control equipment

• Treating and disposing of toxic waste

• Maintaining pollution equipment

• Licensing facilities for producing contaminants

• Recycle scrap

External Failure Activities• Cleaning up a polluted lake

• Cleaning up oil spills

• Cleaning up contaminated soil

• Settling personal injury claims (environmentally related)Restoring land to natural state

• Losing sales due to poor environmental reputation

• Using materials and energy inefficiently

• Receiving medical care due to polluted air (S)

• Losing employment because of contamination (S)

Why are environmental costs important to the management accountant?

• Identifying environmental costs associated with individual products, services or processes helps with correct product or service pricing.

• Saving energy generally leads to cost savings.

• Poor environmental behaviour can result in fines, increased liability to environmental taxes and damage to the business’s reputation.

Environmental Footprints• It is the impact that a business’s

activities have upon the environment including its resource environment and pollution emissions.

Key External Environmental Impacts• Depletion of natural resources• Noise and aesthetic impacts• Residual air and water emissions• Long-term waste disposal• Uncompensated health effects• Change in the local quality of life (ex.

impact of tourism)

Energy ConsumptionVehicles Regular maintenanceEnergy Bills Monitoring and understanding energy bills

can help businesses to work out how to save costs

Heating Increasing the temperature by one degree can increase costs by 8%.

Lighting Should be switched off in rooms and corridors that are not being used.

Windows When heating or air conditioning is on, windows should be kept shut to save energy.

Other equipment

Photocopiers and Printers should not kept near cooling systems

Types of costs• Direct or indirect environmental costs

• Contingent or intangible environmental costs

Direct or indirect environmental costs

• Waste management• Environmental certification and

labeling• Legal costs and fines• Permit fees• Record keeping and reporting• Environmental training

Contingent or intangible environmental costs

• Uncertain future remediation or compensation costs

• Risk by future regulatory changes

• Product quality• Employee health and safety• Public/customer satisfaction

How to estimate Sustainable Profits?

• Set boundaries (must be controllable in some way)

• Establish Targets (As per Royal commission on Environmental Pollution, reduce carbon dioxide emissions by 60% by 2050)

• Identify Impacts• Valuation (impacts of environmental damages)