wiwik-2010 1 lecture 12 environmental management accounting (ema)
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Wiwik-2010 1
Lecture 12
Environmental Management Accounting
(EMA)
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Definition
There are many alternative definitions, but broadly defined…EMA is the identification, collection, analysis, and use of two types of information for internal decision-making:
Physical information on the use, flows, and fates of energy, water, and materials (including wastes)
Monetary information on environment-related costs, earnings, and savings
EMA Expert Working Group of the
United Nations Division for Sustainable Development
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Definition
EMA combines financial and physical data and calculates the environmental costs of companies
• Physical data on material and energy input, material flows, products, waste and emissions PEMA
• financial data on expenditures, costs, earnings, savings related to company activities with potential environmental aspects or impacts MEMA
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Why was EMA Developed?
• EMA was conceived in recognition of some of the limitations of conventional practices for informing environmental management decisions – insufficient tracking of energy, materials, and
wastes– “hiding” of costs in overhead accounts and
elsewhere in the accounting records– lack of data on future and less tangible costs
in the accounting records at all– Insufficient communications between the
accounting and other departments/staff, e.g., production, environmental, research…
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PHYSICAL INFORMATION
Flow of energy, water, materials and waste (MEFA)
Physical Information Materials Inputs Product Outputs Non-Product Outputs (Waste and Emissions)
Materials/Mass Balances
Physical Environmental Performance Indicators
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ENVIRONMENT-RELATED COSTS AND EARNINGS Cost Categories
Waste & Emission Control Costs Prevention & Other Environmental Management
Costs Research & Development Costs Materials Costs of Non-Product Outputs Materials Costs of Product Outputs Less Tangible Costs
Monetary Environmental Performance Indicators
Environment-related Earnings and Savings
Distribution of Costs by Environmental Domain
MONETARY INFORMATION
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•Ecoefficiency essentially maintains that organizations can produce more useful goods and services while simultaneously reducing
negative environmental impacts, resource consumption, and costs.
The Benefits of Ecoefficiency
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Customer DemandCustomer DemandFor Cleaner ProductsFor Cleaner Products
Cost Reduction and Cost Reduction and Competitive Competitive AdvantageAdvantage
Lower Cost of Lower Cost of Capital and Lower Capital and Lower
InsuranceInsurance
Innovations and Innovations and New OpportunitiesNew Opportunities
Better Employees Better Employees and Greater and Greater ProductivityProductivity
ECOEFFICENCY
Significant Special Benefits Significant Special Benefits Leading to Improved ImageLeading to Improved Image
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Environmental Quality Cost
•Environmental costs are costs that are incurred because poor environmental
quality exists or may exist.
Environmental costs can be classified in four categories: prevention costs,
detection costs, internal failure costs, and external failure costs.
Environmental costs can be classified in four categories: prevention costs,
detection costs, internal failure costs, and external failure costs.
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Environmental CostsAre Often Underestimated
• Research Findings:– For every dollar of waste cost that
companies actually measure, another 2 to 3 dollars of cost are” hidden” in the accounting records, or are not on the books at all
– Companies typically underestimate how much waste really costs them, sometimes by several orders of magnitude
– This applies even to big, well-managed companies
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The Cost of Waste Inkat the Southwire Company
• The cost of a drum of hazardous waste ink was estimated as $50 - the average disposal cost per drum
• Upon closer inspection, the true cost of waste was discovered to be $1300 per drum, including:– $819 in lost raw materials (ink, thinner)– $369 for corporate waste management
activities– $50 for disposal– $47 for internal waste handling activities– $16 to pay a hazardous waste tax
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Environmental Costs At A Refinery(As a percentage of operating costs,
excluding crude oil input)
Environmental Costs At A Refinery(As a percentage of operating costs,
excluding crude oil input)
Source: Green Ledgers: Case Studies in Corporate Environmental Accounting. World Resources Institute, May, 1995.
Original Estimate
Actual Situation
97%
3%
78%
22%
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THE HIDDEN COST
The Cost IcebergEnvironmental costs can be like an iceberg, with only a small part
of the cost visible
Adapted from: Bierma, TJ., F.L. Waterstaraat, and J. Ostrosky. 1998. “Chapter 13: Shared Savings and Environmental Management Accounting,” from The Green Bottom Line. Greenleaf Publishing:England.
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EMA “End-uses”EMA can provide the data needed for many
environmental management initiatives– Cleaner Production/Pollution
Prevention/Green Productivity– Design for Environment– Environmentally Preferable Purchasing– Environmental Supply Chain Management– Extended Producer Responsibility– Performance Meas. & Benchmarking– Corporate Environmental Reporting– etc.
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EMA for Improved Capital Budgeting
• Better identification, allocation, and analysis of environmental costs improves the process by which the profitability of potential investment projects are assessed.
• Such investments include any capital project that has the major objective of controlling, reducing or preventing pollution.
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Profitability Assessments of Proposed Sustainable Projects
Profitability Assessments of Proposed Sustainable Projects
EMA can illustrate the potential profitability of projects that utilizes preventive management strategies by doing a better job of profitability assessment:
– Comprehensive inclusion of relevant and significant costs and savings
– Improved cost estimation and allocation– Longer analysis time horizons– Multiple profitability indicators
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Comprehensive Inclusion of Relevant Costs and Savings
(conventional and less tangible costs…)
• The cost of lost manufacturing inputs– lost materials, energy, labor, capital, etc.
• The cost of waste management– waste handling, regulatory compliance,
waste treatment & disposal, etc.• Less tangible costs
– reduced production throughput, reduced product quality, negative company image, liability, etc.
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Costs and Savings:
Capital Costs $1,469,404 $1,469,404
Annual Savings $ 350,670 $ 911,240
Financial Indicators:
Payback Period 4.2 years 1.6 years
Net Present Value $ 47,696 $2,073,607
Internal Rate of Return 17% 46%
company analysis
improved analysis
*TCA
Financial Data for White Water and Fiber Reuse Project
* Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993
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Costs and Savings:
Capital Costs $105,000 $105,000
Annual Savings 1-5 years $ 38,463 $ 38,463
Additional Savings Year 3 $ 55,000
Financial Indicators:
Payback Period 2.7 years 2.7 years
Net Present Value -17,182 +18,981
original analysis
improved analysis
Financial Data for Quality Control Camera Project
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EMA as Driver of Sustainable Investment
EMA helps companies recognize and achieve the multiple benefits of Sustainable Investments– Reduced costs
• increased profit margins• lower product prices• increased market share
– Reduced liability• improved company image• increased market share• increased access to financing and customers
contracts
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Benefits of EMA to Industry
• The ability to more accurately track and manage the use and flows of energy and materials, including pollution/waste volumes, types and fate
• The ability to more accurately identify, estimate, allocate, and manage/reduce costs, particularly environmental types of costs
• More accurate and comprehensive information for the measurement of performance, thus improving company image with stakeholders such as customers, local communities, employees, government and financial providers
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Benefits to Government of EMA Implementation by Industry
• The more that industry is able to justify environmental investments on the basis of financial self-interest, the lower the financial, political, and other burdens of environmental protection on government.
• Implementation of EMA by industry should strengthen the effectiveness of existing government policies/regulations by revealing to companies the true environmental costs and benefits resulting from government regulations.
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EMA Development• United Nations Division for
Sustainable Development’s Consultative Working Group on EMA
• EMA Workbooks: – Environmental Management Accounting
Procedures and Principles– EMA-Links: Government, Management, and
Stakeholders– Policy Pathways for Promoting Environmental
Management Accounting
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UNDSD Expert Working
Group on EMA…UNDSD = United Nations Division for Sustainable
Development EMA Working Group established in 1999 Core members are government representatives
from 30+ countries Other members include invited representatives of
accounting associations, academia, business, etc. Group has met 8 times, each time in a different
country Group has discussed many international topics of
debate surrounding EMA
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EMA Education...
Most initiatives to promote EMA around the world rely on voluntary adoption, with educational activities a core component:– guidance documents– case studies– curriculum development & training– software
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EMA in North America and Europe
Examples of initiatives in North America and Europe that promote EMA as a tool for many environmental programs– US EPA’s Environmental Accounting Project
– Environmental Canada-Quebec Regional Office’s Private Sector P2 Initiative
– Graz (Austria) Department of Environmental Protection’s Eco Profit Initiative
– UK Environment Agency’s EMA for Financial Accountants Project
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EMA in Asia
Examples of EMA and EMA-related projects and activities in Asia– Philippine Training Course on EMA and CP
supported the US-Asia Environmental Partnership (USAEP)
– Environmental Accounting Guideline published by the Ministry of Environment in Japan
– UNEP’s CP Finance’s Profiting from CP Course in Vietnam
– Taiwan Environmental Management Association’s EMA Training Project
– Thailand Environment Institute’s Workshop on EMA