Some Background to Green Accounting:
The CERES Principles.
the Valdez Principles) Protection of the Biosphere
The CERES Principles
Protection of the Biosphere
We will reduce and make continual progress toward eliminating the release of any substance that may cause environmental damage to the air, water, or the earth or its inhabitants. We will safeguard all habitats affected by our operations and will protect open spaces and wilderness, while preserving biodiversity.
Sustainable Use of Natural
We will make sustainable use of renewable natural resources, such as water, soils and forests. We will conserve non-renewable natural resources through efficient use and careful planning.
Reduction and Disposal
We will reduce and where possible eliminate waste through source reduction and recycling. All waste will be handled and disposed of through safe and responsible methods.
We will conserve energy and improve the energy efficiency of our internal operations and of the goods and services we sell. We will make every effort to use environmentally safe and sustainable energy sources.
We will strive to minimize the environmental, health and safety risks to our employees and the communities in which we operate through safe technologies, facilities and operating procedures, and by being prepared for emergencies.
Safe Products and Services
We will reduce and where possible eliminate the use, manufacture or sale of products and services that cause environmental damage or health or safety hazards. We will inform our customers of the environmental impacts of our products or services and try to correct unsafe use.
We will promptly and responsibly correct conditions we have caused that endanger health, safety or the environment. To the extent feasible, we will redress injuries we have caused to persons or damage we have caused to the environment and will restore the environment.
Informing the Public
We will inform in a timely manner everyone who may be affected by conditions caused by our company that might endanger health, safety or the environment. We will regularly seek advice and counsel through dialogue with persons in communities near our facilities. We will not take any action against employees for reporting dangerous incidents or conditions to management or to appropriate authorities.
We will implement these Principles and sustain a process that ensures that the Board of Directors and Chief Executive Officer are fully informed about pertinent environmental issues and are fully responsible for environmental policy. In selecting our Board of Directors, we will consider demonstrated environmental commitment as a factor.
Audits and Reports
We will conduct an annual self-evaluation of our progress in implementing these Principles. We will support the timely creation of generally accepted environmental audit procedures. We will annually complete the CERES Report, which will be made available to the public.
A. Green Accounting Concepts
Functionalist EA -Traditional/Conventional
Methods. Functionalist EA systems do
not track environmental costs and performance, and typically classify costs
A. direct materials and labor,
B. manufacturing or factory overhead (i.e., operating costs other than direct materials and labor).
D. general and administrative (G&A) overhead, and
E. research & development (R&D).
Accounting (EA) Method. Identify costs hidden, ignored, or misallocated
by conventional methods.
A. Decreased use/waste of raw materials and supplies
B. Decreased use/waste of utilities
C. Reducing use of nonrenewable resources
D. Reducing regulatory costs
Potentially Hidden Costs. Exhibit 2 collects several types of environmental costs that may be potentially hidden from managers
Exhibit 2 Environmental Costs (Adapted from EPA 742-R—95-001)
|Regulatory Costs||Up-front Costs||Voluntary Costs|
|HIDDEN COSTS in FUNCTIONALIST ACCOUNTING
|HIDDEN COSTS IN FUNCTIONALIST ACCOUNTING
Engineering & procurement
Disposal of inventory
|HIDDEN COSTS IN FUNCTIONALIST ACCOUNTING
Future Compliance costs
Response to future releases
Personal injury damages
Natural resource damages
Economic loss damages
Relationship with customers
Relationships with investors/insurers
Relationship with professional staff
Relationship with workers
Relationship with suppliers
Relationship with lenders
Relationship with host communities
Relationship with regulators
|EXTERNAL COSTS||EXTERNAL COSTS||EXTERNAL COSTS|
|Societal costs of paying for regulatory agencies to enforce environmental laws.||Cost of personnel, buildings, travel, etc. to conduct regulatory practices||Citizen action to implement recycling, reducse and resuse programs.|
|Loss of bio-diversity.||Cost to reclaim air, water, and ground to pre-toxic levels.||Citizen action to invest in firms with more sustainable practices while boycotting those that do not.|
1. I have extended the original table to allow for externalized social and ecological cost structures.
2. Regulatory Costs. Instead of lumping green costs into overhead, transfer green costs to the process, system or facility incurring the costs. Isolating regulatory costs will receive more management and worker attention.
3. Up-Front Costs. Costs such as green-siting, environmental design, qualifying green suppliers, testing pollution control alternatives are part of the costs of designing and operating processes, systems and facilities.
4. Voluntary Costs There are costs of doing voluntary green costing which affect community relations, insurance, lower remediation costs, and contribute to future sustainability.
5. Back-End Costs. There are life cycle costs to closing and decommissioning sites and processes. Life cycle costing allows costs to be defined at specified points in the future of a site or process. For example licensing toxic materials, holding tanks for hazardous substances, clean-up, and pending regulations that will add costs.
6. Contingent Costs. These are costs that are expected to happen based on probability estimates of dollar value. For example, accidental release of contaminants, fines and penalties, permits, etc. Identifying them allows management to plan for them.
7. Image and Relationship Costs. Some green costs are born to build a better corporate image with customers and communities. These are green image expenses. Reports are done to appeal to green consumers and green investors. Green sites are selected, green award programs are conducted, and there are green contributions (e.g. tree planting) that incur costs.
Is It An "Environmental" Cost?
Customizing Decisions. While not all costs can be correctly and unambiguously identified as "green," the point is to collect data relevant to decision makers. Decisions have to be made about when a cost will be defined as "environmental" or not, when part of an activity is "environmental," or developing a decision rule, such as making it "environmental" when more than 50% is an environmental cost.
For example, if a firm wants to encourage
pollution prevention in capital budgeting, it might consider distinguishing
(1) environmental costs that can be avoided by pollution prevention investments,
from (2) environmental costs related to remedying contamination that has
already occurred. But for product costing purposes, such a distinction
might not be necessary because both are costs of producing the good or
service (EPA 742-R-95-001, June 1995).
Scale Choices. Depending on corporate needs, interests, goals, and resources, environmental accounting can be applied at different scales, which include the following:
? individual process or group of processes
(e.g., production line)
? system (e.g., lighting, wastewater treatment, packaging)
? product or product line
? facility, department, or all facilities at a single location
? regional/geographical groups of departments or facilities
? corporate division, affiliate, or the entire company.
Scope Questions and Choices.
? Will your environmental accounting extend beyond conventional costs to include potentially hidden, future, contingent, and image/relationship costs?
? Does your company intend to consider only those costs that directly affect their bottom line financial profit or loss?
? Will your company track environmental costs that result from their activities but for which they are not accountable, referred to as societal or external costs?
? Will your company tackle costs that are more difficult to measure (see Exhibit 3)?
EXHIBIT 3: The Spectrum of Environmental
(Source: EPA 742-R-95-001)
|Very Easy to Measure||Easy||Moderate||Difficult||More Difficult to Measure|
|Conventional Costs||Hidden Costs||Contingent Costs||Relationship/Image Costs||Societal Costs|
Costs Often Factored into Decision-Making
Environmental Costs PotentiallyOverlooked
(i.e., Regulatory, Voluntary, Upfront,Operational, Back-end, Overhead, Future, Contingent, and Image/ Relationship Costs)
(Externalities) e.g. polluted waste water, air pollution.
Conventional costs are those your company
is already tracking such as capital, labor and material that affect the
bottom line. But, there are also "societal costs: or what Professor Soumen
Ghosh, in his presentation on environmental economics called "externalities."
These externalities include:
(1) environmental degradation for which firms are not legally liable, 1. adverse impacts on human beings, their property, and their welfare (e.g., employment impacts of spills) that cannot be compensated through the legal system.
APPENDIX: Common Terms and Potential
Meanings (Adapted from EPA 742-R-95-001 June 1995 and EPA AT&T
Report on EPA Website).
l Environmental cost accounting is a term
used to refer to the addition of environmental cost information into existing
cost accounting procedures and/or recognizing embedded environmental costs
and allocating them to appropriate products or processes.
Full cost accounting is a term often used to describe desirable environmental accounting practices. In the accounting profession, "full cost accounting" is a concept and term used in various contexts.24 In management accounting, "full costing" means the allocation of all direct and indirect costs to a product or product line for the purposes of inventory valuation, profitability analysis, and pricing decisions.Full cost environmental accounting embodies the same concept as full cost accounting but highlights the environmental elements.
l Total cost accounting, an often used
synonym for full cost environmental accounting, is a term that seems to
have origins with environmental professionals. It has no particular meaning
Total cost assessment has come to represent the process of integrating environmental costs into a capital budgeting analysis. It has been defined as the long-term, comprehensive financial analysis of the full range of private costs and savings of an investment. Adding to the confusion, the acronym for total cost assessment (TCA) is the same as the acronym for total cost accounting (TCA).
l True cost accounting is a less used synonym for full cost accounting. The EPA Office of Solid Waste in its program to encourage local governments to apply full cost accounting to municipal solid waste management uses the term "true cost accounting" to encompass both private and societal costs while employing the term "full cost accounting" to refer exclusively to costs that affect the bottom line of solid waste management activities.
l Life-cycle design has been defined as an approach for designing more ecologically and economically sustainable product systems, integrating environmental requirements into the earliest stages of design. In life cycle design, environmental, performance, cost, cultural, and legal requirements are balanced. Life-cycle terms also are used in connection with environmental accounting. These terms include: life-cycle design, life-cycle assessment, life-cycle analysis, life-cycle cost assessment, life cycle accounting, and life-cycle cost.
l Life-cycle assessment has been described as a holistic approach to identifying the environmental consequences of a product, process, or activity through its entire life cycle and to identifying opportunities for achieving environmental improvements. EPA has specified the four major stages in the life cycle of a product, process, or activity as raw materials acquisition, manufacturing, consumer use/reuse/maintenance, and recycle/waste management. By itself, life-cycle assessment focuses on environmental impacts, not costs. Life-cycle analysis is sometimes used as a synonym for life-cycle assessment. The U.S. EPA uses the life-cycle assessment term. Neither term addresses the costs and revenues of environmental consequences and improvements, however.
l Life cycle costing (LCC). A costing concept that argues for including all the costs incurred for a product, from its inception to abandonment, as part of its product cost. In Green Accounting, this includes cost of extraction, intermediate manufacturing, manufacturing, transportation, product recycling in take-back, disassembling, reverse distribution, restocking used material, disposing of waste, etc.
l Life-cycle accounting is a term used to describe the assignment and analysis of product-specific costs within a life-cycle framework including usual, hidden, liability, and less tangible costs.28
l Life-cycle cost, according to the U.S. Office of Management and Budget, means the sum total of the direct, indirect, recurring, nonrecurring, and other related costs incurred, or estimated to be incurred, in the design, development, production, operation, maintenance, and support of a major system over its anticipated useful life span.29 More recently, life-cycle cost has been defined in an Executive Order as the amortized annual cost of a product, including capital costs, installation costs, operating costs, maintenance costs, and disposal costs discounted over the lifetime of a product.30 The term may also be used more expansively to include societal costs.
These life-cycle terms are also subject to terminological confusion. For example, some people view life-cycle costing as referring only to private costs, while others view it as including both private and societal costs. Some apply a life-cycle perspective to capital budgeting, while others apply life-cycle concepts to process and product design. As previously mentioned, the key to facilitating communication is to recognize the different uses of common terms and to be able to identify underlying concepts. A threshold question is to determine whether someone is using an environmental accounting term to include solely private or both private and societal costs. A related question is to determine what application(s) a person has in mind when using these terms.
l Scope of Costs. Because people may use environmental accounting terminology to refer to specific sets of environmental costs, or may be imprecise about what they mean, careful delineation of which types of costs are intended to be within the scope of one term or another can reduce confusion and enhance communication. This issue is discussed further in Section K. There is an important distinction between costs for which a firm is accountable and costs resulting from a firm's activities that do not directly affect the firm's bottom line:
l Private costs are the costs a business incurs or for which a business can be held responsible. These are the costs that directly affect a firm's bottom line. Private costs are sometimes termed internal costs.
l Societal costs are the costs of a company’s
impacts on the environment and society for which the business is not financially
responsible. These costs do not directly affect a firm's bottom line. Societal
costs may also be referred to as external costs or externalities. These
costs may be expressed, qualitatively, in physical terms (e.g., tons of
releases, exposed receptors), or in dollars and cents. Societal costs (or
externalities) are sometimes subdivided according to whether the impacts
are environmental, referred to as environmental costs or environmental
externalities, or social, referred to as social costs or social externalities.
l Internal costs -- a synonym for private costs.
l External costs -- a synonym for societal costs. Also termed externalities.
l Social costs can be a synonym for societal costs or can refer to a subset of external costs
l Environmental costs can refer to a subset
of external costs or can be used as a synonym for environmental externalities,
societal costs, private costs, or both private and societal costs.
Applications. Of the many types of forward-looking business that can benefit from environmental accounting, this primer focuses on cost accounting, capital budgeting, and process/product design:
l Cost allocation refers to the procedures and systems for identifying, measuring, and allocating or assigning costs for internal management purposes.
l Capital budgeting, also known as investment analysis and financial evaluation, refers to the process of determining a company's planned capital investments.
l Process/product design refers to the process of developing specifications for products and processes, taking environmental costs and performance, among other factors, into account.
l Environmental Costs. Terms used to classify or categorize environmental costs are listed below:
l Regulatory costs are costs incurred to comply with federal, state, or local environmental laws (also termed compliance costs).
l Voluntary costs represent costs incurred by a company which are not required or necessary for compliance with environmental laws but go beyond compliance.
l "Gray zone costs" refers to costs that are not solely or clearly "environmental" in nature but may also be viewed, in whole or part, as health and safety costs, risk management costs, production costs, operational costs, etc.
l Up-front costs include preacquisition or preproduction costs incurred for processes, products, systems, or facilities (e.g., R&D costs).
l Operational costs refer to costs incurred during the operating lives of processes, products, systems, and facilities, as opposed to up-front costs and back-end costs.
l Back-end costs include environmental costs that arise following the useful life of processes, products, systems, or facilities. See also exit costs.
l Conventional costs include costs typically recognized in capital budgeting exercises such as capital equipment, raw materials, supplies, and equipment. Referred to as usual costs in EPA Pollution Prevention Benefits Manual.
l Direct costs is an accounting term for costs that are clearly and exclusively associated with a product or service and treated as such in cost accounting systems.
l Hidden costs refer to the results of assigning environmental costs to overhead pools or overlooking future and contingent costs.
l Overhead is often used synonymously with indirect or hidden costs as comprising all costs that are not accounted for as the direct costs of a particular process, system, product, or facility. The underlying distinction is between (1) costs that are either pooled and allocated on the basis of some formula, or not allocated at all, and (2) costs that an accounting system treats as belonging (directly) to a process, system, product, or facility (i.e., a cost center, in accounting terminology).
l Manufacturing or factory overhead refers to costs that are allocated using more or less sophisticated formulae as contrasted with "general and administrative (G&A)" overhead costs that remain in pools and are not allocated.
l General & administrative (G&A) costs are overhead or indirect costs that are not allocated to the costs of goods and services sold.
l Research and development (R&D) costs can include the costs of process and product design. See also upfront costs.
l Exit costs are the costs of proper closure, decommissioning, and clean-up at the end of the useful life of a process, system, or facility. See also back-end costs.
l Contingent costs refer to environmental costs that are not certain to occur in the future but depend on uncertain future events (e.g., costs of remediating future spills). Sometimes referred to as "environmental liabilities," "liability costs," or "contingent liabilities."
l Future (or prospective) costs refer to environmental costs that are certain to be incurred at a later date, which may or may not be known. Sometimes referred to as "environmental liabilities."
l Environmental liabilities is an umbrella term used to refer to different types of environmental costs including costs for remediating existing contamination, costs of complying with new regulations, future environmental costs of current operations (also known as back-end or exit costs), and/or contingent costs.
l "Less tangible costs" refers to expenses
incurred for corporate image purposes or for maintaining or enhancing relationships
with regulators, customers, suppliers, host communities, investors/lenders,
and the general public. Also termed "relationship costs" or "image costs."
Other Related Terms. Two other terms that are relevant to environmental accounting include the following:
l Activity-Based Costing (ABC) is a means of creating a system that ultimately directs an organization’s costs to the products and services that required these costs to be incurred. Using ABC, overhead costs are traced to products and services by identifying the resources, activities, and their costs and quantities to produce output.31
l Materials accounting or materials balance refers to an organized system of accounting for the flow, generation, consumption, and accumulation of materials in a facility or process in order to identify and characterize waste streams.32 Some view a materials balance as a more rigorous form of materials accounting.
l Sustaining activity. An activity that benefits different parts of the organization (e.g., the company as a whole or a division, plant, or department), but not any specific cost object. Examples of such activities are preparation of financial statements, plant management, and the support of community programs.
l Value chain. 1. A cost-reduction and process improvement tool that utilizes information collected about business processes and to identify candidates for improvement efforts. 2. Any linked set of value-creating activities, from basic raw materials through the ultimate end-use product or service delivered to the final consumers. 3. The set of activities required to design, procure, produce, market, distribute, and service a product or service. In Green Accounting, the value chain is redefined to include take-back, disassembly and reuse and disposal of materials (From: AT&T EPA report).
References and Resources
For a more extensive discussion of environmental accounting, please refer to "An Introduction to Environmental Accounting As A Business Management Tool: Key Concepts And Terms" United States Office of Pollution EPA 742-R-95-001 Environmental Protection Prevention And Toxics June 1995 Agency (MC 7409) Washington, D. C. 20460 )NOTE: The entire document is available at the EPA web site http://www.epa.gov/opptintr/acctg/
Applying Environmental Accounting to electro-plating operations: An In-depth analysis. EPA 742-R-97-003 May, 1997.
List updated December 1997. ??Item available through the Environmental Accounting Project’s website: www.epa.gov/opptintr/acctg Page 6 EPA ENVIRONMENTAL ACCOUNTING PRODUCTS AVAILABLE FROM OTHER SOURCES:
The following two documents were developed by EPA’s Office of Solid Waste and focus on environmental accounting issues related to municipal solid waste. They are available free-of-charge from the EPA RCRA Hotline at 800-424-9346 or TDD 800-553-7672. In the Washington, D.C. area call (703) 412-9810 or TDD (703) 412-3323. They can also be obtained via EPA’s Web Site on Full Cost Accounting for Municipal Solid Waste @ http://www.epa.gov/ epaoswer/non-hw/muncpl/fullcost.
Making Solid (Waste) Decisions with Full Cost Accounting (June 1996) This primer describes FCA concepts, summarizes its benefits and uses, and presents implementation challenges. In addition, the document provides snapshot examples of five communities that are using FCA and the benefits they have realized. The primer also explains the connection between FCA, enterprise funds, and pay-as-you-throw programs. (EPA530-K-96-001, 16 pages)
Full Cost Accounting Resource Guide (August 1996) This is an annotated bibliography of resources available on FCA. It includes journal articles; federal, state, and local government documents; and contact people in communities that are implementing FCA. (EPA530-R-95- 077, 24 pages)
The following document is available for a minimal fee from the National Technical Information Service (NTIS), 5285 Port Royal Road, Springfield, VA 22161; telephone: (703) 487-4650.
Workshop Proceedings: Accounting and Capital
Budgeting for Environmental Costs Workshop, December 5-7, 1993 (May 1994)
Contains presentations, handouts, issue papers, and summarized and detailed
findings of the first national workshop on this subject. (EPA 742-R-94-002,
254 pages) (NTIS accession number: PB96-127170)
UNIVERSITY CURRICULA AND RESOURCES
Press for TD Consulting Gameboard,
Green Accounting Gameboard
or Storytelling Organization Gameboard.