2 Environmental Costing

Question 1

Environmental accounting

Answer 1

subset of social accounting (analyses impact on society and environment). It involves preparation, presentation and communication of information about business’ interaction with natural environment.
Awareness of environmental costs is a recent development. It needs to be considered in planning, control and decision making. The main difference from other costs is that it may be difficult to identify and quantify. Important because:
* identifying environmental costs helps with correct pricing and thus increases profitability,
* not taking into account environmental impact may lead to fines, taxes and loss of reputation,
* recording environmental impact may be useful/necessary for regulatory compliance,
* leads to cost savings.

Question 2

Environmental footprint

Answer 2

impact that actions have on environment. Key impacts (acc. to 1998 IFAC):

• depletion of resources,
• noise/aesthetic impacts,
• air and water emissions,
• long-term waste disposal,
• health effects,
• change in local quality of life.

Question 3

Legislation and international cooperation

Answer 3

1. 1972, Stockholm - first world summit,
2. 1987 - Intergovernmental Panel on Climate Change by UNEP,
3. 1992 - Rio summit, UNFCCC - Framework Convention on Climate Change: slow climate change + reduce greenhouse emissions + greenhouse gas inventory. Return to 1990 levels by 2000.
4. 1997 - Kyoto Protocol (ratified 2005): reduce greenhouse gases in atmosphere. 191 countries ratified but not US,
5. 2012 - Doha (Qatar): amendment to Kyoto.
6. EU legislation: total cap on emissions, reduced annually by 37 mil tonnes.
7. EU Emissions Trading Scheme (ETS, 2005): allowance trading. Market-based mechanism to allocate renewables to most sensible places (overall effect matters). No particular technology or limit. Incentive for renewable companies that benefit from selling allowances —> „carbon market”.

Question 4

Types of environmental costs

Answer 4

• Direct/indirect: waste management, compliance, certification and labelling, R&D, fines, permits, measurements, education,
• Contingent/intangible: perception, future regulatory risks, sustainability.

Question 5

Environmental Costs classification

Answer 5

(a) Environmental prevention costs are the costs required to eliminate environmental impacts before they occur. For example, forming environmental policies, performing site and feasibility studies, staff training.
(b) Environmental appraisal costs are the costs involved with establishing whether activities are complying with environmental standards and policies. For example, developing performance measures, monitoring, testing and inspection costs, site survey costs.
(c) Environmental internal failure costs are the costs of activities that must be undertaken when contaminants and waste have been created by a business but not released into the environment. Examples include maintaining pollution equipment and recycling scrap.
(d) Environmental external failure costs are the costs that arise when a business releases harmful waste into the environment. A business can harm its reputation by doing this. Examples include cleaning up oil spills or decontaminating land.

Question 6

Sustainable profit

Answer 6

profit that would remain after restoring or avoiding environmental impacts of business’ operations. How to estimate them:

1. Set boundaries - (more like establish what you’re measuring),
2. Establish targets - what you want to achieve,
3. Identify impacts - how are we impacting env,
4. Valuation - how much it would cost to make up for impact, ie. difference between coal and renewable energy cost or cost of buying allowances.

Question 7

ISO 14001

Answer 7

standard for environmental management systems, have to include:
* environmental policy statement,
* assessment + legal and voluntary obligations,
* management system,
* internal audit and reports to senior mgmt,
* public declaration of ISO compliance.
Critics: too much emphasis on management, not enough on performance. Does not include rigorous verification and disclosure requirements.

Question 8

Input/output analysis

Answer 8

the difference is waste. Measurement both in monetary and physical terms.

Question 9

ABC for environmental costing

Answer 9

Environmental costs are cost drivers. Costs such as water, energy, waste disposal no longer hidden in O/H, so it’s easier to track and reduce them. Tracking system may be necessary for reasonable allocation.

Question 10

Life cycle costing approach

Answer 10

environmental costs for each stage of product life (from sourcing, production to disposal and recycling). Better understanding of costs and ability to prevent some.

Question 11

Environmental cost accounting vs. environmental accounting

Answer 11

for internal use only (uses life cycle costing) vs. for both internal and external reporting.