Environmental management cost
This can be done at the corporate level, but can also be taken further to directly address cost centers and production processes or even down to specific machinery ND products. It would then become the task of process technicians and not necessarily accountants to tackle and trace the necessary data. EMMA, Environmental management accounting represents a combined approach which provides for the transition of data from financial accounting, cost accounting and material flow balances to increase material efficiency, reduce environmental impact and risk and reduce costs of environmental protection. EMMA is performed by private or public corporations, but not nations, and has a financial as well as physical component.
EMMA metrics for internal decision-making include OTOH: physical metrics for material and energy consumption, flows, and final disposal, and monetarists metrics for costs, savings, and revenues related to activities with a potential environmental impact. Key application fields for the use of EMMA data are: t Assessment of annual environmental costs/expenditures; Product pricing; Budgeting; Investment appraisal, calculating investment options; Calculating costs and savings of environmental projects; Design and implementation of environmental management systems; Environmental performance evaluation, indicators and benchmarking; Setting quantified performance targets;
Cleaner production and Geodesics projects; External disclosure of environmental expenditures, investments
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The fact that environmental costs are not fully recorded often leads to distorted calculations for improvement options and achieved savings. Environment protection projects, aiming to prevent emissions and waste at the source (avoidance option) by better utilizing raw and auxiliary materials and requiring less (harmful) operating materials are not agonized and implemented. The economic and ecological advantages to be derived from such measures are not used. The people in charge are often not aware that producing waste and emissions is usually more expensive than disposing of them. Experience shows that the environmental manager rarely has access to the actual cost accounting documents of the company and is only aware of a tiny fraction of the aggregate environmental costs.
On the other hand, the controller has most of the information but is unable to separate the environmental part without further guidance. In addition, he or she is emitted to thinking within the framework of existing accounts. Thus, the two departments tend to have a severe communication problem. In conventional cost accounting, the aggregation of environmental and non-environmental costs in overhead accounts results in their being “hidden” from management. There is substantial evidence that management tends to underestimate the extent and growth of such costs. By identifying, assessing and allocating environmental costs, EMMA allows management to identify opportunities for cost savings and to actually calculate cost savings of performed projects and investments.
Prime examples are the savings that can result by replacing toxic organic solvents by non-toxic substitutes, thus eliminating the high and growing costs of regulatory reporting, hazardous waste handling and other costs associated with the use of toxic materials. Many other examples deal with more efficient material use, highlighting the fact that waste is expensive not because of disposal fees but because of the wasted material purchase external costs and relate to all costs incurred in relation to environmental damage and protection. Environmental protection costs include sots for prevention, disposal, planning, control, shifting actions and damage repair that can occur in companies, governments or people (VIVID, 20002). The book only deals with corporate environmental costs.
In this analysis external costs, which result from corporate activities but are not internalized via regulations and prices, are not considered. It is the role of governments to apply political instruments such as CEO-taxes and emission control regulations in order to enforce the ‘polluter pays’ principle and thus to integrate external costs into corporate calculations. What then are corporate environmental sots? Costs incurred to deal with contaminated sites, effluent control technologies and waste disposal may first come to mind. Measures for environmental protection comprise all activities taken for legal compliance, compliance with own commitments or voluntary initiatives.
Economic effects are not used as criteria, but the effect on prevention or reduction of environmental impacts is (VIVID, 2000). Corporate environmental protection expenditure includes all expenditures for measures for environmental protection of a company or on its behalf to prevent, reduce, control and document environmental aspects, impacts and hazards, as well as disposal, treatment, sanitation and clean-up expenditure (see Table 1). The amount of corporate environmental protection expenditure is not directly related to the environmental performance of a company (VIVID, 2000). For company internal calculation of environmental costs, expenditures for environmental protection are only one side of the coin.
The costs of waste and emissions include much more than the respective pollution prevention or treatment facilities. The concept of Waste’ has a double meaning. Waste is a material which has been purchased and paid for but which has not been turned into a marketable product. Waste is therefore indicative of production inefficiency. Thus, the costs of wasted materials, capital and labor have to be added to arrive at total corporate environmental costs and a sound basis for further calculations and decisions. Waste in this context is used as a general term for solid waste, waste water and air emissions, and thus comprises all non-product output.
Materials include water and energy. 2 VIVID, the German Association of Technicians, together with German Industry on the definition of environmental protection costs and other terms of pollution reversion, VIVID, 2000. Table 1 Total corporate environmental expenditure Environmental Protection Expenditure (Waste Disposal and Emission Treatment, Environmental Management and Pollution Prevention) Costs of wasted material Costs of wasted capital and labor Total corporate environmental costs 670 The approach taken is based on the underlying assumption that all purchased materials must by physical necessity leave the company either as product or waste and emissions.
Waste is thus a sign of inefficient production. Therefore when calculating environmental costs, not only disposal fees are regarded, but the wasted eternal purchase value and the production costs of waste and emissions are added. Adding the purchase value of non-material output (waste, waste water) to the environmental costs, makes the share of “environmental” costs higher in relation to other costs. However, it is not the goal of this paper to show that environmental protection is expensive. It is also not the most important task to devote a lot of space to defining exactly which costs are environmental or which costs are not, or what percentage of something is environmental or not.
The most important goal of using EMMA is to make ere that all relevant, significant costs are considered when making business decisions. In other words, “environmental” costs are Just a subset of the bigger cost universe that is necessary for good decision making. “Environmental” costs are part of an integrated system of material and money flows throughout a corporation, environmental management accounting is simply doing better, more comprehensive management accounting, while wearing an “environmental” hat, that opens the eyes for hidden costs. Therefore, the focus of material flow cost accounting is no longer on assessing the total environmental” costs, but on a revised calculation of production costs on the basis of material flows.
In the methodology presented, the environmental cost assessment scheme is first used for the assessment of annual corporate environmental expenditures including wasted materials of the previous year. Subsequently, a breakdown to cost centers and processes can be performed. The focus of EMMA is not on disclosure of annual environmental costs, but for further internal calculation, annual expenditure is the first step in a top-down approach of environmental cost management. Annual expenses are the best available data source, a further distinction into cost centers, processes, products and material flow balances should be done in a step by step procedure while gradually improving the information system.
Calculating savings, investment options or estimating future price changes requires consideration of future costs and is dealt with separately. Social costs need to be assessed by using a completely different approach, as most of the costs besides wages, social security, taxes and voluntary benefits, which are recorded in the books, occur outside the company and external effects and need to be estimated. . Environmental cost categories The first category of environmental costs comprises conventional waste disposal and emission treatment costs including related labor and maintenance materials (materials only, if they are recorded on related cost centers).
Insurance and provisions for environmental liabilities also reflect the spirit of treatment instead of prevention. The first section corresponds to the conventional definition of environmental costs comprising all treatment, disposal and clean-up costs of existing waste and emissions. The second block is termed prevention and environmental management and adds he labor costs and external services for good housekeeping as well as the “environmental” share of integrated technologies and the “scrap” share of operational plants, if significant. The main focus of the second block is on annual costs for prevention of waste and emissions, but without calculated cost savings.
The other focus is on higher pro-rata costs for low-emission process technologies and the scrap percentages. From the thus defined production facilities the “scrap” percentage of depreciation is added to the environmental costs. Thirdly, the costs related to he environmental management system are determined. Conventionally, three production factors are distinguished: materials, capital (investments, related annual depreciation and financing cost) and labor. The next two blocks consider the costs of wasted material, capital and labor due to inefficient production and condense the core information for material flow cost accounting. In the third block, the wasted material purchase value is added.
From the material flow balance sheet, all material inputs (including energy and water) are assessed for their share of non-product output (scrap percentage, efficiency losses). Wasted materials are evaluated with their material purchase value or materials consumed value in case of stock management. Lastly, the production costs of non- product output are added with the respective production cost charges, which include labor hours, depreciation of machinery and operating materials. Care has to be taken to avoid double counting with costs already taken care of under other cost categories. This mainly depends on the quality of data availability and information systems.
In activity based costing and flow cost accounting the flows of residual materials are more precisely determined and located to cost centers and cost carriers. Environmental revenues derived from sales of waste or grants of subsidies are accounted for in a separate block. Costs that are incurred outside the company and borne by the general public (external costs) or that are relevant to suppliers and consumers (life cycle costs) or social costs are not dealt with, as they don’t show up in the company’s accounts and need a completely separate assessment methodology. Table 2 shows the environmental cost assessment scheme developed for the UN-ADDS EMMA working group. The workbook provides more information on the efferent cost categories.
The media follow the distinction of the Environmental Protection and Resource Management Accounts of the System of integrated Environmental and Economic Accounting (SEA) developed by the United Nations Statistics Division. Externalities? Environmental management accounting-?EMMA-?has been developed coming from conventional expenditure for waste treatment facilities, disposal fees, environmental protection and management costs and related issues. EMMA adds a significant further cost factor, that is vital for internal calculation, as a decision basis for investment projects and for correct reduce pricing: the purchase value and production costs of all non-product output.
It is calculated by multiplying the input side of the material flow analysis in tons, that is normally set up for environmental management projects and reporting, with the respective scrap (or efficiency loss) percentages of each material input. Waste is thus expensive not because of disposal fees, but because of wasted material purchase costs. All these costs actually occur in the company, only they are normally not traced and transparent. Therefore, they are neglected for decision making. It is the focus f the UN EMMA methodology to make them visible. Externalities, in contrast, occur outside the company and don’t show up in its accounts. Environmental and social costs to the general public are also evaluated by completely different methodologies, there is no “purchase value” in the books, but damage costs and “availability values” are estimated.