Expressing Environmental Impact in Monetary Units - Environmental Accounting/Costing Approaches

1. Expressing Environmental Impact in Monetary Units-Environmental Accounting/Costing Approaches

2. Economic Metrics Working with cost as a unit provides designers and companies a good guideline. However, like in LCAs, the major disadvantage of such economic metrics is the lack of hard data concerning environmental costs and profits,difficult to convert environmental impact in dollars. Formula only takes product retirement into account and no environmental cost incurred during the product’s operational life. Portions of the process costs can be assigned to the individual parts of the product and to the linking elements between the parts. Example: # of links to be disassembled S C = C + {C + C } Recollection Disassembly, i Reassembly, i i=1 # of components to be reused S + {C + C + C } Cleaning, j Check/Sort, j Reconditioning, j j=1 # of links to be separated # of materials + S {C } + S {C + C } reprocessing, k Identification, l Separation , l k=1 l=1

3. Economic Assessments • One of the key elements of each product development process is the economic evaluation of the design concepts. • Environmental impacts occur over an entire product life-cycle. Hence, the economic implications of the environmental impacts should also be assessed. • Four methods for such economic assessment are: • Total Cost Accounting • Life-Cycle Costing • Full Cost Accounting • Environmental Life-Cycle Cost • A good overview of terms and relevant resources can be found at http://www.epa.gov/oppt/acctg/, for example: • “An Introduction to Environmental Accounting as a Business Management Tool: Key Concepts and Terms (June 1995)”. This paper presents an overview of environmental accounting for those unfamiliar with environmental accounting. It describes what environmental accounting is, why it is important, outlines some application options, and presents key concepts, definitions, and issues. (EPA 742-R-95-001, pp. 39) • Download it at http://www.epa.gov/oppt/acctg/pdf/busmgt.pdf

4. Life-Cycle Costing • Eco-Design includes assessments of impacts in the product life-cycle outside the producing company or Original Equipment Manufacturer. • For an economic assessment, therefore, we have to address all the costs and benefits for which actors and participants in a product’s life-cycle have to account for. • This investigation of economic impact is called Life-Cycle Costing. • Basically, LCC is an assessment of the costs in each stage of the life-cycle of a product. • The different cost factors (such as capital, labor, material, energy, and disposal) are investigated on the basis of current and/or future costs.

5. Total Cost Accounting (TCA) • Total Cost Accounting (TCA) was introduced in the late 1980s with the introduction of clean production. • The method typically focuses on in-company assessments of cleaner production investments. • TCA can be described as a normal, long-term oriented cost accounting method which pays special attention to hidden, less tangible and liability costs. • Liability costs are fines due to liability for things as future clean-up, health care and property damage. • Less tangible costs are, e.g., consumer acceptance, corporate image and external relations. • The TCA method also focuses on the risks and hidden costs associated with a product or activity.

6. Full Cost Accounting • There is an additional category of costs that should be accounted, namely, the social costs related to production, use, and disposal which are not accounted for by any of the life-cycle actors or participants. • Societal Cost Accounting or Full Cost Accounting (FCA) could be used to treat topics such as ozone layer depletion. • Because nobody is directly responsible for such issues, they are TYPICALLY not taken into account in TCA and LCC. • The monetarization of waste streams and emissions is based on a “willingness to pay” to avoid negative environmental effects. • Clearly, it is difficult to estimate the current and future social costs associated with specific products. • The Environmental Priority System (EPS) provides a framework.

7. Environmental Life-Cycle Costs • “Environmental Life-Cycle Costs” are costs caused by the environmental impact of the product. • The outcome of an LCA can be used as a basis for assessing the environmental life-cycle costs. • The most common method is to use standard cost factors, e.g., the costs a company has to incur to clean waste water. • Environmental Life-Cycle Cost accounting is much narrower than the preceding approaches. • It only looks at the cost related to environmental aspects - a subset of total costs.

8. Life Cycle Accounting/Costing Issues • To do a LCC, one basically has to follow the same four steps as in an LCA, except that the outcome is a single numerical monetary value. • More and more companies are starting to realize the importance of Life-Cycle Costing. • For example, a mercury thermostat switch may be the cheapest alternative to buy, but when one includes the costs of disposal, a solid state switch becomes more advantageous. • Clearly Full Cost Accounting is the broadest approach. • Many use Activity-Based Costing (ABC) as the tool for Life-Cycle Costing and accounting of environmental costs.

9. Very Important Issue: Cost versus Value • Example: Disposal costs of a product are smaller than the (economic) value added in the production process. • Focusing on “costs” only will limit the identification of improvement opportunities! Cost  Value

10. Another Important Issue: Different types of “Capital” • In Sustainable Development, three types of capital are recognized and should be accounted for (ideally!) • Sustainable Development = “development that meets the needs of the present generation without compromising the needs of future generations.” • Financial capital • Financial resources • Natural capital • Natural resources • Social capital • Social resources Financial units are often incapable or insufficient to accurately measure Natural and Social Capital. Example: What do YOU pay for the CO2 emitted from your car?