Green, the color of prosperity, is also one of the colors that calm our fierce eyes need after we burn them out after hours of screen time. What better than the natural green we find around ourselves, or do we these days? I remember the days when the beautiful season of monsoon was described to us by imagining lush green lawns, beautiful landscapes, and the sweet smell of wet mud. But probably, the children these days, if asked about their first thought of the monsoon season, might tell us about the overflowing sewers, traffic blockage, flooded roads, etc. No mention about the green. Why did this transition take place? We all know the answer, but we never knew the quantum of harm that unsustainable rate development and industrialization would do to our environment. And by the time we started accounting for it, we probably were not in the situation to accept it. Vehicle emissions, carbon emissions – all emit toxins into our atmosphere, toxic waste, cause air pollution. These are the by-products of our inventions and ingenuity.
This is what’s causing Global Warming. Statistics suggest;
Every year, an estimate of 55 billion tons of fossil energy, metals, minerals, and biomass is extracted from the Earth.
The world has already lost 80% of its forests, and we’re continually losing them at a rate of 375 km2 per day!
There is a garbage island floating in our oceans that mainly comprise plastics – the size of India, Europe, and Mexico combined!
As we realized and accumulated these facts, we tried to find out solutions. Several agreements were made at international levels, and many voluntary organizations pulled up their socks to save the environment at local levels. For instance, in India, Environment Improvement Trust has been working for forest and environmental protection since 1998. There is also a group of Green Volunteers with a goal of Green India Clean India concept. In developing countries, such as Latin America, these agreements are commonly used to remedy significant levels of non-compliance with mandatory regulations.
The agreements have a long history, with some multinational agreements being in place from as early as 1910 in America, Europe, and Africa. Some of these most well-known international agreements include the Paris Agreement of 2015 and the Kyoto Protocol of 1997.
Accounting is an essential practice that has its roots way back into history. But one can only account for things that are measurable and cardinal. So do we measure the pollution and the Cost related to it? How do we ask the people who pollute the environment to contribute to its well-being?
Introducing Green accounting:
It is an accounting with an attempt to include environmental factor costs into the financial results of operations. To understand it thoroughly, let’s imagine a corporate cutting down forests to increase its industry setup space. The slashing of forests can be referred to as environmental degradation. But the corporate can only account for a cost that is paid to acquire that land. It didn’t consider the different types of effects the environment will face because of the lack of forest area in that particular region. Degradation in quality of air, replantation of trees as per their social responsibility, dislocation of environmental habitat and species living there, prediction of future fines, etc., isn’t much considered before deciding to acquire the forest land. Environment costs may represent a significant proportion of the operating costs. Particularly for companies that are operating in highly industrialized sectors such as oil production. Amoco’s environment costs at its Yorktown refinery were at least 22% of non- crude operating Costs against the estimates of only 3% (Source – Ranganathan and Ditz (1996) & case study of Ditz et al. (1998)
Green Accounting, or as many call it, Environmental Management Accounting, is essential for internal management before taking a decision.
Over time, different frameworks like GRI, EMAS, ISO 14001 have emerged. Still, there was a need for a more sustainable framework and process that would teach these issues at the point of decision making. And so, the concept of Green Accounting was introduced. Also known as Environmental Management Accounting, the primary purpose of green accounting is to help businesses manage and understand the potential quid pro quo between traditional economic goals and environmental goals.
The major areas for the application for EMA are:
Product Pricing:
To discount the future environmental costs to reimburse the money from the customer of the products. Also, to operate sustainably, a corporate might shift to environment pro production methods which will be comparatively costly, and the exact cost is passed to the customers.
Budgeting:
Budgeting of future environment-related costs like estimating future fines, restoration costs, etc., is required to help us manage a sufficient amount of cash at different time zones.
Investment Appraisal:
Before investing, a corporate might apply the process of capital budgeting. This involves discounting of projected income and Cost and arriving at a decision whether investing in the project is profitable or not. Environment costs cannot be ignored as they might even change the management’s conclusion in accepting the project.
Savings of Environmental Projects, or Setting Quantified Performance Targets:
The corporate is bound to achieve tangible and non-tangible benefits from society using environment-friendly techniques. Segregating the impact of using environment pro methods will help the corporate look at the savings boost corporate confidence.
Classification of Expenses
For us to understand how do we account for the environmental cost, we need first to understand how we classify them-
1.External & Internal costs:
Internal costs include
- Waste disposal costs
- Cost incurred to improve the systems and checks to avoid violation of norms
External costs include
Instead of an organization that causes these costs, these costs are born by society.
It includes:
- Use of water, energy resources
- Emission of carbon and change in climate
An excellent observation here will be there is an inverse relationship between both the costs. The more the internal costs incurred by the company to prevent environmental damage leads to a decrease in the external costs.
2.Conventional costs, potentially hidden costs, contingent costs, relationship & corporate image costs-
It is a classification that is based on the visibility of costs-
Conventional Costs-The costs of using raw materials, utilities, capital goods, and supplies are usually addressed in cost accounting and capital budgeting but are not traditionally considered environmental costs. However, decreased Use and less wastage of utilities, raw materials, supplies, and capital goods, are environmentally preferable, in turn reducing both environmental degradation and consumption of nonrenewable resources.
Potentially Hidden Costs–The costs may be obscured through treatment as overhead or R&D, distorted through improper allocation to cost centers, or overlooked. This means the expenses which lose their identity in general overheads, e.g., upfront environmental costs, back-end environmental costs, and regulatory (including voluntary) ecological fees.
Contingent Costs – Costs that may or may not be incurred at some point in the future. Eg-penalty, fines, legal expenses, and personal injury damages.
Relationship & Corporate Image Costs – Some environmental costs are called “less tangible” or “intangible” because they are incurred to affect subjective (though measurable) perceptions of management, customers, employees, communities, and regulators, e.g., the costs of preparing environmental reports.
There is yet another type where we can classify the environmental Cost into four categories –
Environmental Prevention Costs– Those costs are associated with preventing adverse environmental impacts. Examples include
- Evaluating and picking pollution control equipment
- Creating environmental policies
- Environmentally driven R &D
Environmental Appraisal Costs– The Cost of activities executed to determine whether products, processes, and activities comply with environmental standards, policies, and laws. Examples include
- Monitoring, testing, inspection, and reporting
- Improved systems and checks to prevent fines/penalties
Environmental Internal Failure Costs– Costs incurred from activities that have been produced but not discharged into the environment. Examples include
- Recycling scrap
- Disposing of toxic material
- Back end costs such as decommissioning costs on project completion
Environmental External Failure Costs– Costs incurred on activities performed after discharging waste into the environment. These costs harm the organization’s reputation and natural resources. Examples include
- Cleaning up contaminated soil.
- Restoring land to its natural state
Managing the Environment Cost
All the effort to classify costs will only come to see if the cost is allocated to the correct cost center and cost units, and the continuous process is formed to control the environmental costs. Generally, the prices are hidden in general overhead costs, and thus, it gets difficult for corporates to identify these costs and manage them. This is where a separate process should be established which looks into the environmental costs. Once these costs are determined, it becomes crucial for us to find their cost driver. A cost driver is a concept that establishes a relationship between the total amount of overhead and what factor drives that overhead. If we allocate costs to their respective cost drivers and then control the cost drivers, we can maintain the Total Cost. There are various techniques for identification and allocation of environmental costs-
1. Input-Output Analysis:
This technique involves preparing records for material inflows and then balancing these inflows with the quantum of outflows relying on the principle ‘what enters in the production system, must move out, either at a productive output or unproductive output (waste).
2. Flow Cost Accounting:
Inflow cost accounting, the organizational structure, is also considered apart from material flows. Material losses which are incurred at various stages of production are also recorded.
3. Life Cycle Costing:
Lifecycle costing has a feature of full cost accounting because it takes into account the costs and revenues of a product over its whole life rather than one accounting period&hence therefore, the entire environmental Cost associated with producing a product will be taken into account irrespective of the fact who borne it.
4. Activity-Based Costing:
Activity-Based Costing is a technique that deals with allocating cost pools to the cost centers using cost drivers based on consumption or benefit received. It can be of two types- Environment Related Costs(ERC) and Environment Driven Costs(EDC). ERC can be attributed directly to a joint cost center, e.g., waste filtration plant and sewage plant. At the same time, ERC is hidden in the general overheads and does not relate directly to a common environmental cost center.
Controlling the Environment Cost
Once the identification and allocation of environmental costs are made, we move to the crucial part of controlling the environmental costs. Various techniques such as Total Quality Management(TQM) can be followed to reduce environmental costs. The reduction can be from an individual element point of view and a uniform organization-wide point of view. The four significant elements are-
1. Waste:
Mass balance’ approach can determine how much material is wasted in production, where the weight of materials bought is compared with the product yield. With the help of this process, potential cost savings may be identified.
2. Water:
Businesses pay for water twice, firstly to buy it and secondly dispose of it. Savings are to be made to reduce the water bills; organizations need to identify where water is used and how the consumption can be reduced.
3. Energy:
Often, energy costs can be reduced significantly too at a minimal cost. EMA also helps to identify inefficiencies and wasteful practices, therefore, create opportunities for cost savings.
4. Transport and Travel:
Again, EMA techniques may be used to identify savings in travel and transport of goods and materials. At a superficial level, a business can invest in more fuel-efficient vehicles.
Uses of Environmental Accounting
People are transitioning towards a more sustainable world, and the corporates play an essential role in making the world a place to live for the generations to come. There have been various indicators that now incorporate environmental degradation while calculating the domestic economy. One such indicator is Green GDP. Calculating green GDP requires that ecological degradation, net natural capital consumption, including resource depletion, treatment, and protective environmental initiatives, be subtracted from traditional GDP.
These calculations can also be applied to the net domestic product (NDP), which helps deduct the produced capital from GDP. Thus, in each case, it is necessary to convert the resource activity into a monetary value since it is in this manner, indicators are generally expressed in national accounts.
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