Environmental Costing

Firms are under increasing pressure to reduce their environmental impact. To help towards this it is vital to understand the full range of environmental costs.

Environmental Costs

Management are often unaware of the extent of environmental costs and cannot identify opportunities for cost savings.

Environmental costs can be split into two categories:

Internal costs

These are costs that directly impact on the income statement of a company. There are many different types, for example:

• improved systems and checks in order to avoid penalties/fines
• waste disposal costs
• product take back costs (i.e. in the EU, for example, companies must provide facilities for customers to return items such as batteries, printer cartridges etc. for recycling. The seller of such items must bear the cost of these "take backs)
• regulatory costs such as taxes (e.g. companies with poor environmental management policies often have to bear a higher tax burden)
• upfront costs such as obtaining permits (e.g. for achieving certain levels of emissions)
• back-end costs such as decommissioning costs on project completion

External costs

These are costs that are imposed on society at large, but not borne by the company that generates the cost in the first instance.

For example,

• carbon emissions
• usage of energy and water
• forest degradation
• health care costs
• social welfare costs

However, governments are becoming increasingly aware of these external costs and are using taxes and regulations to convert them to internal costs. For example, companies might have to have a tree replacement programme if they cause forest degradation, or they receive lower tax allowances on vehicles that cause a high degree of harm to the environment. On top of this, some companies are voluntarily converting external costs to internal costs.

Other classifications

Other classifications include those from :

Hansen and Mendoza

(i)Environmental prevention costs: the costs of activities undertaken to prevent the production of waste.

(ii) Environmental detection costs:costs incurred to ensure that the organisation complies with regulations and voluntary standards.

(iii)Environmental internal failure costs: costs incurred from performing activities that have produced contaminants and waste that have not been discharged into the environment.

(iv)Environmental external failure costs: costs incurred on activities performed after discharging waste into the environment.

The US Environmental Protection Agency

The US Environmental Protection Agency makes a distinction between four types of costs :

(i)Conventional costs : raw materials and energy costs having environmental relevance

(ii) Potentially hidden costs : costs captured by accounting systems but then losing their identity in 'general overheads'

(iii)Contingent costs : costs to be incurred at a future date, e.g. clean-up costs

(iv)Image and relationship costs : costs that, by their nature, are intangible, for example the costs of preparing environmental reports.

The United Nations Division for Sustainable Development

The UN Division for Sustainable Development describes environmental costs as comprising of

(i)    Costs incurred to protect the environment (for example, measures taken to prevent pollution) and

(ii)    Costs of wasted material, capital and labour, ie inefficiencies in the production process.

Related topics

Many firms have sought to address this through the use of environmental management accounting.

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