Environmental Accounting Essay

————————————————- Topic : Companies across the world have started to adopt environmental accounting. What is environmental accounting? Should it be made mandatory? Does environmental accounting help the environment in any way? Give specific examples of how environmental accounting has benefited the environment. ————————————————- Introduction : The developing countries like India are facing the twin problem of protecting the environment and promoting economic development. A trade-off between environmental protection and development is required.

A careful assessment of the benefits and costs of environmental damages is necessary to find the safe limits of environmental degradation and the required level of development. This is where Environmental accounting comes into picture. So what exactly is environmental accounting? Environment Accounting is the identification, collection, estimation, analysis, internal reporting, and use of materials and energy flow information, environmental cost information, and other cost information for both conventional and environmental decision-making within an organization, be it a government or a corporate organisation.

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Unless the proper accounting work is done either by the individual firm or by the Government itself, it cannot be determined whether both have been fulfilling their responsibilities towards environment or not. Therefore, the need of environmental accounting The joint workshops organised by the United Nations Environment Programme (UNEP) and the World Bank set out to examine the feasibility of physical and monetary accounting in the area of natural resources and the environment and to develop alternative macro indicators of environmentally adjusted and sustainable income and product.

Parallel to this revision, the statistical division of the United Nations (UNSTAT) has developed methodologies for a system of Integrated Environmental and Economic Accounting (SEEA), issued as an SNA handbook on Integrated Environmental and Economic Accounting which is used as a framework for EA across the world. In recent years there has been a trend in many public corporations to provide more information on environmental matters both within the management accounting system and in annual reports. This is in response to increased concern by the stakeholders and public awareness of environmental issues.

These factors have put pressure on listed corporations to measure environmental costs and expenses and to develop and enhance environmental disclosure to different stakeholder groups. The process of environmental accounting seeks to embed the responsibilities of the senior management towards shareholders as well as other stakeholders in the company’s accounting and reporting procedures. Environmental accounting reveals the environmental conservation activities undertaken by a company or organization in a given period.

The range of environmental costs, energy and material use and waste disposal, insurance and fines and penalties, shows participation of multiple disciplines, along with accounting sub-disciplines. The yield of this effort is the decision support system, in which environmental impact can be determined specifically in the following terms: • Full cost accounting (FCC) • Total cost assessment (TCA) • Life-cycle costs (LCC) • Life-cycle cost analysis (LCCA) • Total quality environmental management. (TQEM)

An environmental accounting system is composed of environmentally differentiated conventional accounting and ecological accounting. * Environmentally differentiated accounting measures impacts of the natural environment on the company in nominal or monetary terms. * The ecological accounting measures the impact that the company has on the natural environment. The measurement is usually in physical units. Environmental accounting can be broken down into three different disciplines: * Global environmental accounting. * National environmental accounting. Corporate environmental accounting. Corporate environmental accounting can be classified in three broad steps/phases : 1) Environmental Management accounting and This is the basic step which is a part of environmental accounting. Environment Management Accounting (EMA) is the identification, collection, estimation, analysis, internal reporting, and use of materials and energy flow information, environmental cost information, and other cost information for both conventional and environmental decision-making within an organization.

EMA integrates corporate environmental and business policies, and thereby provides guidance on building a sustainable business. 2) Environmental cost accounting An advanced step of development of environmental accounting is development of environmental cost accounting. Cost accounting is defined as use of the accounting record to directly assess costs to products and processes (Lally, 1998). In this approach, costs are accounted for by their specific causes. Environmental cost accounting directly places a cost on every environmental aspect, and determines the cost of all types of related action.

Environmental actions include pollution prevention, environmental design and environmental management. Past approaches on environmental impacts were based mainly on environmental cleanup costs and past product disposal. 3) Environmental National Accounting (ENA): National Level Accounting with a particular focus on natural resources stocks & flows, environmental costs & externality costs etc. Should it be made mandatory? From the point of view of the environment, yes, making EMA mandatory will be helpful in reducing the burden on the environment substantially.

But just as the loopholes in other laws that are imposed by the government are being exploited by the companies, making EMA mandatory is not the only solution. Instead, increasing the awareness about EMA and more voluntary undertaking by companies is required. As CEA proves to be beneficial to both the environment as well as the corporation, it should be voluntarily adopted by companies. To elaborate a bit on how CEA is beneficial to the company, consider the following : 1) Many people are willing to pay more for a product that is environmentally friendly. ) Many companies are now interested in being “green,” as many investors place a high value on environmental responsibility. 3) The concept of environment management accounting is new for India but the recent policies of Indian government of liberalization have catalyzed the need or practice of environment management accounting in India. 4) EMA focuses on costs internal to the company; EMA does not include external costs to individuals, society, or the environment for which a company is not legally held responsible. Also, along with this, the basic objective of EMA i. e. educing the burden on the environment can be achieved. So, instead of making corporate environmental accounting mandatory, increasing its awareness in the corporate world and implementing certain policies will be more effective in implementing CEA on a large scale. Does environmental accounting help the environment in any way? To a certain level, CEA does play a key role in reducing the burden on the environment. The various forms of EMA through which the environment is benefitted can be stated as follows: 1) Waste reduction. 2) Eliminate the use, release, and transfer of hazardous chemicals. ) Degradation and destruction like soil erosion, loss of bio diversity, air pollution, water pollution, voice pollution, problem of solid waste, coastal & marine pollution. 4) Deforestation and Land uses. 5) Depletion of non-renewable natural resources i. e. loss emerged due to over exploitation of non-renewable natural resources like minerals, water, gas, etc. Give specific examples of how environmental accounting has benefited the environment. The number of Japanese corporations, which publish environmental reports, has been increasing very rapidly.

According to the ”A Survey of Environmentally Corporate Behavior” [Ministry of the Environment (2001a)], the proportion of listed corporations surveyed which disclosed environmental information showed a rising trend from 35. 7 per cent (1998) to 40. 9 per cent (1999) to 51. 0 per cent (2000). Out of these companies the proportion of those which published environmental reports also increased from 30. 9 per cent (1998) to 37. 3 per cent (1999) to 45. 9 per cent (2000). Let us have a look at some case studies of Environmental accounting which have been quoted in the US Environmental Protection agency: . The first one that is quoted in the US EPA is of Commonwealth Edison (ComEd), a large Chicago-based electric utility company. The experience of this company proves that electric utilities and other companies can successfully and substantially reduce their environmental burdens as well as the costs incurred to the company with innovative accounting practices. In 1993, ComEd began to recognize that the total cost of managing materials and equipment was much more than the initial acquisition cost.

In particular, company managers realized that the costs related to environmental management were often overlooked. This acknowledgment led to ComEd’s first phase of life cycle management activities, which enabled them to minimize the chemical inventories at generating stations. What was the effect of such reduction in the number of inventories? ComEd’s LCM initiative has reduced waste volume, thus reducing some amount of burden on the environment, and at the same time, providing over $50 million in financial benefits to the company. . The next example that we are going to look at is that of the Anderson corporation, the largest manufacturer of wood windows and patio doors in North America with annual revenues of approximately $1 billion. In the late 1980s, executives at Andersen released a directive to their staff to reduce emission levels of toxic chemicals. In response to the directive, Andersen managers formed a Corporate Pollution Prevention Team whose mission was to eliminate the use, release, and transfer of hazardous chemicals.

This multi-disciplinary team conducted a waste accounting project, developed waste reduction goals, and justified waste reduction projects by developing several business cases that quantified environmental and other cost savings. For example, the team justified the purchase of an improved system for mixing paints at point-of-use based on the savings from improved material usage rates and reduced waste. 3. Closer to our home, in India, there are various laws that have been implemented by the government of India for the protection of the environment which come under environment accounting.

To mention a few, let us take a look at their names a. The water (Prevention and Control of pollution) rules, 1975. b. The manufacturer, storage and import of hazardous chemical rules, 1989. c. The bio-medical waste (management and handling) rules, 1998. 4. Indian company, Parikh and Parikh (1997) made an attempt to account for air pollution in India, using input-output sectoral information at the all India level, power and transport sector and household level emissions (including livestock sector).

Two approaches can be used to value and account the air quality changes within an income accounting framework. They are: Maintenance cost or Avoidance cost approach. Parikh and Parikh used the second method of assessing the damage due to air pollution. 5. In another study, Murty et al. (1999) illustrated how to account for water pollution. Water pollution is measured by a number of indicators like Biological Oxygen Demand (BOD), Chemical Oxygen Demand (COD), pH, suspended solids, dissolved solids, variety of chemicals, metals etc.

Two approaches have been used in the literature to value and account the impacts of water pollution. The first is to assess the health and other impacts of water pollution on human and animal life. The second is take account of the cost of water treatment before discharging the effluents into the rivers etc. , following the principle of “polluter pay”. Brandon and Homman (1995) used the first approach to provide an all-India level estimate of urban and rural health effects due to water pollution (measured basically in terms of mortality and morbidity rates).


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