Environmental Accounting
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MI Summary
Full article: Environmental Accounting
Environmental Management Accounting (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. An organization's decision-makers can use the physical flow information and cost information provided by EMA to make decisions that impact both the environmental and financial performance of the organization. EMA is a broad set of principles and approaches that provides the materials/energy flow and cost data critical to the success of many other environmental management activities. The need for EMA was conceived in recognition of some of the limitations of conventional management accounting approaches for management activities and decisions involving significant environmental costs.
OVERVIEW OF ENVIRONMENTAL MANAGEMENT ACCOUNTING (EMA)
What is EMA?
Environmental Accounting (EA) is a broad term that is used in several different contexts, as illustrated below.
General Types of Accounting with Environmental Accounting Parallel
- Management Accounting (MA): The identification, collection, estimation, analysis, & use of cost & other information for decision-making within an organization
- Environmental Management Accounting (EMA): Management Accounting with a particular focus on materials & energy flow information and environmental cost information
- Financial Accounting (FA): The development & reporting of financial information by an organization to external parties (e.g., bankers, stockholders)
- Environmental Financial Accounting (EFA): Financial Accounting with a particular focus on reporting environmental liability costs and other significant environmental costs
- National Accounting (NA): The development of economic & other information to characterize national income & economic health
- Environmental National Accounting (ENA): National-level accounting with a particular focus on natural resource stocks & flows, environmental costs, externality costs, etc.
Information on this web site focuses primarily on the application of EA as a management accounting tool for internal business decisions, i.e., EMA.
EMA can be defined as 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.
Key points to note are:
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. EMA places particular emphasis on accounting for environmental costs.
EMA encompasses not only environmental and other cost information, but also explicit information on physical flows and fates of materials and energy.
EMA information can be used for most types of management activity or decision-making within an organization, but is particularly useful for proactive environmental management activities. Thus EMA incorporates and integrates two of the three building blocks of sustainable development - environment and economics - as they relate to an organization's internal decision-making.
Uses & Benefits of EMA
An organization's decision-makers can use the physical flow information and cost information provided by EMA to make decisions that impact both the environmental and financial performance of the organization. It is important to note that, while EMA supports internal decision-making, the implementation of EMA does not guarantee any particular level of environmental or financial performance. However, for organizations and programs that have the goals of minimizing costs, especially environmental costs, and minimizing environmental impacts, EMA provides an essential set of information for meeting those goals.
EMA data are particularly valuable for management initiatives with a specific environmental focus. EMA provides not only the cost data necessary for assessing the financial impact of these management activities, but also the physical flow information (e.g., raw materials use and waste generation rates) that help characterize environmental impacts. Examples of the many environmental initiatives that benefit from EMA include
- Pollution Prevention
- Design for Environment
- Environmental Life Cycle Assessment/Costing/Design
- Environmental Supply Chain Management
- Environmentally Preferable Purchasing
- Extended Producer/Product Responsibility
- Environmental Management Systems
- Environmental Performance Evaluation & Benchmarking
- Environmental Performance Reporting
Thus, EMA is not merely one environmental management tool among many - rather, EMA is a broad set of principles and approaches that provides the materials/energy flow and cost data critical to the success of many other environmental management activities.
Increasingly, the range of decisions affected by environmental costs of one type or another is generally on the rise. Thus, EMA is becoming increasingly important not only for environmental management decisions, but for all types of routine management activities, such as:
- Product & process design
- Cost control & allocation
- Capital budgeting
- Purchasing
- Supply chain management
- Product pricing
- Performance evaluation
Potential Benefits of EMA to Industry
EMA brings many potential benefits to industry:
- The ability to more accurately track and manage the use and flows of energy and materials, including pollution/waste volumes, types, and fate
- The ability to more accurately identify, estimate, allocate, and manage/reduce costs, particularly environmental types of costs
- More accurate and comprehensive information to support the establishment of and participation in voluntary, cost-effective programs to improve environmental performance
- More accurate and comprehensive information for the measurement and reporting of environmental performance, thus improving company image with stakeholders such as customers, local communities, employees, government, and finance providers
Potential Benefits of EMA to Government
The implementation of EMA by industry also can benefit government in a variety of ways:
- The more that industry is able to justify environmental programs on the basis of financial self-interest, the lower the financial, political, and other burdens of environmental protection on government.
- Implementation of EMA by industry should strengthen the effectiveness of existing government policies/regulations by revealing to companies the true environmental costs and benefits resulting from those policies/regulations
- Government can use industry EMA data to estimate and report financial and environmental performance metrics for government stakeholders such as regulated industries or the industry partners in voluntary programs.
- Industry EMA data can be used to inform government program/policy design.
- Government can use industry EMA data to develop metrics for reporting the financial and environmental benefits of voluntary partnership programs with industry, innovative approaches to environmental protection, and other government programs and policies.
- Industry EMA data can be used for regional or national-level accounting purposes.
In addition, government organizations can implement EMA themselves, with the following benefits:
- Government EMA data can be used for environmental and other decisions within government operations, e.g., purchasing, capital budgeting, and federal facility environmental management systems.
- Government EMA data can be used to estimate and report financial and environmental performance metrics for government operations.
Potential Benefits of EMA to Society
- Enable the more efficient and cost-effective use of natural resources, including energy and water
- Enable the cost-effective reduction of pollutant emissions
- Reduce the external societal costs related to industry pollution, such as the costs of Environmental monitoring, control, and remediation as well as public health costs
- Provide improved information for improved public policy decision-making
- Provide industrial environmental performance information that can be used in the broader context of evaluations of environmental performance and conditions in economies and geographic regions
Why was EMA Developed?
The need for EMA was conceived in recognition of some of the limitations of conventional management accounting approaches for management activities and decisions involving significant environmental costs and/or significant environmental consequences/impacts. For example, the following conventional management accounting practices might contribute to the inadequate consideration of environmental costs in internal decision-making:
- The unintentional "hiding" of many environmental costs in overhead accounts
- Inaccurate allocation of environmental costs from overhead accounts back to processes, products, and process lines
- Inaccurate characterization of environmental costs as "fixed" when they may actually be variable (or vice-versa)
- Inaccurate accounting for volumes (and thus costs) of wasted raw materials, and
- The actual lack of inclusion of relevant and significant environmental costs in the accounting records at all.
As more organizations come to recognize that many management decisions have potential environmental impacts and costs of various kinds, recognition of the value of EMA will grow. In the end, the distinction between conventional management accounting and EMA may blur, as the two approaches merge into a single broad management accounting approach that can better inform all decisions, environmental and otherwise.
- Source: EMA
