Expressing Environmental Impact in

Monetary Units
-
Environmental Accounting/Costing
Approaches

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Systems Realization Laboratory
 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.

Example: # of links to be disassembled

C = C Recollection + S {C Disassembly, i+ CReassembly, i }
i=1

# of components to be reused
+ S {C Cleaning, j + C Check/Sort, j+ C Reconditioning,}j
j=1

# of links to be separated # of materials

+ S reprocessing, k}
{C k=1 + S {C Identification, l+
l=1
C Separation , }l

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.
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Systems Realization Laboratory
 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
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Systems Realization Laboratory
 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.
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Systems Realization Laboratory
 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.
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Systems Realization Laboratory
 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.
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Systems Realization Laboratory
 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.

Georgia Institute of Technology

Systems Realization Laboratory
 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.

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Systems Realization Laboratory
 Very Important Issue: Cost versus Value

Cost  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!

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Systems Realization Laboratory
 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

Financial units are often incapable

• Natural capital or insufficient to accurately measure
– Natural resources Natural and Social Capital.

• Social capital Example: What do YOU pay for the CO2

– Social resources emitted from your car?

Georgia Institute of Technology

Systems Realization Laboratory