Environmental Cost Accounting

• Environmental accounting, also known as green accounting, includes environmental costs in financial results.
• It addresses the limitations of gross domestic product by incorporating environmental factors.
• Environmental accounting uses traditional accounting principles to calculate the costs of business decisions on the environment.
• It is considered a component of corporate social responsibility

Forms of environmental accounting

• Environmental Management Accounting (EMA) focuses on material and energy flow and environmental cost information.
• Segment Environmental Accounting is for selecting investment activities related to environmental conservation and assessing their effects.
• Eco Balance Environmental Accounting supports PDCA (Plan-Do-Check-Act) for sustainable environmental management.
• Corporate Environmental Accounting informs the public with compiled relevant environmental information.
• Environmental Financial Accounting (EFA) focuses on reporting environmental liability costs.
• Environmental National Accounting (ENA) focuses on natural resources, environmental costs, and externality costs at a national level.

Reasons for adopting environmental accounting

• Helps managers reduce or eliminate environmental costs
• Tracks costs previously hidden in overhead accounts
• Improves understanding of environmental costs for accurate product costing
• Broadens investment analysis to include environmental impacts
• Supports the development of overall environmental management systems
• Reduces/eliminates environmental costs through operational changes and greener technologies
• Offsets costs by generating revenue through waste sales or clean technology licensing
• Improves environmental performance and benefits human health
• Promotes accurate costing and pricing for environmentally preferable products/services
• Gives competitive advantage by offering environmentally preferable options
• Supports company development and operation of environmental management systems

Environmental damage and hazards

• Environmental damage refers to the deterioration of the natural environment due to human activities or natural disasters.
• Examples of environmental damage: deforestation, pollution, biodiversity loss, soil erosion, and climate change.
• Environmental hazards are potential sources of danger to the environment and human health, either natural or human-induced.
• Types of Environmental Damage:
• Air Pollution: Release of harmful gases and particles.
• Water Pollution: Contamination of water bodies.
• Soil Pollution: Degradation of soil quality.
• Deforestation: Clearance of forests.
• Climate Change: Global warming and altered weather.
• Biodiversity Loss: Decline of plant and animal species.
• Soil Erosion: Loss of fertile soil.

Causes of Environmental Damage and Hazards

• Environmental damage and hazards arise from human activities and natural factors.
• Human Activities:
• Air Pollution: Emissions from factories, vehicles, and burning fossil fuels release harmful pollutants such as carbon monoxide, sulfur dioxide, and nitrogen oxides.
• Water Pollution: Industrial waste, agricultural runoff, and untreated sewage contaminate water bodies.
• Deforestation: Logging, agriculture, and urban expansion reduce forests, biodiversity and disrupt ecosystems.
• Climate Change: Greenhouse gas emissions from burning fossil fuels and deforestation contribute to global warming, causing extreme weather.
• Overpopulation: Increased population overuses resources and increases waste.
• Overfishing: Depletes marine populations and disrupts oceanic ecosystems.
• Mining: Destroys habitats, causes soil erosion, and contaminates water.
• Nuclear Testing and Radioactive waste: Nuclear testing and radioactive waste results in radioactive materials hazardous for extended periods.
• Urbanization and Infrastructure increases population density.
• Natural Factors:
• Natural Disasters: Earthquakes (sudden energy releases), Hurricanes (tropical cyclones with strong winds), and Tsunamis (ocean waves from earthquakes/eruptions).
• Volcanic Eruptions: Release magma and produce lava flows, ashfall, pyroclastic flows, and lahars.
• Wildfires: Destroy habitats and pollute air and water. Lightning, Human activity, Drought are causes of them.
• Floods and Droughts: Floods submerge land, and droughts cause water scarcity.
• Soil Erosion and Landslides: Water/wind erode topsoil, reducing fertility; landslides are gravity-driven movements.

Hazards of environmental damage

• Health Risks: Air/water pollution causes respiratory diseases, cancer, and neurological issues.
• Climate Change Effects: Increased natural disasters, melting ice caps, and rising sea levels.
• Water Scarcity: Pollution/overuse impacts drinking water and agriculture.
• Economic Impact: Loss of livelihoods, decreased tourism, increased healthcare costs, and instability.

Long-term consequences

• Irreversible Damage to Ecosystems: Permanent harm leading to loss of biodiversity, ecological resilience, habitat destruction, disruption of nutrient cycles, changes in ecosystem, soil degradation/erosion, and water pollution.
• Permanent Loss of Biodiversity: Irreversible extinction of species and decline in ecosystem health.
• Climate Change Feedback Loops: Processes that amplify or diminish climate change effects, such as ice sheet collapse, coral bleaching, or methane release.
• Soil Degradation and Desertification: Decline in soil quality transforming productive land into desert conditions.
• Water Scarcity and Food Insecurity: Insufficient access to clean water affect food supply as food insecurity is a lack of access to sufficient, safe, and nutritious food.

Government policies and environmental damage

• Government policies are crucial in preventing environmental damages and hazards:
• Clean Air Act (CAA): Regulates air pollution in the U.S.
• Clean Water Act (CWA): Regulates water pollution in the U.S.
• National Environmental Policy (1991): Nigeria's policy for conservation and sustainable development. Targets human health/well being, and biodiversity.
• Environmental Impact Assessment (EIA) Act (1992): Nigerian law requiring impact assessments.
• National Conservation Strategy (1993): Nigeria's framework for conserving natural resources.
• Hazardous Waste (Management) Regulations (2001): Nigerian regulation for safe waste management.

Impact of environmental hazards on society

• Health Impacts:
• Diseases and Mortality: Pollution increases respiratory diseases, cardiovascular issues, and cancers; contaminated water spreads diseases.
• Mental Health: Displacement leads to anxiety, depression, trauma.
• Food Safety Issues: Soil degradation/pesticides affect nutrition and health.
• Economic Consequences:
• Increased Costs: Natural disasters increase infrastructure costs.
• Loss of Livelihoods: Environmental degradation reduces resources for agriculture and fishing.
• Insurance and Risk Costs: Hazards increase insurance premiums.
• Social Disruption:
• Displacement and Migration: Extreme weather forces relocation, straining urban areas.
• Inequality: Vulnerable populations are disproportionately affected.
• Cultural Loss: Destruction of sites erodes identities.
• Environmental Degradation Feedback Loop:
• Biodiversity Loss: Reduces essential ecosystem services.
• Climate Change Acceleration: Exacerbates global warming.
• Psychological and Social Strain:
• Community Tensions: Competition over scarce resources leads to conflicts.
• Reduced Quality of Life: Exposure to hazards lowers living standards.
• Impact on Future Generations:
• Intergenerational Inequity: Unsustainable practices compromise future needs.
• Loss of Ecosystem Services: Damage to ecosystems deprives future societies.

Environmental hazards - defintion

• Environmental hazard: A substance, state, or event that threatens the natural environment or people's health.
• Physical Hazards: Environmental factors causing harm due to physical characteristics: Including natural disasters, radiations, temperature extremes, noise pollution, and vibrations.
• Chemical Hazards: Substances/agents harming humans, animals, and the environment: toxicity, corrosivity, flammability, reactivity, and carcinogenicity.
• Biological Hazards (Biohazards): Biological agents threatening health, animals, plants and the environment. Through pathogens, toxins allergens and bioactive substances.
• Ergonomic Hazards: Conditions causing musculoskeletal injuries due to poor workplace design.
• Psychosocial Hazards: Aspects of work causing psychological harm, such as poor management and interpersonal conflicts.
• Socioeconomic Hazards: Factors threatening wellbeing resulting from economic/social conditions which include; poverty, inequality, unemployment, and environmental degradation.

Factors of environmental damage

• Environmental damage: Deterioration of the natural environment due to human activities and natural processes.
• Pollution: Air, water, and soil pollution from industrial activities, waste, and chemicals.
• Deforestation: Clearing forests impacting biodiversity and climate change.
• Climate Change: Global warming from greenhouse gases.
• Overexploitation of Resources: Unsustainable harvesting of resources.
• Urbanization: Habitat destruction and increased waste.
• Agriculture: Intensive farming practices degrade soil and deplete water.
• Industrialization: Release of harmful substances.
• Waste Management: Poor practices lead to pollution.
• Habitat Destruction: Development destroys natural habitats.
• Invasive Species: Disrupts ecosystems.
• Overpopulation: Strains resources and increases waste.
• Climate Events: Natural disasters exacerbated by climate change.
• Oil Spills: Devastate marine life.
• Chemical Runoff: Contaminates water bodies.

Effects of environmental damage and hazards on society

• Health Impacts: Physical and mental well-being affected by pollution and diseases.
• Social Impacts: Loss of livelihoods and social inequality.
• Economic Impacts: Economic losses, decreased productivity, and increased healthcare costs.
• Environmental Impacts: Climate change, soil erosion, and water scarcity.

Environmental accounting effects

• Environmental damage and hazards impact a business's financial performance and reputation.
• Increased Costs: Reveals financial burdens of energy/water use, waste disposal, and pollution mitigation.
• Loss of Value: Environmental damage reduces the market value of assets.
• Loss of Sales: Reputational harm can cause businesses to lose customers.
• Loss of Insurance: Environmental incidents can make insurance difficult to secure.
• Legal Issues: Violations lead to fines and increased taxes.

Disclosure requirements

• Regulations require entities to reveal information to stakeholders to promote transparency.
• Financial Disclosures:
• Annual Reports: Public companies must disclose audited financial statements.
• Quarterly Reports: Updates on financial health.
• Material Events: Mergers, acquisitions, or losses must be disclosed.
• Corporate Governance Disclosures:
• Board Composition: Information on board members.
• Executive Compensation: Details on compensation.
• Risk Management Policies: Strategies to mitigate risks.
• Environmental, Social, and Governance (ESG) Disclosures:
• Environmental Impact: Information on emissions and resource usage.
• Social Impact: Diversity metrics and labor practices.
• Governance Policies: Ethical standards and CSR.
• Risk Disclosures:
• Market Risks: Risks related to market fluctuations.
• Operational Risks: Risks associated with production.
• Legal and Political Risks: Information on litigations and sanctions.
• Internal Control Disclosures:
• Controls and Procedures: Disclosure of internal controls.
• Audit Committees: Reports by audit committees.
• Environmental-Related Disclosures: Increasing as stakeholders prioritize transparency which includes disclosure of environmental performance.
• Energy Consumption and Efficiency: Disclosure of total energy usage and efficiency improvements.
• Water Usage and Conservation: Data on water withdrawal and recycling.
• Waste Management and Reduction: Reports on waste generated and diversion efforts.
• Environmental Impact of Products: Information on product lifecycle assessments.
• Climate-Related Risks and Opportunities: Disclosure of climate change impacts.
• Pollution and Environmental Violations: Reports on pollution levels and incidents.
• Environmental Goals and Targets: Outline long-term goals for sustainability.

Environmental costs and financial reporting

• Environmental cost refers to the economic impact associated with the environmental effects of an organization's activities.

Types of environmental costs

• Prevention Costs: Incurred to minimize environmental damage which Includes investments in air filtration systems and employee training programs.
• Appraisal Costs: Assessing and monitoring environmental performance and environmental audits to ensure compliance with local and international regulations.
• Internal Failure Costs: Costs that arise when environmental standards are not met within the organization (i.e. cleaning up chemical spill in factory)
• External Failure Costs: Environmental damage impacts parties outside the organization i.e. compensating a community for health issues caused by the company's air pollution.
• Environmental Liabilities: Potential future costs associated with environmental damage from the organization's activities, such as cleaning up contaminated sites.
• Environmental Accounting: Assigning monetary values to environmental impacts.
• Life Cycle Assessment (LCA): Evaluating environmental impacts throughout a product's life cycle.
• Environmental Impact Assessment (EIA): Identifying and evaluating potential impacts of a project.
• Carbon Footprint: Calculating greenhouse gas emissions.
• Water Footprint: Assessing water usage and pollution.
• Ecological Footprint: Measuring demand for natural resources.
• Monetary Measurements:
• Environmental Costs Accounting (ECA): Assigning values to environmental costs.
• Shadow Pricing: Assigning values to environmental impacts.
• Contingent Valuation: Estimating values through surveys.
• Index-Based Measurements include Environmental Performance Index (EPI), Dow Jones Sustainability Index (DJSI) and Global Reporting Initiative (GRI).
• Environmental Performance Index (EPI): Measures environmental performance/climate change.
• Dow Jones Sustainability Index (DJSI): Sustainability performance based on environmental, social, and governance.
• Global Reporting Initiative (GRI): Framework for company reporting on environmental, social, and governance.

Accounting of provisions for liabilities

• IAS 37 describes the provisions for liabilities in accounting.
• IAS 37: Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions and contingent assets and liabilities.

Key definitions

• Provision: A liability of uncertain timing or amount.
• Liability: Present obligation from past events, settlement is expected to result in an outflow of resources (payment).
• Contingent liability: A possible obligation depending on a future event, or payment is not probable, the amount cannot be measured reliably.

Recognition of a provision

• Entity must recognize when there is a present obligation (legal or constructive) from a past event and payment is probable
• An obligating event is an event that creates a legal or constructive obligation which results in an entity having no realistic alternative but to settle the obligation.
• A constructive obligation arises if past practice creates a valid expectation for a third-party.
• Discounted present value is determined using a pre-tax discount rate that reflects the current market assessments of the time value of money/ the risks specific to the liability.

Accounting for environmental liabilities

• Involves recognizing/measuring costs and ensuring that costs are stated properly on financial statements.
• Environmental liabilities arise from obligations to remediate pollution/contamination and a liability should be recognized when there is a legal obligation to remediate the pollution.
• The measurement involves estimating the costs required to fulfil accounting obligations which can include remediation costs, legal and consulting fees and monitoring costs.
• Balance Sheet: Recognized as a liability, either current or noncurrent, based on settlement timing.
• Income Statement: Costs related to environmental liabilities are expensed as incurred, based on when they meet criteria for capitalization.
• Disclosure Requirements
• The nature of the liability
• The financial impact
• the timing and uncertainties related to the liability
• Any insurance recoveries or third party recoveries

Financial Reporting in Environmental Accounting

• Incorporates environmental costs/benefits into traditional practices.
• Accounting provides enhanced transparency/supports sustainable business practices.
• Encourages enhanced decision-making as it helps identify areas for cost savings/sustainability improvements.
• Attracts investment as they offer transparency which may attract socially responsible investors.
• Can ensure regulatory compliance as companies adapt to increased environmental disclosures.
• Can involve effective stakeholder engagement as they demonstrate a better commitment to sustainability.

Limitations in Accounting for Environmental Costs

• Measurement uncertainty: Difficult to measure costs/liabilities, (the timing/amount of future expenditures are uncertain).
• Lack of standardization: currently no standardized approach to accounting for them.
• Disclosure limitations: Requirements may not provide sufficient information for stakeholders.