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Ecological Economics 58 (2006) 548 – 560

www.elsevier.com/locate/ecolecon

ANALYSIS

Environmental accounting: A management tool for enhancing


corporate environmental and economic performance
Patrick de Beer, Francois Friend *
Environmental Engineering Group, Department of Chemical Engineering, University of Pretoria, Pretoria, 0002, South Africa
Received 20 January 2004; received in revised form 7 July 2005; accepted 27 July 2005
Available online 28 September 2005

Abstract

Industries are becoming progressively more aware of the environmental and social liabilities pertaining to their operations
and products, with associated financial effects. Uncertainties in measuring these financial effects can be addressed by using
environmental evaluation and accounting techniques. Environmental accounting assists in expressing environmental and social
liabilities as environmental costs. While environmental accounting systems now form part of industrial decision making in first
world countries, there is a lack of similar systems in South Africa. The EEGECOST model was developed to promote
environmental accounting in South Africa. Implementation of the model will provide South African industries with the
framework for corporate evaluation of alternative investments, projects and processes and for estimating economic and
environmental performance at present and especially in the future. The model identifies, records and allocates internal and
external environmental costs to five identified cost types, categorised into several environmental media groups. It also assists in
the capital budgeting process for alternative investments. Applicability of the model was tested in a case study conducted on the
life cycle assessment of a functional unit of one million cigarettes. The model indicated that Type V costs (external costs, with
Types I to IV being different internal cost types) contributed 12% of the total production costs of a functional unit of cigarettes.
As Type V costs are subjective, it is recommended that further research be conducted to structure an objective framework to
evaluate and determine cost factors involved in the development of Type V costs.
D 2005 Elsevier B.V. All rights reserved.

Keywords: Capital budgeting; Environmental accounting; Environmental media; External costs; Internal costs

1. Introduction effects. Industries are therefore becoming progres-


sively more aware of the social and environmental
Industrial operations worldwide cause significant liabilities pertaining to their operations and products
environmental liabilities; with its associated financial (Environmental Protection Agency, 2000). These
liabilities include impacts on the natural environment;
* Corresponding author. Tel.: +27 82 554 8900; fax: +27 12 362
conveyed through the three principal media: air, water
5089. and soil. Financial effects are lately more often por-
E-mail address: ffriend@eng.up.ac.za (F. Friend). trayed in corporate images and reporting (Goodstein,
0921-8009/$ - see front matter D 2005 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2005.07.026
P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560 549

2002). However, some companies still find it difficult logical and social integrity (Wackernagel and Rees,
to relate environmental liabilities to financial effects 1996).
(Carter et al., 2001). Environmental accounting is an innovative sustain-
This is primarily due to inherent uncertainties in ability initiative. Coupled to the various standardised
measuring these liabilities, and in ways of expres- procedures and practices for effective environmental
sing them as part of corporate financial evaluations management, for example, ISO 14000 and Integrated
(Hayden, 1989). Environmental Management Systems (IEMS), it
Uncertainties in measuring environmental liabil- defines the environmental management frameworks
ities can be addressed by using environmental evalua- that exist at present that can assist companies in
tion and accounting techniques, such as qualitative managing, measuring and improving the environmen-
matrix evaluation and streamlined life cycle analysis tal aspects of their operations (Tibor, 1996) and within
methods (Labuschagne, 2002); and quantitative meth- which industries must operate today (Grace et al.,
ods including quantitative life cycle analysis, life 1999).
cycle costing and total cost assessment (Veefkind,
1998). Environmental accounting can be used to 2.2. Environmental accounting
demonstrate the potential for environmentally benefi-
cial investments to yield significant financial pay-offs, Steele and Powell (2002) define environmental
through the avoidance of environmental liabilities accounting as the identification, allocation and analy-
(Hayden, 1989). While environmental accounting sis of material streams and their related money flows
now forms part of industrial decision making in first by using environmental accounting systems to pro-
world countries, there is a lack of similar commitment vide insight in environmental impacts and associated
to the environment in South Africa (Labuschagne, financial effects.
2002). The following examples illustrate the benefits
The objective of this research is to evaluate envir- obtained by industries that have incorporated environ-
onmental accounting systems currently available in mental accounting as part of their environmental man-
the world market and to customise an environmental agement framework (Environmental Protection
accounting model appropriate for South Africa. The Agency, 2000):
results of an existing life cycle analysis for a chosen
process, the production of cigarettes, will then be used ! General Motors reduced its disposal costs by $12
to evaluate the model, especially to determine the million by establishing a reusable container pro-
impact of external costs on a company’s production gram with its suppliers,
costs. ! Commonwealth Edison, a major electric utility
company, realised $25 million in financial benefits
through more effective resource utilisation,
2. Literature survey ! Andersen Corporation implemented several pro-
grams that reduced waste at its source and had
2.1. Background internal rates of return (IRR) exceeding 50%,
and
Environmental management can be defined as the ! Public Service Electric and Gas Company saved
process of allocating natural resources so as to make more than $2 million in 1997 by streamlining its
optimum use of the environment in satisfying basic inventory process.
human needs, if possible, for an indefinite period and
with minimal adverse effects to the environment (Bar- 2.3. Environmental costs
row, 1997). However, earth’s ecosystems cannot sus-
tain current levels of economic activity and material The main component to consider for environmental
consumption, therefore effective sustainability initia- accounting is that of environmental costs. The Envi-
tives are required as basis of corporate environmental ronmental Protection Agency (1996) defines environ-
management frameworks to relieve pressure on eco- mental costs as those costs that have a direct financial
550 P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560

impact on a company (internal costs), and costs to activities such as tree planting. The costs them-
individuals, society and the environment for which the selves are not intangible, but the direct benefits
company is not accountable (external costs). The type that result from relationship or corporate image
of costs included in an environmental accounting expenses often are.
system ultimately determines the scope of the system
(Fig. 1). 2.3.2. External costs
External costs include: (1) environmental degrada-
2.3.1. Internal costs tion for which firms are not legally liable and (2)
Internal costs may include conventional costs, adverse impacts on human beings, their property
potentially hidden costs, contingent costs and image and their welfare that cannot always be compensated
or relationship costs (Environmental Protection for through legal systems.
Agency, 1995). For example, damage caused to a river because of
polluted wastewater discharges, or to ecosystems from
! Conventional costs include costs of capital equip- solid waste disposal or to asthmatics because of air
ment, raw materials and supplies. pollutant emissions are all examples of external costs
! Hidden costs refer to the results of assigning envir- for which an industry often does not pay (Quah and
onmental costs to overhead pools or overlooking Boon, 2003). To determine the financial value of
future and contingent costs (see Section 2.4). external costs are difficult; nevertheless, some busi-
! Contingent costs refer to environmental costs that nesses are attempting to address these costs as part of
are not certain to occur in the future but depend on their environmental accounting systems (Environmen-
uncertain future events, for example, the costs tal Protection Agency, 1995).
involved in remediating future spills.
! Image and relationship costs are less tangible 2.4. Cost allocation
costs because they are incurred to affect subjec-
tive perceptions of management, customers, Conventional management accounting systems
employees, communities, and regulators. This most often attribute environmental costs to general
category can include the costs of annual environ- overhead accounts with the consequence that product
mental reports and community relations activities and production managers have no incentive to reduce
and costs expended voluntarily for environmental environmental costs and executives are often una-

Types of environmental costs

Internal costs External costs

• Conventional costs • Environmental degradation costs


• Hidden costs • Human impact costs
• Contingent costs
• Image and relationship costs

Fig. 1. Types of environmental costs.


P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560 551

ware of the extent of these costs. By identifying, assessment as part of product or process evalua-
assessing and correctly allocating environmental tions, with the capability to evaluate the full life
costs, environmental accounting allows management cycle in question, considering all environmental and
to identify opportunities for cost savings (United social aspects from raw material extraction to the
Nations, 2001). end-of-life phase of the product or process. It sup-
Environmental costs should be allocated directly to ports the understanding of environmental and
the relevant cost drivers, that is, to the activity that human health costs and impacts related to projects,
causes the costs. For example, the costs of handling accounting for both internal and external costs
and treating a toxic waste brought about by the pro- (Little, 2000).
duction of, say product X, should directly and exclu-
sively be allocated to product X.
Understanding cost drivers and allocating costs 3. Environmental accounting model
accordingly is the conceptual cornerstone of activity-
based costing (ABC). The strength of activity-based 3.1. The EEGECOST model
costing is that it enhances the understanding of the
business processes associated with each product (Uni- The EEGECOST model was developed to promote
ted Nations, 2001). Activity-based costing improves environmental accounting in South Africa. The
internal cost calculation by allocating costs typically EEGECOST model (Environmental Engineering
found in overhead accounts to the polluting activities Group environmental costing model) is based on the
and products that are determined by quantitative life principles of the total cost assessment environmental
cycle assessment procedures. accounting system. The objective of the model is to
fully understand the cost significance of environmen-
2.5. Quantitative life cycle assessment tal and human health related decisions, activities and
consequences over the whole life cycle of a product or
Quantitative life cycle assessment for environmen- process; at present and especially for the future. This
tal accounting systems entails coupling a quantitative model is different from traditional environmental
value to environmental impacts associated with a accounting systems available in the world market
project by (Little, 2000): through the following:

! compiling an inventory of relevant energy and ! the set of cost and benefit items included are
material inputs and environmental releases, broader than in traditional systems,
! evaluating the potential environmental and social ! risk and uncertainty are dealt with in a systematic
impacts associated with identified inputs and fashion,
releases, and ! the model assists in quantifying items that are
! interpreting the results to make informed decisions. usually left unquantified (intangibles and externa-
lities), and
Coupling quantitative life cycle assessment to an ! traditional overhead items are assessed and allo-
environmental accounting system provides a compre- cated to specific cost drivers (a cost driver is the
hensive view of the environmental impacts of a pro- actual activity or reason for a cost to occur) of a
ject and a more accurate picture of the true project or process.
environmental trade-offs, with associated financial
effects, in product and process selection (Environmen- The structure of the model is given in Fig. 2 and
tal Protection Agency, 2001). consists of five steps for analysis:

2.6. Total cost assessment ! Compiling an objective statement and scope of


analysis.
The total cost assessment environmental account- ! Conducting the life cycle assessment of the process
ing system incorporates quantitative life cycle or product being analysed.
552 P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560

Objective statement and scope of analysis

• company profile
• product description
1
• process description
• basis of analysis
• period of assessment

Life cycle assessment 2

Cost inventory 3

Cost types Media groups


Internal
• air and climate
• Type I • waste
• Type II • waste water
• Type III
• soil and groundwater
• Type IV
• noise and vibration
External • biodiversity and landscape
• radiation
Type V • other

Impact assessment 4

Sustainability indicators Benefits

• energy efficient use Quantitative


• environmental impacts • cost benefit analysis
• social impacts Qualitative
• resource efficient use • ecosystems
• financial integrity • human health

Document results and assumptions 5

Fig. 2. Structure of the EEGECOST model.


P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560 553

! The third step involves the cost inventory where are competing for existing manufacturing consid-
environmental costs are recorded and allocated to eration or capacity; or for benchmarking competi-
cost types. tors’ processes or products.
! After the costs have been processed in the cost ! Existing process vs. new process analysis: com-
inventory, an impact assessment is completed to pares an existing process or product with new
identify the high impact cost types. products or processes.
! The final step is that of documenting the results of ! New process vs. new process analysis: compares
the model for use by stakeholders, enabling new processes or products for selecting future
informed business decisions. industrial operations with lowest associated
impacts, risks and costs.
The model is a spreadsheet-based program and ! Capital budgeting analysis: compares different
consists of pathways, which the user must follow in investment alternatives.
a specific analysis. These different pathways depend
on the objective statement and scope of analysis, and The time frame selected will determine the period
the amount of data the user needs to acquire or record. of cost analysis, for example, future costs per annum
In Fig. 3 a flowchart of the different pathways to or costs as incurred. This will include, inter alia,
follow in the EEGECOST model is provided. The deciding on what discount rates are to be used to
bold arrows depict the main pathway to follow to discount future costs, and the future period to be
account for all environmental costs. The dashed covered. This will require review of a company’s
arrows represent secondary pathways, whereas the internal cost systems to see how depreciation and
thin solid arrows depict tertiary and subsequent path- other items will affect the analysis and decide how
ways. The different cost entities presented in Fig. 3 these decisions should be evaluated.
are named according to the accounting forms avail-
able in the EEGECOST program. 3.3. Life cycle assessment

3.2. Objective statement and scope of analysis The life cycle assessment (LCA) of the process or
product being considered represents the next step in
The first step of the EEGECOST model is the using the EEGECOST model (see Fig. 2). The LCA is
compilation of an objective statement and scope of a manual procedure determined by a company’s spe-
analysis that incorporates an analysis background. cific guidelines of evaluation. Therefore, the EEGE-
Analysis background entails a background of the COST model does not support an LCA procedure in
company and provides some informative value to itself, but only the output of a relevant LCA is used as
the product and process being considered. input to the model. This input is allocated to cost types
The scope of analysis determines the type of cost and converted to economic values in cost inventory
comparison and the time frame that is desired for the forms to provide insight in environmental cost and
analysis. These two factors will determine how the risk reduction efforts.
costs will be developed and incorporated into the
model. The initial decision of cost comparison relates 3.4. Cost allocation to cost types
to establishing the basis for analysis, of which five
types are available: During the third step of the EEGECOST model,
output from the LCA of the process or product is
! Existing process analysis: evaluates an existing allocated to cost types to be used in the environ-
process or product to determine its impact on mental cost inventory (see Section 3.5). The model
the environment and the cost associated with allocates environmental costs to the following cost
production. types:
! Existing process vs. existing process analysis:
compares an existing process or product with ! Type I: site costs,
other existing processes or products that either ! Type II: corporate costs,
554 P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560

objective statement and scope of analysis output from the project life cycle assessment cost inventory

depreciation

maintenance and operating materials depreciation calculations

external services personnel employee payroll single or shared asset depreciation

fees, taxes and charges straightline or fixed percentage depreciation

predevelopment and construction decommissioning fines and penalties insurance provisions

general activities

research and development

extra debt interest

direct costs volunteer and prison labour

indirect costs transportation reconciliation

internal intangible costs type of load definition

external costs revenues costs incurred by type

cost types by year

cost report

Fig. 3. Flowchart in using the EEGECOST model.


P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560 555

! Type III: impact costs, ! insurance cost; and


! Type IV: internal intangible costs, and ! cost of provisions for environmental management.
! Type V: external costs.
Type I costs are further subdivided in Type I (a) or 3.6.1. Depreciation of related assets
non-recurring site costs and Type I (b) or recurring Depreciation is the process by which the price of
site costs. acquiring an asset is systematically allocated as cost
(that is, depreciation expense) over an asset’s useful
3.5. Environmental cost inventory life. This cost category includes assets like, for exam-
ple, collection containers, vehicles and air pollution
After allocation to cost types, the output from the control equipment.
LCA of the process or product analysed is translated The model allocates depreciation costs as Type II
to an economic value. Economic values are calculated costs. Depreciation can be calculated in terms of
by recording/entering all relevant present and future years, machine hours or machine mileage; using either
environmental costs and revenues in cost inventory of two methods:
forms. These forms are categorised into the following
environmental media groups: ! straight line depreciation, or
! fixed percentage depreciation.
! air and climate,
! waste, 3.6.2. Maintenance and operating materials
! wastewater, Maintenance and operating materials are not part of
! soil and groundwater, the product, but are necessary for production and
! noise and vibration, administrative processes. They may be used in labora-
! biodiversity and landscape, tories or workshops and contain harmful and toxic
! radiation, and substances, which often have to be disposed of sepa-
! other costs which do not fit into any of the above rately as hazardous wastes. Cost drivers often include
categories. oils, lubricants, chemicals, paints, varnishes, diluting
agents, glues and cleaning agents. The model allocates
The cost inventory forms are subdivided into envir- maintenance and operating materials costs as Type II
onmental cost groups that include: costs.

! treatment, operation and prevention, 3.6.3. External services


! general and beyond, and External service providers can be contracted for a
! environmental revenues. variety of environmental management functions. Pos-
sible cost drivers may range from site construction to
3.6. Treatment, operation and prevention legal aid and functional management, environment-
related consultations, training, inspections, audits and
This environmental cost group addresses the treat- communication.
ment of wastes, pollution and hazard prevention pro- External service costs can be allocated to Type I
cedures, and ordinary plant operation and production or II costs, using company defined criteria. External
processes. The group is further subdivided into the services costs would typically be allocated as Type I
following cost categories: (a) costs for a new site developed, as these costs are
not recurring in the near future. Where external
! depreciation costs; services involve weekly maintenance of site gar-
! costs for maintenance and operating materials; dens, for example, these costs would be allocated
! costs for external services; as Type I (b) costs. External services would be
! personnel costs; allocated as Type II costs for the case where
! costs related to fees, taxes and charges; research and development, for instance, is contracted
! costs of fines and penalties; to another company.
556 P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560

3.6.4. Personnel ! radioactive emissions, and


This cost category accounts for all in-house person- ! soil contamination.
nel, ranging from operating personnel to management.
The model allocates personnel costs as Type II costs. Provisions are allocated as Type III costs. Risk
analysis scenarios are created in the provisions form
3.6.5. Fees, taxes and charges to account for possible future expenses.
Fees and taxes may include cost drivers, for exam-
ple, disposal and effluent fees, costs for specific 3.7. General and beyond
licenses and environmental taxes and permit fees for
air emissions and wastewater discharges. Charges are General and beyond refers to costs impacting directly
recorded as cost when another division, within the on the company as well as those costs (Types IV and V
same company, for which charges must be paid, pro- costs) considered beyond ordinary financial accounting
vides services. This may include, for example, main- costs (typically Types I and II costs). This environmen-
tenance services, waste management services or site tal cost group includes the following cost categories:
development services. The user can allocate fees,
taxes and charges costs to cost Type I or II, according ! general environmental management activities;
to company definitions. ! research and development;
! extra expenditure for cleaner technologies;
3.6.6. Fines and penalties ! general direct costs;
In cases of no compliance to environmental regula- ! general indirect costs;
tions, fines and penalties are charged. These may ! internal intangible costs; and
include cost drivers like illegal discharges to the ! external costs.
environment, or releases to the environment above
permitted quantities. Fines and penalties are allocated 3.7.1. General environmental management activities
as Type III costs. Future expense risk analysis scenar- This cost category includes general environmental
ios, related to possible fines and penalties in the management activities, not directly related to emis-
future, can be created in this instance for the number sions management or the treatment of wastes. Work
of years depicted in the objective statement and scope hours for training programs, including travel expenses,
of analysis to enhance project feasibility studies. discussion sessions of environmental management
activities and projects, audits for compliance and exter-
3.6.7. Insurance for environmental liability nal communication should be reported here and eva-
Possible cost drivers could include the annual con- luated with the respective work hour costs. These costs
tributions to insurance against traditional damage to can be allocated as either Type I and/or Type II costs.
persons, goods and biodiversity caused by dangerous
and potentially dangerous activities and, insurance of 3.7.2. Research and development
transportation of hazardous materials. The model allo- Research and development accounts for extra ex-
cates insurance costs as Type II costs. penses related to internal environmental related research
and development projects. Research and development
3.6.8. Provisions for environmental management costs can be allocated as Type I or II costs. These costs
This form provides for cost drivers with possible could be allocated, for example, as Type I (a) costs for
future expenses related to, for example, remedial new site development, Type I (b) costs for existing site
activities, equipment repairs and governmental and upgrades and relevant research, and Type II costs for
public hearings that can result due to the following production research, process and system upgrades.
accidental events:
3.7.3. Extra expenditure for cleaner technologies
! groundwater contamination, Extra expenditure for cleaner technologies includes
! surface water contamination, cost drivers like, for example, integrated pollution pre-
! air emissions due to breakdown of control equipment, vention measures as part of the ordinary production pro-
P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560 557

cess, and interest expense on debt related to sustainable mers, employees, communities and regulators, including
environmental management. Extra expenditure for clea- for example, worker mortality and morbidity costs that
ner technologies is allocated as either Type I or II costs. are also regarded cost drivers of intangible costs.
Risk analysis scenarios can be created in this form
3.7.4. General direct costs to account for possible future costs. Internal intangible
Direct costs represent direct capital outlay with the costs are allocated as Type IV costs.
material purchase cost the most important direct cost
factor. Cost drivers could include: 3.7.7. External costs
This cost category includes costs of a company’s
! raw materials that constitute the major part of a impacts on the environment and society for which the
product; business is not financially responsible. External costs
! auxiliary materials that become part of the product, must incorporate environmental and human health
but are not its main components, for example, glue costs to the extent quantifiable. As for internal intan-
in a table or shoe; gible costs, future risk analysis scenarios can be cre-
! packaging that leaves the company with the ated in the form. The EEGECOST model allocates
product; external costs as Type V costs.
! energy that includes electrical energy purchased
and fuels; and 3.8. Environmental revenues
! water, that comprises the sum of all raw/potable
water purchased and/or water obtained from sur- Environmental revenues include earnings from
face and groundwater sources. recycled materials and subsidies. Capital investments
for environmental protection and projects for environ-
Direct costs can be allocated to either Type I or II mental management may enjoy subsidies, tax exemp-
costs, depending on company specific definitions. tions or other advantages. Subsidies, tax exemptions
Also considered a direct cost component is the use and non-fiscal advantages should be calculated when
of volunteer and prison labour in operations. This determining the cost savings arising from investments
labour is used by the production functions and its and projects and entered in the subsidies, rewards and
value should be costed during the periods that bene- earnings form, as they mean actual income.
fited from the labour.
The total transportation cost value of a company is 3.9. Cross-balance and reporting
also reported as a direct cost in the direct cost form.
The EEGECOST model supplies a consistency check
3.7.5. General indirect costs and cross-balance function to confirm that all costs
Indirect costs are capital outlay over the whole incurred have successfully been allocated to cost types.
spectrum of operations and environmental media, The final report can be compiled according to company
including cost drivers such as advertising and tele- specific regulations, incorporating the reported value/s
phone costs. as given in the costs incurred by type form, the cost types
The model allocates indirect costs as either Type I by year form and the cost report form of the model. In
or Type II costs. addition, some graphs were pre-developed for incor-
poration into reports. These are presented in the cost
3.7.6. Internal intangible costs report form of the model and include:
This category can include cost drivers for annual
environmental report costs, community relations acti- ! costs incurred by media,
vities, costs incurred voluntarily for environmental ! future costs by type,
activities (such as tree planting), and costs incurred for ! revenue received by media,
pollution prevention awards or recognition programs. In ! costs incurred by type,
addition, some costs are associated with subjective, ! interactive costs incurred by media graph, and
though measurable perceptions of management, custo- ! interactive cost types by year graph.
558 P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560

4. Case study Table 2


Conventional costs measured by the company
4.1. Introduction Conventional costs Cost per functional unit Type of cost
Remuneration R 6206.61 Type II
The EEGECOST model was used in a case study, Maintenance R 1823.71 Type II
Depreciation R 1347.27 Type II
based on the life cycle assessment of the cigarette
Utilities R 783.30 Type II
production process. The case study was conducted Rentals R 69.69 Type II
at the Heidelberg factory of British American Tobacco Environmental R 119.23 Types II
(BAT). British American Tobacco (BAT) is South health and safety and IV
Africa’s leading tobacco company, with a share of Meals and R 28.24 Type II
refreshments
over 93% of the cigarette market in the country
Recruitment costs R 11.78 Type I
(British American Tobacco, 2003). Service contracts R 191.60 Type I
Traveling R 28.70 Type II
4.2. Life cycle assessment Communications R 35.06 Type II
Training R 51.39 Type I
Insurance R 249.49 Type II
The life cycle assessment (LCA) of the cigarette
Vehicles R 65.05 Type II
production process revealed the environmental Other R 77.80 Types I,
resources used for the production of a functional II and IV
unit of cigarettes and its accompanying emissions to Total R 11,088.92
air, effluents to water and wastes to landfill and
hazardous wastes treatment sites. The functional unit 4.4. Impact assessment
is one million cigarettes. Table 1 is a summary of the
LCA for the cigarettes production process. Table 3 illustrates the results of the impact assess-
ment for the case study with all costs, Types I to V,
4.3. Cost allocation and environmental cost inventory incorporated into the EEGECOST model for the 2003
to 2005 financial years. Fig. 4 shows the percentage
Table 2 represents conventional costs measured by contribution of each cost type for the production of 1
the company, based on the production of a functional million cigarettes, based on the present value totals.
unit of 1 million cigarettes (Buissine, 2003). These
costs are categorised by cost type for inclusion into 4.5. Documentation of results and assumptions
the EEGECOST model.
The results of the impact assessment, gained from
Table 1 the EEGECOST model, indicate that the costs for the
LCA of the cigarette production process
production of a functional unit of cigarettes are sig-
Functional unit
One million cigarettes
Input Unit No. of Output Unit No. of Table 3
units units Results of the impact assessment
Cost 2003 2004 2005 Present value
Energy GJ 25.20 Air emissions ton CO2 eq 2.59
type total
Water kl 14.22 Wastewater kl 8.25
Total dissolved kg 1.62 Type R 232.64 R 207.71 R 185.46 R 625.80
solids I (a)
Chlorine kg 0.25 Type R 31,04 R 27.71 R 24.74 R 83.49
Total wastea kg 78.20 I (b)
Data source: Buissine (2003). Type II R 10,710.25 R 9562.72 R 8538.15 R 28,811.12
a
Total waste includes: (a) waste to landfill, which is mixed non- Type III R 0.00 R 470.89 R 362.84 R 833.74
hazardous waste. (b) Waste for recycling (off-site), which includes Type IV R 115.00 R 280.25 R 250.22 R 645.46
paper, card, metal and tobacco fines. (c) Hazardous waste for Type V R 0.00 R 2011.65 R 2037.89 R 4049.54
removal, which includes oil, glue and plastic. Totals R 11,088.92 R 12,560.93 R 11,399.30 R 35,049.15
P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560 559

II
mental media groups. Within the environmental media
82%
groups, these costs are further allocated to specific
cost drivers that cause the costs. Therefore, no costs
are simply allocated to overhead accounts, which are
III usually the shortcoming of traditional fiscal accoun-
2% ting systems.
Possible future risk and cost scenarios can also be
created in the model for up to 4 years. These future
costs are discounted to present value costs to create a
IV basis for cost comparison between different years. The
2% results of the EEGECOST model are summarised in
report forms. These forms contain interactive graphs
V
I (b) I (a) 12%
and tables for easy inclusion in management reports
0% 2% and presentations. The capital budgeting function of
the model can calculate return on investment periods
Fig. 4. Percentage contribution by cost type.
and internal rates of return on investments.
The EEGECOST model was used in a case study,
based on the life cycle assessment of the cigarette
nificantly larger in 2004 with Types III to V costs production process. The case study proved the impor-
included, than those reported using conventional cost tance of accounting for all environmental costs, both
accounting for 2003. In 2005, the costs are only internal as well as external, and allocating these costs
slightly larger. For 2005, it was assumed some costs to cost types and cost drivers in a structured environ-
would stay constant related to the 2004 costs, which mental accounting model. The case study revealed
would indeed not be the case in reality due to inflation that Types III to V costs, usually not considered in
increases. This serves as a lower bound limit to illus- traditional fiscal accounting systems, contributed 16%
trate that incorporation of Types III to V costs do in of the total production costs of one million cigarettes.
fact result in a higher reflected production cost for the The contribution from Type V costs alone, which
production of a functional unit of cigarettes. The are normally considered external to a company, was
graph depicted in Fig. 4 illustrates the contribution 12% for this case study. As Type V costs are sub-
of Types III to V costs to production costs. Once jective, it is recommended that further research be
incorporated into the EEGECOST model, these conducted to structure an objective framework to
costs account for nearly 16% of the total production evaluate and determine cost factors involved in the
costs. In reality, the future expense risk scenarios development of Type V costs.
would be reviewed at this point to reassess both the The EEGECOST model provides the framework
probability of future risk scenario occurrences and the for corporate evaluation of alternative projects and
uncertainties in the cost magnitude. processes and for estimating economic and environ-
mental performance in the present and especially the
future. The model can assist South African industries
5. Conclusions and recommendations in identifying, recording and allocating environmental
costs within environmental media groups, using cost
The EEGECOST model was developed to promote types and cost drivers, to enhance their corporate
environmental accounting in South Africa. The model decision making processes.
has two functions; an accounting function, using a
cost inventory to allocate environmental costs to spe-
cific cost types and cost drivers; and a capital budge- Acknowledgements
ting function for investment appraisal.
The EEGECOST model allocates environmental The authors wish to express their appreciation
costs to Types I to V costs, categorised in environ- to Burt Buissine of British American Tobacco for
560 P. de Beer, F. Friend / Ecological Economics 58 (2006) 548–560

his assistance during the case study, as well as Goodstein, E.S., 2002. Economics and the Environment, 3rd edi-
British American Tobacco for permission to pub- tion. John Wiley and Sons, Inc., New York.
Grace, N.O., Grace, D.M., Perez, A.L., Maywah, N.A., 1999. ISO
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ment. Florida Water Resources Journal, October 1999, Florida.
Hayden, F.G., 1989. Survey of Methodologies for Valuing Extern-
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