Using the Social Fabric Matrix to Establish Corporate Accounting Consistent with Normative Criteria Regarding Climate Change

Abstract

During the past 30 years, an elaborate literature has developed to integrate the concepts about social norms with the concepts of law. During that same period, climate change impacts became more pronounced and citizens became aware of and concerned about those impacts. This paper explains how the rules governing corporate accounting need to be revised in order to change the accounting systems of production corporations, so those systems reflect social norms and climate change impacts. The paper uses the social fabric approach to explain why the accounting change is needed and how it should be organized in order to allow public agencies to effectively carry out environmental rules and regulations. The double-entry accounting system currently used by production corporations is not structured to record the contribution of their investment and production activities to climate change. The Federal Reserve and US Treasury, as the world's most powerful monetary authorities, need to be involved in bringing about climate change remediation, but that is not possible without an accounting system that provides relevant indicators. Today regulators and corporations are impeded by an accounting system that does not take into consideration the ecological impacts. This paper explains how new accounts that record ecological impacts can be designed and integrated into traditional accounts (without converting to single-entry accounting) in order to demonstrate the environmental impact of particular corporate activities and to provide monetary authorities with the socio-ecological indicators for effective climate change remediation.

Keywords::

• accounting
• climate change
• monetary policy
• norms
• rules

JEL classifications::

• Q56
• E42
• E52
• B52

Notes

¹ There has been a concerted research effort by the scientific community to learn the details of climate change and global warming due to GHG emissions and the consequences thereof. In addition, the scientific community has pursued a massive effort to explain its findings to the general public and policymakers. These efforts have been effective. According to analysis conducted at Stanford University, and reported in Scientific American, the majority of the public in the US states that are both blue and red politically have arrived at the following conclusions: (1) “the world's temperature has been going up” (over 75% in all states); (2) “past global warming has been caused by humans” (over 60% in all states); and (3) “the U.S. government should limit greenhouse gas emissions from U.S. businesses” (over 60% in all states) (Fischetti, 2014, p. 92).Many of the scientific studies have been broad based with an emphasis on global systems and impacts. A major study by the National Aeronautics and Space Administration (NASA) Goddard Institute for Space Studies found, as reported by the study's director Dr James Hansen to the US Senate, that:

Number one, the earth is warmer in 1988 than at any time in the history of instrumental measurements. Number two, the global warming is now large enough that we can ascribe with a high degree of confidence a cause and effect relationship to the greenhouse effect. And number three, our computer climate simulations indicate that the greenhouse effect is already large enough to begin to affect the probability of extreme events such as summer heat waves. (US Senate Committee on Energy and Natural Resources, 1988)

From the time of the NASA study to 2008, “carbon dioxide emissions have been as much as were emitted in the prior 236 years” (Boden, Marland, & Andres, 2011, p. 1).The Intergovernmental Panel on Climate Change (IPCC), which was formed in 1988 by the World Meteorological Organization and United Nations Environment Programme, has completed a number of major studies. Conclusions reached include

(1) Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level (IPCC, 2007a, p. 5)

(2) At continental, regional and ocean basin scales, numerous long-term changes in climate have been observed. These include changes in arctic temperatures and ice, widespread changes in precipitation amounts, ocean salinity, wind patterns and aspects of extreme weather including droughts, heavy precipitation, heat waves, and the intensity of tropical cyclones (IPCC 2007a, p. 7)

(3) Warming of the climate system has been detected in changes of surface and atmospheric temperatures in the upper several hundred meters of the ocean, and in contributions to sea level rise. Attribution studies have established anthropogenic contributions to all of these changes (IPCC 2007a, p. 10)

(4) Global GHG emissions due to human activities have grown since pre-industrial times, with an increase of 70% between 1970 and 2004 (IPCC, 2007b, p. 36)

(5) Impacts from recent climate-related extremes, such as heat waves, droughts, floods, cyclones, and wildfires, reveal significant vulnerability and exposure of some ecosystems and many human systems to current climate variability (very high confidence). Impacts of such climate-related extremes include alteration of ecosystems, disruption of food production and water supply, damage to infrastructure and settlements, morbidity and mortality, and consequences for mental health and human well-being. For countries at all levels of development, these impacts are consistent with a significant lack of preparedness for current climate variability in some sectors (IPCC, 2014, p. 6).

As the adverse consequences of climate change have intensified and as more disastrous scientific predictions for the future continue to be made, many local, state, and regional studies, along with studies with special concerns, have been completed. A summary of the diverse array of reports, journal articles, and books reviewed by this author that have been published in the past 20 years regarding global warming and climate change forecast that the social, ecological, economic, and military consequences are going to be very severe unless action is taken on several fronts.

² The approach here with regard to rules is in general disagreement with that of new institutional economics with regard to rules.

³ “Given the importance of normative criteria, one should not conclude that institutions are guided only by legitimate normative criteria that are consistent with what society believes to be appropriate—the community standards, so to speak. That is not the real-world case. Many criteria, rules, regulations, requirements, and attitudes that guide institutional and organizational operations are variant criteria, rules, regulations, and requirements. Although variations from normative ones, they are enforced to guide the working of institutional processes. They deviate from legitimate community standards, but are enforced in relevant societal settings. Some are not considered moral, but are legal. Some may be common practice without being stated in legal codes or court orders. Examples are practices of corporations when corporate campaign funds and lobbyists are used to establish variant laws and court decisions through legislative actions and court cases. Or they may be cases in which variant criteria are not legal, for example, the illegal abuse of workers in a factory setting” (Hayden, 2011, p. 1215).

⁴ Accounting textbooks often state that double-entry accounting is natural and logical. It is neither. It did not come from nature or natural law. It did not come from deductive, inductive, or deontic logic. It evolved as a set of normative criteria, and it can continue to evolve as norms change.