Valuing external costs – from theory to practice: implications for full cost environmental accounting

Abstract

This article presents an experiment in full cost accounting applied to the case of an industrial process. It aims at exploring the difficulties of putting full cost accounting into practice. Its specific contribution to the growing body of experiments in full cost accounting is that it attempts to compare exactly what impacts can be translated into financial information with the impacts that are being left out. Amongst other things, we provide a quantitative figure of what is monetized in the experiment, expressed as a percentage of what should be monetized if all negative external effects were to be taken into account. The experiment uses three different external cost evaluation methods. The most comprehensive method monetizes less than 10% of the flows of the industrial process studied. According to the method used and the assumptions made, external costs vary by a factor of more than 1 to 12,000 per unit of product. The paper then discusses what can be learnt by comparing the range of results obtained with each method and suggests directions for future research.

Acknowledgements

This research has been made possible through joint funding by the Agence De l'Environnement et de la Maîtrise de l'Energie (ADEME) and the Bio-Intelligence Service Company, a private scientific expertise agency.

The author would like to thank Professor Cheryl McWater, University of Alberta, as well as two anonymous reviewers for their helpful comments on this paper.

Notes

Time will tell if existing attempts will meet with more success. For a review and a discussion of twenty-five years of social and environmental accounting models see Mathews (1997).

Subsidiary of British Energy. See Nuclear Electrics environmental reports for years 1994–95 and 1995–96 and those of British Energy for the following years. See also: British Energy, Changing the climate of opinion: raising the profile of nuclear energy in the sustainable debate, British Nuclear Industry Forum, MP’s Symposium, Royal Academy of Engineers, 6 July 1999.

See also http://www.wessexwater.co.uk/strikingthebalance/green_accounts.html

See also Manaaki Menua/Landcare Research (2000) as well as Bebbington and Gray (2001).

See also Forum for the Future (2000) and Howes (2000).

See also Centre for Waste Reduction Technologies (1999).

For example, if pollution from a power station were to contribute to health problems the market system would register those external costs (in the cost of healthcare) but the costs would be separated from the origin of the impact (in time and space).

In Costanza et al. (1997), the authors present the evaluation of seventeen ecosystem services for sixteen biomes, based on existing studies and on a few own calculations. The total value of services provided by ecosystems ranges between 16,000 and 54,000 billion US dollars with a median value at 33,000 billion US dollars. By comparison, and according to UN statistics, world GDP is of 18,000 billion US dollars.

The ExternE project regroups a vast body of research studies financed by the European Commission. This project tackles the monetary evaluation of environmental damages caused by electricity production. Its purpose is to help calculate rates for an environmental tax in the energy production sector.

For more information, refer to the extensive Internet site covering European projects for the calculation of external costs linked to electricity production and transport, funded by the European Commission (ExternE): http://externe.jrc.es. Refer also to the many publications relating to these projects, including European Commission (1995).

Derived from ideology, common sense or truisms in the case of nomological experiments. Derived from a theory in the case of analytical experiments.

Meaning flows specific to the site where the industrial process being studied took place.

Flows included in the system, as they are linked to the industrial process, but not located at the same site. An example could be flows generated by the production of raw materials or electricity required for the operation of the industrial process being studied.

OECD (1993) Les coûts de la réduction des émissions de carbone, résultats tirés de modèles mondiaux (Paris: OECD).

BSO/Origin, annual reports, 1992–95.

State of New York PSC Case 88-E-241, Order issuing final environmental impact statement and adopting staff response to agency comments. Issued and effective 24 March 1989.

Local conditions (climate, geography etc.) have an effect on the dispersion of some pollutants in the different natural environments (air, water etc.). As far as indirect flows are concerned no information is available on the site of emission.

For a presentation, in an accounting journal, of what dose response functions are about see Milne (1992).

For a review of studies corroborating the relationship between atmospheric emissions and the impacts mentioned in Table 2, as well as for a precise definition of these impacts, we refer the reader to item 13 shown in Figure 1, pp. 61–156.

The way these figures were obtained and the research from which they originate is presented in item 13, in Figure 1, pp. 419–460 and 507–518.

For greenhouse gases it is assumed that local conditions do not influence the estimate of damages. For that reason, both direct and indirect flows are taken into account.

At the time this work was carried out (end 1996) it was the most up-to-date data available.

For more information see items 15 to 18 in Figure 1.

… and accounted for in the life cycle inventory.

This in itself is already a brave assumption.