How Traditional Cost Accounting Methods Resolve Carbon Footprint Issues

Written by Moritz Bühner   // November 26, 2011    1 Comment

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Life cycle assessment (LCA), in simplified definition, is a task that uncovers all environmental effects a process or a product creates. It is a difficult task and one that is complex. Why is it so complex? Mainly, because the environment can be harmed in multiple ways and because emissions can have multiple levels of impact. A usual life cycle analysis focuses on six different goals or six ways in which the environment needs to be protected. To mention the most important ones: there is the greenhouse effect, the ozone hole, eutrophication, noise emission, human toxicity and eco toxicity. Including all six of these concerns in a single analysis takes a lot of expertise and requires sophisticated LCA tools. The complexity of LCA, however, can be drastically reduced by limiting the analysis to one single environmental effect. That is exactly what carbon and water footprints allow: a reduced LCA that exclusively assesses one type of emission, or one type of in- and output.

By reducing the complexity of LCAs to one level of impact, you take life cycle thinking one step toward practical relevance. This is the reason why full LCAs seem to remain prominent in the academic sector, whereas carbon footprints have clearly entered into wide-spread use in business.

Life Cycle Thinking for Practitioners: Single Score Footprinting

Results for carbon footprints, be it for organizations, processes or products, comprise one figure. One figure, one single score, can be compared to others. As long as you follow a uniform methodology, e.g. ISO 14067 for carbon footprinting, this single score is very significant. Product carbon footprints which show the carbon footprint figure for one functional entity, hence one product, have a huge potential for customers to compare products and choose the least polluting.

Comparable results are satisfying, but not the only advantage of “single score footprinting”. Mario Schmidt, guest editor of the October, 2011 issue of “Chemie Ingenieur Technik” (related article in “Chemical Engineering & Technology” April, 2010 issue on material and energy flow analysis), showed how easily conventional cost accounting methods transfer to footprinting analysis. Because his article is in German, and because it is so interesting, I am allowing myself to summarize and illustrate his thoughts here.

Carbon Footprint: Accumulates All Greenhouse Gas Emissions

In a complex production system, the production process consists of many sub-processes. Every sub-process “inherits” carbon emissions from its predecessor, and generates further direct emissions on top. The final product, which results from all the steps of the production process, possesses their accumulated GHG emissions.

Greenhouse gas emissions, when visualized, usually follow an arrow pointing up into the air, since this is how carbon dioxide is imagined to enter the atmosphere. The following sankey diagram, however, shows us a view of emissions going the other way: carbon-equivalent emissions point downwards, into the process. The logic behind this visualization is clear: emissions are cumulative. Remember? Accumulated GHG emissions.

Process structure and emission calculation including the upstream chain. e-Sankey diagram taken from Chemie Ingenieur Technik 10/2011, pp. 1541–1552

But how can you assign a certain level of emissions to the following production stream where there are two or more interrelated processes and/or benefits? This question arises from what business economists call joint products, and correct allocation is needed. To give you an example from Schmidt’s article:

A sub-process generates a product (good) and waste (bad). What happens if you can sell the waste as a raw material instead? In this case, the same sub-process generates a product (good) and another product (also good). In the following illustration, this is shown as process B. Processes B and C don’t necessarily need to happen in the same company. The difficulty is determining how much of the process emissions need to be assigned to one and how much to the other product.

Allocation problem because of various benefits and recycling of material. Diagram by Moritz Bühner.

Emission x Factor = Material x Unit Cost

There are two ways in which traditional accounting would solve this problem. Why traditional accounting? Because the ecological footprinting perspective is very similar to the financial accounting one. Really? Yes, just change the units: in footprinting, you have

[weight of GHG emission] x [emission factor]

whereas with cost accounting you have

[amount of material] x [unit costs]

OK, but what is it good for? The accounting methods are well developed and tested and allocation of overhead expense, for example, is extremely useful regarding product carbon footprints, and easily feasible, too.

Allocation: by Amount or by Market Price?

Back to resolving the allocation problem. One of the two methods looks at product amount, in weight or in pieces. You can find this approach in ISO 14040 on environmental management. The other approach allocates costs (in accounting) or emissions (in footprinting) by market prices. The latter can be found in PAS 2050, the British standard on carbon footprinting. So, if a process results in 9 kg of product A, worth $3 and 1 kg of product B, worth $7 our first approach would allocate 90% of the emissions to product A, whereas only 30% of the emissions would be allocated to it using the market price approach. Got it?

I hope to have given you some insight into the possibilities of cost accounting in carbon footprinting. Special thanks go to Prof. Mario Schmidt, whose article in German formed the basis for this blog article. For his complete article, see Von der Material- und Energieflussanalyse zum Carbon Footprint – Anleihen aus der Kostenrechnung.

Article image by Keith Williamson.


About Moritz Bühner :

Job: Freelance blogger, attitude: green, reason: by conviction. Bachelor in Environmental and Bioresource Management at the University of Applied Life Sciences Vienna. Born in Hamburg, Germany, lived in Quebec (CAN), Vienna (AUT) and Pamplona (ESP). Why he blogs? "The possibility of going into detail with every link, satisfying the desire to learn. The direct feedback. The free global distribution. I just love the medium!"

Tags:

carbon assessment

carbon footprint

co2-equivalent

cost accounting

e-sankey

greenhouse gas emissions

innovation

LCA

methodology



1 COMMENT

  1. By Moritz Buehner, May 6, 2012

    I just found a 92-page “guidance document” on Environmental Management Accounting, by the International Federation of Accountants. Published in 2005, it still provides lots of useful information, especially chapters 3-5:

    Chapter 3 – Physical Information: Flow of Energy, Water, Materials and Wastes
    Chapter 4 – Monetary Information: Environment-Related Costs and Earnings
    Chapter 5 – Selected Examples of EMA Applications for Internal Management

    http://www.kwt.or.at/en/PortalData/2/Resources/downloads/umwelt/IFAC_Guidance_document.pdf

    Reply

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