What Is Environmental Cost Management?

by Matt Petryni; Updated September 26, 2017
Smokestack pollution is often the most obvious example of an externalized environmental cost.

Many businesses are looking for ways to manage their environmental costs--or, in other words, to reduce their impact on the environment. One of the ways to do this is to develop a method to account for environmental costs. Because environmental costs are often carried out over the long term, it can be difficult to calculate their present value. Also, the impacts of pollution aren't always known, as the scientific understanding of ecology is continuing to change and expand.

Carbon Emissions

Climate change is one of the most significant environmental costs of business.

Carbon emissions are one of the most significant environmental costs of business operations. Until recently, carbon emissions were not regulated under the Clean Air Act, and so businesses had little incentive to account for, let alone reduce, these emissions. In recent years, however, both customers and businesses have become concerned about their carbon emissions and have begun to develop methods for cutting them. While the monetary costs of climate change are very much speculative, the easiest way to account for carbon impacts is to calculate a carbon footprint. Businesses can purchase offsets of carbon emissions to manage this environmental cost or, even better, they can reduce it through energy efficiency and supply decisions. Some companies are beginning to report environmental costs to shareholders, consumers and regulators to ensure compliance with environmental laws and track progress on their environmental commitments.

Compliance Efficiency

One aspect of environmental cost management is the reduction of costs associated with regulatory compliance. By integrating environmental cost accounting and management into a business plan, companies can more easily meet the needs of environmental regulators. Because environmental cost management is planned for initially, rather than later, companies can also avoid the introduction of risk into their business strategy by future regulation of environmental costs. This makes their operation more resilient to long-term regulatory trends while helping to reduce the environmental costs they incur over time.

Energy Efficiency

Many businesses install renewable energy generators to manage their environmental costs.

Energy efficiency is among the most important elements of environmental cost management. Because carbon emissions are a significant environmental cost created by businesses, efforts to diversify their energy portfolio or practice conservation can be effective strategies to managing their long-term environmental impact. This can be done in a number of ways, including the installation of on-site renewable energy technology or the adherence to green architectural principles in facilities expansion and construction. The individual plan developed by a business should take into account their business strategy and recognize the constraints of the changing energy market.

Cradle-to-Grave Cost Assessment

Understanding how a product creates costs at its manufacture, use and disposal can provide more information about environmental costs.

Environmental cost management typically requires the accounting of all of the environmental costs created by a product, both in its manufacture and distribution as well as its use and disposal. Obviously, life-cycle assessment will not be appropriate for all business models. Increasingly, however, industrial businesses are especially being required to account for their environmental costs well beyond the point-of-sale by government regulation. Additionally, businesses who offer recycling of their products can generate a more accurate assessment of the potential waste created when their product is disposed and can develop strategies for managing these costs in product design and materials.

Monetary Environmental Management Accounting

Monetary environmental management is a method of converting environmental costs into dollar amounts.

While many companies account for environmental costs with physical metrics--for example, the tonnage of annual carbon emissions or solid waste--others prefer to account for environmental costs with a dollar amount. One method of doing this is to consider the cost of offsetting or sequestering all existing pollution. Sequestration is essentially the negation of waste: for example, with carbon emissions, sequestration might mean the storage of the emissions in a liquid form such that they is not released into the atmosphere. Similarly, solid wastes might be accounted for by calculating the cost of turning them back into raw materials or usable resources. In most cases, these costs are exorbitant, but calculating them allows companies to set goals for their reduction at the beginning of the input process through energy and resource efficiency or by eliminating or redesigning products that necessarily create waste.

About the Author

Matt Petryni has been writing since 2007. He was the environmental issues columnist at the "Oregon Daily Emerald" and has experience in environmental and land-use planning. Petryni holds a Bachelor of Science of planning, public policy and management from the University of Oregon.

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