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ENVIRONMENTAL COST ACCOUNTING
FOR CHEMICAL & OIL COMPANIES :
A BENCHMARKING STUDY
A Project of Institute for Corporate Environmental Management at the University of Houston
in Partnership with the Business Council for Sustainable Development - Gulf of Mexico
Authors:
David Shields, University of Houston, College of Business
Administration(CBA) and American Graduate School of
International Management (Thunderbird)
Beth Beloff, Director, CBA Institute for Corporate Environmental
Management(ICEM), University Of Houston
Miriam Heller, University of Houston, Cullen College of Engineering
Dept. of Industrial Engineering
Internet Address (URL) http://vvww.epa.gov
Recycled/Recyclable Printed with Vegetable Oil Based Inks on Recycled Paper (20% Postconsumer)
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Table of Contents
Topic
Page
List of Figures and Tables
Purpose of Report
Acknowledgments
Executive Summary
Summary of Key Findings
Project Background
Benchmarking Process
Environmental Accounting System Development
Framework
Attitude Toward Environmental Stewardship
Environmental Cost Accounting System Development
Environmental Costs
Use of Environmental Cost Accounting in Managerial
Decision Making
Appendix A: Partner Company Profiles and
Case study Summaries
Appendix B: Questionnaire
Appendix C: Definitions of Factors
2
3
4
5
10
12
14
17
18
22
29
33
38
44
54
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List of Figures and Tables
Name
Page
Table A: Ranking of Factors and Issues
Table B: Cost Sheet for Product A*
16
28
Table C: Comparative Environmental Costs 31
Figure 1: Environmental Cost Accounting Cooperative BenchmarkingsM Process 14
Figure 2: Conceptual Level Framework for Environmental Cost Accounting 17
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Purpose of This Report
This report summarizes an Environmental Cost Accounting Benchmarking Study of five
major U.S. and Mexican companies currently involved in developing environmental accounting
systems. The purpose of the benchmarking study, which was conducted from June 1995 through
June 1996, was to compare environmental accounting approaches in oil and chemical companies
whose activities have significant environmental impact.
This project was jointly facilitated by the Institute for Corporate Environmental
Management of the University of Houston ("ICEM"), and by Pilko & Associates ("Pilko").
We would particularly like to thank the five participating companies for their exhaustive
contributions to the study. Due to confidentiality agreements, two of the five companies are
referred to using fictitious names, denoted by an asterisk (*) below:
Celanese Mexicana
Ciba-Geigy
Grupo Primex
International Refineries*
Specialty Refiners*
The purpose of the study was not to identify a single best system for environmental cost
accounting, since requirements of such systems vary with industry, location, corporate culture,
and many other aspects of a company. Rather, the purpose was to allow the Partners to discuss
the form and functions of the environmental cost accounting systems they are developing or
using, as well as to discuss uses for the cost information yielded by such systems. This report
summarizes the information shared in the Benchmarking.
For more information about basic Environmental Accounting concepts or EPA's
Environmental Accounting Project, contact the Pollution Prevention Information Clearinghouse
at 202 260-1023 to have an information packet sent to you, or visit the Environmental
Accounting Project website at http:\\www.epa.gov.opptintr/acctg/
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Acknowledgments
We gratefully acknowledge the agencies and organizations who provided support for this
research: Business Council for Sustainable Development-Gulf of Mexico (BCSD-GM) for which
funding was provided through the U. S. Environmental Protection Agency's (EPA)
Environmental Accounting Project in an ORD social science research grant, National Science
Foundation (Grant # ni-9319795), Texas Hazardous Waste Research Center (Inter-Agency
Contract # LUB-IAC-7UHH), Gulf Coast Hazardous Substance Research Center - Lamar
University (Contract # LUB-IAC-8UHH), Management Institute for Environment & Business
(MEB) and the University of Houston. Additionally, the participating companies covered out-of-
pocket expenses for the work effort.
We wish to thank Holly Elwood of the EPA Environmental Accounting Project, Jim Cole
and the ORD staff at EPA for their help in making this project possible and for spending much
editorial time.
This document has been refined considerably with the kind assistance of the following
reviewers:
(1) Earl Beaver, Ph.D., Director of Waste Management, Monsanto Company, St. Louis,
Missouri.
(2) Stephan Barg, Director, International Institute for Sustainable Development, Canada.
(3) Daryl Ditz, Ph.D., Associate, Technology and Environment Program, World Resources
Institute, Washington, DC.
(4) Carl Henn, President, Senior Vice President, Concord Energy, Inc., New Brunswick, New
Jersey.
(5)-Naomi Soderstrom, Ph.D., Associate Professor of Business & Administration, University of
Colorado, Denver.
(6) Chris Stinson, Ph.D., Assistant Professor of Accounting, University of Texas, Austin.
Particular thanks go to the participants from industry, who provided the grist for this
study, and for the assistance of Trish Gillespie, Carmel Adelberg, Rodolfo Lopez, Kavan Mehta
and Vaishali Patil at the Institute for Corporate Environmental Management, who labored many
long hours on this project.
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Executive Summary
Over the past twenty years, responsible environmental management has become an
important focus of companies throughout the world. During this period, many environmental
regulations have been enacted, requiring management to consider the environmental implications
of virtually every decision facing their companies. Governmental mandates for environmentally
responsible behavior have been enacted in virtually all countries.
Recently, there has been a shift in environmental regulation from the "command and
control" approach to environmental regulation to market driven forms, in which pollution
prevention alternatives are replacing mandated end-of-pipe technologies. This movement is
driven by the realization that it can be more efficient (and cost effective) to avoid pollution than
it is to clean it up.
Determining the appropriate pollution prevention approach often leads to additional
decisions that must be made by management. These decisions include selecting among proposed
capital expenditures, and making better pricing and product mix decisions by uncovering the real
costs (including environmental costs) of various products and processes. As markets for
emissions' allowances develop, companies will want to determine whether it is more cost-
beneficial to buy or sell these allowances, given the costs of avoiding the covered emissions.
Finally, estimates of subsequent cleanup liability can change the relative attractiveness of
acquiring or disposing of a facility.
These decisions require information about costs and benefits that have often not
previously been collected. Environmental cost accounting information is useful in improving a
number of business decisions. This document describes the process and results of a
benchmarking effort conducted to define current practices in environmental cost accounting and
future needs.
Project Background
In 1994, as part of on-going environmental accounting research, a benchmarking project
was initiated at the Institute for Corporate Environmental Management (ICEM), University of
Houston, to examine current practices in environmental accounting in industry. The team
assembled included Miriam Heller from Industrial Engineering, David Shields from
Accountancy and Taxation in the College of Business, and Beth Beloff from ICEM. The team
chose the methodology described as Cooperative Benchmarking to develop this information.
This methodology was created by Pilko & Associates to bring participating companies (Partners)
together in small groups to discuss environmental issues/ problem areas and generate new ideas
for improving environmental management practices.
At the same time, member companies of the Business Council for Sustainable
Development - Gulf of Mexico (BCSD-GM) were developing projects to demonstrate the
business opportunities arising from incorporating sustainable development concepts into business
decisions. The development of a tool to assist in identifying economic opportunities in reduction
of environmental impacts was of great appeal to the BCSD-GM. As a result, member companies
from both the U.S. and Mexico were encouraged to participate in the benchmarking effort, and
BCSD-GM became a valuable partner in the project. Two non-BCSD members also joined to
form a group of five companies from the chemical and refining industries that participated in the
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study. The companies were Celanese Mexicana, Ciba-Geigy, Grapo Primex, "International
Refineries," and "Specialty Refiners."
The environmental cost accounting Cooperative Benchmarking process can be
characterized by the following steps:
Determination of Factors and Issues of most interest to the participating companies.
Conversion of Factors and Issues into an in-depth questionnaire.
Formation of cross-functional teams within companies to complete the questionnaires and
prepare case studies highlighting specific applications of environmental accounting to
corporate decisions.
Implementation of two in-depth multi-day benchmarking sessions in which companies
presented information developed for the questionnaire and case studies to the group.
Facilitation of group discussions around issues presented and lessons learned.
Distribution to participating of confidential reports summarizing results and review.
Generation of the sanitized version of report to sponsoring organizations.
What are Environmental Costs?
Due to the importance of accurate cost information in making the decisions sketched out
above, the term "environmental cost" has been introduced into the vocabulary of environmental
managers. Environmental cost has been defined in various ways. During the benchmarking
sessions, the term was often used to refer to costs incurred in order to comply with regulatory
standards, costs which have been incurred in order to reduce or eliminate releases of hazardous
substances, all other costs associated with corporate practices aimed at reducing environmental
impacts, and costs associated with not addressing these issues. (More uses of the term can be
found in the Environmental Protection Agency's Introduction to Environmental Accounting As A
Business Management Tool: Key Concepts and Terms'.) Six observations emerge from the
definition provided here:
1. Environmental costs are really a subset of the costs of operating a business. Formerly,
when substances were released into the air, water or land, the resulting pollution would be
considered a social cost, an externality. Regulation has resulted in internalization of some of
these environmental externalities, through, for example, requirement of additional investment in
equipment or training, or for fines and fees resulting from noncompliance.
2. As environmental externalities become internalized, new costs emerge. These new
costs must be captured by the cost accounting system, so that product costs remain accurate
enough to facilitate sound decision making. For example, how should the cost of improved
waste treatment (wastewater plants, incinerators, etc.) be reflected in the costs of the products
responsible for waste generation?
3. The magnitudes of environmental costs are greatly underestimated, and their impact on
product or process costs is often obscured through inaccurate overhead accounting.
Environmental costs are often hidden in overhead and underestimated. For instance, in another
1 Environmental Protection Agency 742-R-95-001, June 1995, 39 pages.
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effort, the Amoco Yorktown Refinery case study documented in "Green Ledgers: Case Studies
in Corporate Environmental Accounting," a large sample of employees estimated environmental
costs to be 3% of non-crude operating expenses. After further investigation, those costs were
found to be at least 22% of non-crude operating costs2.
4. Environmental cost information, like all cost information, is useful only when there are
decisions that are facilitated by knowing that information. Among the decisions that can be
facilitated by environmental cost information is product costing. Product costing accuracy is not
improved by defining costs already accurately assigned to products by the cost accounting
system, regardless of whether they are called environmental. That is, the label "environmental"
does not improve cost accuracy in this case but it may enable cost reduction of the product.
5. Many superior environmental projects are often not identified as environmental
because they convey operating benefits as well (i.e., pollution prevention projects which increase
yield). Sometimes, the best environmental projects are not identified as environmental at all.
Conversely, end-of-pipe treatments are classified as environmental and are often given high
priority by management, but may not represent the best solution to the problem. Thus, proactive
environmental management often leads to higher "nonenvironmental" costs and lower
environmental costs.
6. Despite the existence of fledgling environmental cost accounting systems, participating
companies relied on techniques such as Life Cycle Assessment and materials balancing, which
do not require financial data. They claim that, in many cases, environmental cost information is
less useful than non-financial, real-time measures of performance. Participating companies had
difficulty providing environmental cost data relating to various types of environmental activities.
Attitude Toward Environmental Stewardship
As is true with the development of any management initiative, the development of
environmental cost accounting systems is dependent on the corporate culture, or attitudes, in
place. Given favorable attitudes among top management, an internal champion, adequate
funding, and follow-through that includes integration of the tool into everyday decision-making,
the development of such a system is likely to succeed. Without such support, the system will not
have an impact.
The degree of success experienced by the participant companies in establishing and using
environmental accounting systems reflects this. Some participating companies appear to value
environmental considerations as one of the primary keys to company success. Other companies
supported voluntary environmental initiatives less enthusiastically. However, their agreement to
participate in this study indicates a strong interest in responsible environmental management.
In the companies with cultures supporting high integration of environmental functions
into the business processes, it was considered less important to differentiate between
environmental and nonenvironmental costs, and emphasis was placed on allocating all costs to
2 Ditz, D., Ranganathan, J., and Banks, D.(ed.). (1995). Green Ledgers: Case Studies in Corporate Environmental
Accounting. World Resources Institute, Washington, DC.
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product and processes. In those companies less well integrated, there were more reasons found
to identify environmental costs separately from other costs.
Environmental Cost Accounting Systems
A supportive corporate culture forms the foundation for developing a successful
environmental cost accounting system. Participating companies point to varying degrees of
success:
International Refineries is addressing environmental cost accounting by identifying
environmental costs through a coding system. Similarly, Ciba-Geigy describes the development
of an environmental cost accounting system based on detailed overhead accounting; one which
also incorporates standard cost variance analysis. This system will be useful in allocating
environmental costs to the products and processes that cause them, and isolating nonstandard
cost performance where it occurs.
Both International Refineries arid Grupo Primex are approaching environmental costs by
retrofitting to their existing accounting systems. International Refineries and Ciba-Geigy
generate environmental cost data as part of the General Ledger systems. Grupo Primex and
Specialty Refiners utilize free standing systems that access, but are not directly integrated with,
other systems.
The categories defined for accumulating environmental costs may directly affect how
environmental cost information is and can be used within an organization. Each company's
"cuts" at the problem was a little different. For example:
International Refineries' system tracks and defines all HSE related expenditure by
category, media and line of business, yet has difficulty tracking environmental costs by
location or sub-unit.
International Refineries' focus on expense elements is consistent with their primary use
of the system as an aid to capital budgeting for environmental projects
International Refineries, Grupo Primex and Specialty Refiners have a strong focus on the
environmental cost of a product. Accumulated costs in high level categories generally
limited the degree to which such costs could be used for "what if analyses.
Ciba-Geigy accounts for environmental costs by product or as part of capital projects.
These distributed environmental costs are difficult to accumulate by other categories.
No company was developing activity-based environmental accounting systems. Thus,
there was no direct attempt to identify the relationship between managerial decisions and the
costs of those decisions. At best, the focus was on improving how costs associated with
environmental processes are allocated to product. In many cases, this entailed installing better
measurement capability to improve cost allocation. For example, Ciba-Geigy has implemented a
transfer pricing mechanism to provide appropriate internal economic signals.
No environmental cost system tracked intangible or less tangible costs. Specialty Refiners
reported that historical liability was considered in their system but no details were given. Ciba-
Geigy and International Refineries track remediation and liability costs using another system.
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Some companies found value in defining synthetic performance measures over aggregate
information: ecological management ratios (Grupo Primex) and cost per pound of waste
(International Refineries). Ciba-Geigy believes that environmental costs cannot adequately
indicate performance and that other methods, such as materials balancing and Life-Cycle
Assessment is necessary complementary tools for environmental cost management.
Use of Environmental Cost Accounting in Managerial Decision Making.
A number of difficulties may hamper efforts to incorporate environmental cost
accounting information into business decision making. For example, end-of-pipe projects are
more easily identified as environmental than are pollution prevention projects. By prioritizing
environmental projects which are required for compliance (which is done by all of the
participating companies), there may be a bias toward acceptance of end-of-pipe projects at the
expense of superior, pollution prevention projects. Indeed, the structure of environmental cost
accounting information will have a profound effect on the decisions. Conversely, the corporate
culture will directly affect decisions regarding the kind of environmental cost accounting
information to be gathered.
All companies differentiated between environmental capital expenditures and
environmental operating and maintenance costs. They reported systematic methods for
evaluating capital expenditures for budgetary approval. Environmental operating and
maintenance costs are tracked in most cases. However, these costs are not singled out for special
management. They are used in the same way as nonenvironmental costs, to identify problem
areas in cost performance (identification of significant deviations from budget), or to
demonstrate the cost impact of process improvements.
A major issue identified by participants relates to circumstances in which environmental
cost accounting information is more useful to managers than real-time nonfinancial information,
such as waste stream metering and yield rates. In general, the participants felt that nonfinancial
measures were superior to financial information for day-to-day management, but that financial
information more effectively justified the need for intervention to top management.
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Project Background
In the 1990's, the traditional command-and-control approach has given way to a more
market-driven regulatory strategy. Today, businesses are encouraged to select technologies and
methods to best meet environmental performance standards, taking cost-benefit relationships into
account. Yet, the market-driven approach can only be successful if companies understand their
cost structures, including environmental costs, and the economic benefits that arise from
improved environmental performance. For assistance, environmental managers are seeking
decision support tools to characterize the cost and benefit relationship of environmental
activities. They need tools to bridge the communication gaps between environmental, financial
and operations managers around these issues. Reliable environmental cost information and
accounting models for allocating environmental costs to specific activities, processes, and
products are essential for the market-driven approach, as well as for the broader integration of
environment into the business, to succeed.
Over the last three years, the Institute for Corporate Environmental Management (ICEM)
at the University of Houston, in response to requests from business, has been coordinating the
development of an environmental accounting framework. This research has been directed by an
interdisciplinary environmental accounting team, through grants from the University of Houston,
National Science Foundation, Gulf Coast Hazardous Substance Research Center, US
Environmental Protection Agency, and Management Institute for Environment and Business.
A major step toward building a foundation for a corporate system to account for
environmental costs are to understand current practices of leading companies in similar
industries. The ICEM team chose the methodology described as Cooperative BenchmarkingSM
to develop this information. This methodology was created by Pilko & Associates to bring
participating companies (Partners) together in small groups to discuss environmental issues /
problem areas and generate new ideas for improving environmental management. Cooperative
Benchmarking^, is an attempt to produce results far exceeding those realized from traditional
benchmarking methods. The benchmarking sessions are rigorous, with each session lasting two
to three days.
In 1994, ICEM and Pilko & Associates initiated the Environmental Accounting
Benchmarking Project to develop an understanding of environmental cost accounting through a
benchmarking study of corporate practices. The project had the following objectives:
To collect information on what companies in the chemical and refining industries are
doing in accounting for environmental costs and how environmental accounting can
provide decision makers with the information they need.
To develop case studies from each participating company on how they are grappling
with the issues of environmental management and cost accounting for environmental
activities.
To establish baseline environmental cost information as identified by all participating
companies.
To develop a framework for understanding the nature and uses of environmental
accounting.
12
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At the same time, member companies of the Business Council for Sustainable
Development - Gulf of Mexico (BCSD-GM) were developing projects to demonstrate the
business opportunities inherent in incorporating sustainable development approaches in business
decisions. BCSD-GM recognizes the value of developing a tool to assist in identifying economic
opportunities in reduction of environmental impacts. The BCSD-GM encouraged its U.S. and
Mexican companies to participate in the environmental cost accounting benchmarking project. In
addition, several companies outside of the BCSD membership were approached.
The Environmental Accounting Benchmarking Project was formed with the assistance of
grants from various sources previously mentioned and a commitment from the companies to
cover direct project expenses. The companies agreed to the participation of two corporate
individuals representing three skill sets: environmental, operations and finance. David Shields
from the University of Houston (ICEM) and Eric Dietert from Pilko agreed to co-facilitate the
benchmarking sessions. Research assistants from the MBA, Industrial Engineering, and
Chemical Engineering programs at the University of Houston were brought into the project.
Confidentiality agreements were signed by the benchmarking team.
Company profiles and examples of each company's usage of environmental accounting
can be found in Appendix A.
13
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The Benchmarking Process
The benchmarking process has been organized into four parts: Defining Project
Objectives from Factors and Issues, Data Collection through Questionnaires, Benchmarking
Sessions, and Synthesis. The following diagram captures the flow of activities characterizing the
entire effort3:
Environmental Cost Accounting
Cooperative Benchmarking SM Process
Participating
Companies Agree
to Benchmarking
Preliminary
Factors and
Issues are
Drafted
Final Report
Findings
Synthesized and
Draft Report
Prepared
Benchmarking
Sessions:
May 16,17
June 26-28
Questionnaire
Developed
Participating
Companies
Comment
Companies
Complete
Questionnaires
and Prepare
Case Studies
Completed
Questionnaires
and Case Studies
Distributed
Benchmarking
Sessions
Scheduled
Figure 1: Environmental Cost Accounting Cooperative Benchmarking^ Process
Defining Project Objectives through Factors and Issues: In an effort to organize the project
around environmental accounting factors and issues of greatest interest to the Partners, a list of
eighteen factors was prepared. Definitions were discussed and Partners ranked the factors by
greatest to least interest. This formed the basis for the organization of the Data Collection phase
of the project. (Table A, Ranking of Factors and Issues)
Partners were most interested in 1) understanding how to monitor for environmental
costs; 2) developing systems for cost accounting; 3) automating environmental accounting
information systems; 4) and learning about methods to allocate environmental costs to product
and process. They chose to emphasize the decision support aspects of the accounting
developments: managerial control, budgeting, etc. Of least interest to participants were the
impacts of North American Free Trade Agreement (NAFTA) on costs, and life cycle costing.
The underlying structure for the project (as depicted in Figure 2) became clearer during
the discussions regarding factors and issues. It became apparent that corporate attitudes toward
responsible environmental performance (corporate culture) were the primary factor in
Cooperative Benchmarking^ is a service mark ofPilko & Associates, Inc.
14
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determining the implementation and use of environmental cost accounting systems in decision
making.
Data Collection: On the basis of the Factors and Issues work (refer to Table A), the ICEM/
Pilko team developed a Questionnaire to assist Partners in generating information about their
operations and environmental cost structures. (See Appendix B) The information gleaned from
the questionnaires was used to generate case studies which were presented to the other Partners
during the benchmarking sessions.
The questionnaire was divided into five parts:
Company Overview
Attitude toward Environmental Stewardship/ Corporate Culture
Environmental Cost Accounting Systems
Environmental Costs & Non-Financial Performance Measures
Cost Inform'ation for Decision Making
In addition, guidelines for case presentations by partner companies were distributed.
Benchmarking: Benchmarking was organized into two sessions over five days. Partners were
given guidelines for presenting the information developed for the questionnaire. Presentations
were organized to flow from company overview and culture, to environmental cost accounting
systems, costs and other performance measures, and cost information for decision making. Case
studies were interspersed throughout the five days and were often presented in conjunction with
the related topic of discussion.
Discussion was guided by the ICEM/ Pilko team. Key issues and findings were noted
periodically and summarized at the end of each session. All companies except Ciba-Geigy were
represented in the first session; all companies except Celanese Mexicana were represented in the
second session.
Synthesis: Results of the benchmarking sessions were summarized first in a draft report, and
reviewed by the participants. When completed, this confidential report formed the basis for
documentation and recommendation to the participating companies.
This report, sanitized of confidential information, was generated for use by outside
sponsors of the study. The intent of this report is to provide generalized findings about corporate
environmental cost accounting procedures and uses for the chemical manufacturing and
petroleum refining industry.
15
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Table A - Ranking of Factors and Issues
Factor*
Environmental cost monitoring
Full cost accounting
Environmental accounting info, systems
Capital Versus Operating
Management Control
Environmental cost allocations
EGA info, for decision support
Budgeting process
Future environmental liabilities
Compliance versus voluntary costs
Reporting Systems - Accounting systems
Remedial/clean-up costs
Other metrics
Life cycle cost accounting
EC info, for external-focused issues
Environmental cost drivers
Public financial disclosure statements
NAFTA
Rank
1
2
2
3
3
3
3
3
4
5
5
5
6
6
7
7
7
7
* Note: Working definitions are given in Appendix C
16
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Environmental Accounting System Development Framework
The following framework illustrates the relationship between different management
processes involved in environmental cost accounting. This framework was the basis for the
questionnaire developed in conjunction with the Environmental Cost Accounting Benchmarking
Project. Each of the elements in the framework was the subject of one or more discussion
sessions during the Benchmarking Sessions.
Cbtpceate
Attitude Toward
EnvuxiitiEtlal
EnvHcnrrErtal
Infooradcn
Systems
Rgue 2: Conceptual Level Ranewctkfcr BwiiontiErtal Cbst Amounting
The framework reflects the interrelationship between corporate culture (attitude toward
environmental stewardship) and the availability of resources for development of an
environmental accounting system. Only companies with a clear desire to integrate
environmental decision making into the normal business context is likely to make such an
investment.
The environmental information system will generate data that would otherwise be
unavailable to managers. This data may be cost-based or may consist of nonfinancial measures.
Nonfinancial measures can be used to either generate financial measures with the addition of
other data, or they may be used directly, as real-time data.
In either case, the data provide evidence relating to the decision to be made. Ultimately,
the creation of better information systems generates better data that support better decision
making. This, in turn, may have a feedback effect on the organizational learning and culture of
the company. This culture change brings about conditions that could cause future changes in the
organization's information systems as well as the kinds of decisions that management will make.
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Attitude Toward Environmental Stewardship
During this project, it became clear that, for the five participating companies, an
organization's attitude toward environmental stewardship is directly related to the company
culture and, in fact, is a subset of the company culture. An example for assessing how these
elements function together was offered by one Partner company. Ciba-Geigy has published its
environmental policy: "Vision 2000" which describes a balance between the economic, social
and environmental responsibilities that will ensure the prosperity of the business beyond the year
2000.
The Vision 2000 policy reflects the company culture at Ciba-Geigy, defining the nature
of the organization and describing the core values that determine the actions of the company:
Economic Success: This is ultimately the measure by which companies and their
shareholders evaluate their success.
Social Responsibility: Ciba-Geigy accepts responsibility for the effects of its actions on
employees, the community, and other stakeholders.
Environmental Responsibility: Ciba-Geigy strives to maintain a policy of sustainable
development, including resource conservation and pollution prevention. The goal is to
conduct business in a way that will not impede the ability of present and future generations to
meet their needs.
This attitude toward environmental stewardship helps to define the organization through
its culture because the culture represents the set of values, norms and procedures that serve as the
foundation for any environmental project. The culture is affected by the dominant individuals in
the organization, as well as by the industry and, perhaps, the nationality of the company.
Nationality can be important due to differences in laws and regulations, socio-economic
conditions, and cultural traditions.
The five Partners made presentations on the topic of attitude toward environmental
stewardship. Although the topics discussed during this session varied with each Partner, most of
the discussion centered around a few main areas. These areas include: the environmental
organization and associated roles and responsibilities; environmental management systems,
policies and procedures; environmental standards, compliance efforts and voluntary programs,
and organizational changes.
Structure of the environmental organizations. All five Partners have some form of
environmental organization. The roles and responsibilities of these environmental units vary
among the Partners. Some companies organize their environmental group in a decentralized
manner. In these cases, significant resources are placed at operating facilities while the corporate
group provides an oversight and limited support role.
Other Partners allocate a greater share of resources to a centralized organization. The
centralized environmental group provides proportionately more top-down support to the
facilities. The amount and allocation of environmental resources provide an initial indicator of
the company's attitude toward environmental stewardship. However, differences in
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organizational demands for environmental services may also explain the different organizational
structures and resource allocations.
U.S7Mexico Environmental Climate. Each Partner has developed environmental
management systems, policies and procedures which reflect their national cultures, as well as
their corporate cultures. All Partners, whether Mexican or U.S.-based, are concerned with
compliance with applicable environmental rules and regulations.
The regulatory requirements in the U.S. and Mexico are generally similar, but there are
also a number of differences. Many of the regulations created in the U.S. are subsequently issued
in Mexico after a time lag of several years. Consequently, it may be easier for Mexican
companies than for U.S. companies to accurately predict what future regulations will be.
The Mexican companies in this study claim that they face a more regulated environment
than U.S. companies in the use of water. Water usage is taxed at a higher rate than in the U.S.,
and is taxed twice: once when it is extracted from groundwater wells, and a second time either as
the cost of treating the water to standards or the costs of reinjecting water to water quality
standards. This double taxation results in very conservative water usage policies by Mexican
Partners.
The extent to which the Partners participate in voluntary environmental programs varies
with the nationality of the company. The U.S. companies tend to have more voluntary program
participation than do the Mexican companies. However, there are fewer voluntary programs in
Mexico than in the U.S. The direction of causation is not clear: do voluntary programs generate
interest among companies, or do companies provide the impetus for voluntary programs?
All the Partners have undergone or are in the process of undergoing significant
environmental organizational changes. This phenomenon is not limited to the current wave of
"re-engineering" which is occurring in many U.S. industries. Additional competitive pressures,
brought on by dynamics such as the globalization of industry and political policy changes such as
NAFTA, have caused the Mexican Partners to undergo significant organizational changes as
well. (Recall that Partner companies ranked NAFTA-driven environmental changes as relatively
uninteresting during the planning session.)
The following sketches out relevant aspects of the corporate culture of the participating
companies:
Ciba-Geigy. Within Ciba-Geigy, compliance is the responsibility of the line
organization. If the line organization requests assistance in determining compliance levels, or for
related support, several groups are available to provide it. These include Environmental Affairs,
Regulatory Affairs, Legal Department and Regulatory Networks. If local standards are below
Ciba-Geigy's internal standards, they will comply with the higher standards.
Ciba-Geigy participates in a number of voluntary programs including ICC Charter for
Sustainable Development, Responsible Care, ISO 14000 (site by site), EPA 33/50,
Environmental Leadership and Green Lights. In general, all employees are responsible for both
regulatory compliance and company internal standards. Environmental performance goals are
part of the organization's objectives. Consequently, there is a corresponding impact on
compensation. Adherence to these environmental regulations and standards is everyone's
responsibility day in and day out.
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Grupo Primex. Within Grupo Primex, compliance issues are a top priority. Compliance
with effluent discharge limitations is currently under evaluation. The company plans to start up a
wastewater treatment system to address chemical oxygen demand, suspended solids and oil and
grease exceedences.
Li addition to its membership in the BCSD-Gulf of Mexico, Grupo Primex participates in
the Responsibilidad Integral: El Compromise de la Industria Quimica (Integral Responsibility:
The Commitment of the Chemical Industry). This voluntary program is analogous to the
Responsible Care program in the United States. This program is aggressive as companies have
agreed to full implementation in five years.
Grupo Primex reorganized and downsized during 1993. The company closed a plant and
is now conducting all operations at a single complex. Upon completion of the reorganization,
Grupo Primex began a program of paying employees who submit ideas that improve
environmental performance, but only after the idea is implemented.
International Refineries. Within International Refineries, the operating unit is
responsible for conformance with the environmental policy. International Refineries employs a
decentralized staff, placing resources at operating locations. A lean and flat organization
provides preventive support to the operating organization for ongoing efforts.
International Refineries' environmental policy is signed by the CEO and was last updated
in 1990. The management systems emphasize preventive programs, and senior management
supports efforts by the corporate environmental group to improve performance. As demonstrated
in the case studies included in this report, International Refineries management sees value in
better understanding its environmental costs.
International Refineries participates in a number of industry and government voluntary
programs. These include Responsible Care, American Petroleum Institute's(API) STEP, EPA
33/50, Green Lights, Natural Gas STAR and Energy STAR. Incentives have been created for
improvements in environmental performance. Individual performance review has an
environmental element, and senior management performance review also includes an informal
environmental element.
International Refineries has significantly changed its organization and asset structure
from 1990 to 1995. Assets in the Exploration and Production and retail marketing areas have
been rationalized. The upstream operations have been consolidated and new business units were
created for the downstream and chemical operations. These changes have led to an approximate
30% decrease in headcount. During this period, the Health, Safety and Environmental "(HSE)
group has increased headcount and created a stable structure.
Specialty Refiners. Specialty Refiners conducts a compliance auditing program to
evaluate the effectiveness of compliance efforts at the company's facilities. Specialty Refiners
also requires annual assurance letters from facility management which certify compliance with
regulations. Specialty Refiners also participates in a number of voluntary programs including:
EPA 33/50, API STEP, Green Lights, Waste Wise and ISO 9000.
Specialty Refiners has been a leader in developing a used oil stewardship program in
support of its car service business. Major efforts under the auspices of the API included the
formation of a used oil coalition which consisted of 12 to 15 oil companies. Another effort was
in the area of developing model laws and regulation for the used oil, mainly to prevent it from
becoming a hazardous waste.
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Specialty Refiners reorganized during 1995, effectively moving corporate resources out
to operating facilities. The corporate group is currently responsible for regulatory matters and
environmental policy. There are also two shared services groups. These are remediation and
occupational health, both located within the marketing division. All other functions are within
the operating divisions or at the facility. There are approximately 100 full time equivalents
involved in the Environmental Safety and Health (ESH) group.
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Environmental Cost Accounting System Development
In the sessions, each of the partner companies discussed their current system for
generating environmental cost information. A variety of methods were used. Some systems
were wholly integrated, or layered, onto the General Ledger. Other systems were in the fledgling
stage, existing as ad hoc systems that access information from other established systems to fulfill
decision making needs as they arise. Each system is described more fully in the following
section.
Ciba-Geigy. Ciba-Geigy has identified two uses for environmental cost accounting. The
first use is to assign the proper current cost to the correct product, for profit determination and
inventory valuation. The second use is to provide management with support for controlling and
managing costs. Ciba-Geigy recognizes the impact of misallocation of overhead costs, which
often include environmental costs, to product. The system implemented by Ciba-Geigy addresses
most issues regarding environmental costs by instituting an improved cost accounting system
that accurately associates each cost with each product.
Ciba-Geigy generates environmental cost information as part of the General Ledger
System. Each product has associated with it a detailed product cost sheet which defines all cost
elements associated with the product. Given for each cost element is the unit of measure,
consumption per 100 pounds of product, unit price and cost per 100 pounds of product (see Table
B at the end of this section for a fictitious cost sheet.) The cost elements include raw material,
direct labor, equipment, repair and maintenance, electricity, steam, analysis and quality control,
wastewater, incinerated wastes broken down into solid, organic and aqueous types, general
facilities, services, and overhead (general FS&O), and unit overhead.
While the cost sheets enable more accurate product costing, controlling and managing
environmental costs are dealt with using transfer pricing mechanisms. Ciba-Geigy has weighed
several methods for determining the appropriate rate for the transfer price. One method, using the
ratio of the total cost to total capacity is easy to implement, provides a predetermined rate for the
budget cycle, and it adequately reflects a lower cost for lower usage. However, since it is not
normalized to reflect actual usage rather than total capacity there may be unallocated costs.
Another method, which defines the rate as the ratio of total cost to actual usage, shows
the real cost of services but results in a rate that varies during the budget cycle. This method may
not provide incentive to minimize wastes, since the environmental cost will depend -on the
interactive effects of all users of the service. For example, if all users reduce their use of the
service by one half, none will realize a reduced rate for usage, as the corresponding unit rate will
double.
Moreover, Ciba-Geigy recognizes limitations of purely financial information. Ciba-
Geigy has developed another management tool for computerized reporting known as SEEP
(Safety, Energy, and environmental Protection). The system requires all major production sites to
input to SEEP data on safety, resource use and environmental releases, excluding those from the
raw materials production and consumer use stages of the product life-cycle. Cost data are also
manually entered by site. Aggregate and analytic forms of these data form the foundation of
Ciba's Corporate Environmental Report. Also, these data fit directly into a limited Life-Cycle
Assessment methodology currently under development to improve the cost-effectiveness of
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environmental decision. (A more detailed description of the use of LCA is given in the Ciba-
Geigy Case Study.)
System users and system maintenance. The system is used by line employees to manage
ongoing environmental costs (as with other costs). Cost information is available throughout the
organization and each operating unit knows product costs. Corporate Environmental Affairs is
responsible for remediation costs, but these are not handled by the cost accounting system. They
are dealt with in a fashion similar to how capital investment projects are handled. The
maintenance of the systems rests with corporate, division, and plant accounting functions.
System strengths and weaknesses. The system clearly defines responsibilities and
accountabilities. The objective is to try to account for environmental costs at the location and
level where individuals are responsible for them and can make decisions to manage them.
A primary weakness of the system is that environmental costs are part of many cost
centers. This leads to environmental costs being general and summary in nature. While charge
back mechanisms should facilitate improvement, it is difficult to explicitly define environmental
costs and accumulate them into meaningful categories. For instance, aggregating environmental
cost information over multiple cost centers, as is required to be consistent with annual SEEP
reporting needs, is very difficult.
Grupo Primex. In 1996, Grupo Primex began environmental cost monitoring. Goals for
the environmental accounting system were established. First, the environmental cost accounting
system was to be a sub-system from their existing management information system. Second, the
system needed to assist Grupo Primex in determining the impact of an environmental cost on net
profit and conversion (direct labor and overhead) cost. Finally, the system would have to enable
performance measurement, at all levels in the company based on ecological management ratios.
The ecological management ratio is an index which measures pounds of waste produced per
pounds of product, i.e., it is a waste-focused yield measurement. The index is not yet widely used
in the plants.
Grupo Primex focuses on environmental costs in certain income statement categories:
variable costs, maintenance, and fixed expenses. Variable costs may fall into a general regulatory
category, which includes environmental audits, risk assessment, penalties, remediation or
research and development. Other variable costs are tracked by media. Variable costs associated
with water may relate to duty payments for environmental permit exceedences not associated
with audits, compliance fees for particular discharge conditions, utilities, electricity, water
analysis, and labor costs. Water has double costs, since there is a fee to extract it from the ground
as well as to dispose of it. Variable costs for air include monitoring and duty payments (fees and
taxes). Currently, Mexico has nothing comparable to the Clean Air Act Amendments of 1990.
Variable costs for hazardous materials may be associated with analysis, duty payments, treatment
and disposal, transportation and labor cost. Finally, costs for soil analyses and duty payments are
variable.
Measurement instrumentation enables Grupo Primex to track environmental costs at the
unit level. For instance, the costs of the wastewater treatment plant are allocated to each product
according to loading and volume.
Mexican companies report usage and emissions to the government to determine duty
payments. Payment is made when emissions are reported. Water is reported quarterly; air
emissions are reported once per year. Soil is reported periodically. Funds are escrowed, based on
predicted duty payments. To facilitate reporting, Grupo Primex's General Ledger tracks metric
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tons of production with costs. The financial and environmental management systems are
reviewed on a monthly basis.
Maintenance costs include all expenses incurred as a result of preventive and corrective
maintenance for ecological assets, e.g., the wastewater treatment plant. Fixed expenses are
integrated by salaries and wages paid to ecology department personnel.
System strengths and -weaknesses. Grupo Primex has begun separating environmental
costs from operating costs. The system is free standing and does not directly access data from
any other system. However, they have made strides in procuring measurement equipment that
enables real-time data collection. Environmental costs can be related to financial information
using their management information system.
One principle problem with the environmental accounting system is implementation.
People resist what they perceive to be forced compliance or behavioral change. The company is
trying to provide incentives through monetary recognition of individual initiatives once
implemented.
Another,issue to be resolved" is the company's operating definition of environmental
costs. This definition process is not complete, so not all potentially interesting information is
being collected. For example, the current system does not attempt to track less tangible costs.
Depreciation costs of environmental equipment and production assets are commingled,
i.e., environmentally-related depreciation is not separated from depreciation of nonenvironmental
assets. This distinction is more important in Mexico than in the U.S., because, in Mexico, if a
capital investment is for environmental assets, it can be fully depreciated in the first year,
resulting in significant tax savings.
International Refineries. Four overarching goals led International Refineries to the
decision to extend their accounting system to incorporate environmental costs. First, International
Refineries would like to improve reporting capabilities for governmental, public and industry
concerns. Second, the system would provide additional detail to management about Health,
Safety and Environment (HSE) expenditures. Third, such a system would provide a standardized
approach to capturing HSE data through divisions. Finally, International Refineries opted to
"enhance" the system rather than risk disruption and change through the construction of an
entirely new system.
Specific requirements for the system were internally generated. The system would be
simple but would have the capability to 1) track and define all expenditures related to health,
safety or environmental projects by category, media, location and line of business; 2) track
penalties and fines imposed by regulatory agencies; and 3) spot errors. System development
entailed three people working for seven months: two accountants and one environmental
specialist.
The Enhanced Health, Safety and Environmental(HSE) Accounting System builds on the
existing accounting system by defining HSE product codes. These HSE product codes are teamed
(via prefix) with existing accounting, location, and expense codes. There are eight categories of
HSE product codes: safety, air, water, solid and hazardous waste, remediation, spill cleanup,
medical services and other (e.g., maintenance). Other categories correspond to those defined by
the U.S. Census Bureau and the American Petroleum Institute (API) in their annual surveys.
HSE product codes for safety include compliance fines, monitoring, asbestos, safety,
equipment and safety supplies. HSE product codes for air include compliance fines, emissions
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testing, and stack sampling. Solid waste product codes include compliance fines, hazardous
waste, non-hazardous waste, and waste testing and analysis. Remediation codes include soil
remediation, compliance fines, testing and analysis and site assessment. A last category (other)
includes miscellaneous environmental expenses, e.g., bird cones for the stacks. About 30 expense
codes are explicitly associated with HSE product codes. Examples of environmentally connected
expense codes include environmental professional fees, public awareness programs, external
analytical laboratory fees, and waste transportation.
Field personnel approve an invoice and select the correct product and expense codes.
Accounting "load" forms are filled in using specific accounting codes assigned by location,
product and expense codes. The accounting department pays invoices and enters coding into the
General Ledger system. Therefore, any expense can be identified and selected according to any of
these three codes. Utility costs can be listed in this format and one can even specify the utility
according to whether it is electric, water, gas, etc.
Although environmental costs have been tracked to some degree for the last several years,
only data after 1993 are accurate and comparable.
Strengths and weaknesses of the system. The system has many strengths. Its simplicity
and the nature of its extension to the existing accounting system. Data is continuously and
instantaneously available, so expenditures can be instantly tracked by category. By including
environmental costs into the cost base of project accounting, individuals who are in the best
position to manage environmental costs can give them full consideration. In turn, these
individuals can be held responsible for their decisions. Extraordinary activities can be captured
because the system is expandable through the simple addition of new account categories.
The ease with which new accounts can be added can also be risky, since it facilitates
inappropriate changes as well as appropriate ones. New account classifications may be added,
resulting in overlapping account codes. This inconsistency means that time series comparison of
environmental costs will not be accurate. The system will reject codes of impossible formats, but
no other checks are performed as the data are entered. Thus, classification accuracy will depend
on the account assignment, as determined by an accounting clerk.
Another weakness of the system is its lack of distinction of recurring and non-recurring
costs. Distinguishing between these costs could produce cost time series comparisons of higher
fidelity, since non-recurring costs could be screened out.
Future improvements in the system include developing a procedure to routinely review
product codes to delete redundant codes and ensure that new product codes are not included in
the wrong categories.
The account classifications do not facilitate tracing costs arising from incidents, such as
spills, back to a specific unit, since not all units have separate cost centers (e.g., the wastewater
treatment plant). These systems are viewed as general overhead costs, without any chargeback
mechanism. The system, therefore, does not currently support transfer pricing to all units.
Additional metering capabilities, e.g., tracking volumes sent to flares, would provide measures of
activity that could be used as a basis for transfer pricing.
International Refineries is aware that excessive reliance on profit maximization strategies
using internal charge backs will inevitably cause internal arguments, and may not be good in the
long run, since cost cutting may short-change safety. On the other hand, International Refineries
believes charge back could contribute to improved operations management. A transfer pricing
mechanism would help track line leaks or determine which unit ought to recycle.
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The system has some limitations regarding labor costs. It does not capture personnel time
by project, and only includes labor if it is associated directly with an "environmental unit," e.g.,
the desulfurization unit, or the wastewater treatment plant.
Specialty Refiners. Specialty Refiners' primary goal for an environmental cost
accounting system is to provide "point of generation" environmental expenses assigned to
product lines. Spills, disposal costs, over/under treating for lube oils, permitting, wastewater
treatment, etc., would all be assigned relatively accurate costs. The cost information would be
distributed to appropriate field personnel to demonstrate the cost of specific actions as well as
inaction. Given Specialty Refiners' trend toward decentralized ESH, environmental costs could
serve as a unifying metric and communication tool.
Specialty Refiners has begun examining environmental costs, although a separate
environmental cost system is not in place. Environmental cost data are generated and analyzed
on an ad hoc basis. Environmental cost data are generated using the mainframe General Ledger
and the Maintenance Management System. Labor costs are not included since salary information
is stored on the payroll system. Capital contractor work requests are maintained and accessed on
a database. All of these data are used to synthesize environmental costs which are stored on a
manually generated spreadsheet. The spreadsheets are generated by the accounting department or
by management on an as-needed basis. The level of detail depends on need, and is usually based
on a particular commodity, chemical or contractor.
Specialty Refiners can modify their General Ledger in a fashion similar to International
Refineries'. Any environmental area can be set up as a cost center at the business manager's
discretion. One refinery is tracking costs using the system. This capability permits detailed
information to be made available from high level categories, e.g., materials and supplies, labor,
contract services, etc. This capability is rarely utilized and depends on a facility's desire to
capture information. Although cost center codes are easy to set up, gaining approval for them
may be politically difficult: cost codes require authorization of each division and each division's
controller.
Capital project costs can be retrieved from invoices. There are tax benefits to capturing
details on capital costs. These costs have been identified and broken out for several annual
reports for the last 20 years. In determining which costs fall under the category "environmental",
there is not much discretion since Specialty Refiners uses the percentages recommended by API.
Work order and material detail information can be obtained from the Maintenance
Management System. Material detail is available only if a requisition is written or a warehouse
has entered information. The discretionary use of credit cards for expenses under $5000,
instituted three to four years ago, confounds the ability to accurately track all costs. These
expenses translate into approximately $25,000 per supervisor per month, based upon EHS
personnel estimates. Labor costs can only be obtained using the payroll system and are based on
timecards.
Specialty Refiners maintains a capital projects database which monitors project
information, including status, contract work orders (CWO), authorization requests and
authorization for expenditures. This system generates and tracks CWO's, excluding vendors
which are often charged on credit cards, for expense work. Contractor cost detail can be
generated by the desired category.
Users of the system. The system's use depends on each facility's demand for
environmental cost information. There is typically a monthly review of information by a
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management team. The information is analyzed with both an environmental as well as non-
environmental perspective. The information is used by waste management teams consisting of
two or three individuals focused on a specific problem, and by project managers to justify
environmental expenditures. Finally, the environmental department uses the various systems
mentioned above to generate and report required regulatory data.
System maintenance. Accounting is charged with maintaining the General Ledger
system. Maintenance is responsible for the Maintenance Management System. Interfaces are the
responsibility of the Corporate Information Technology Group.
System strengths and weaknesses. The systems in place that are used to generate
environmental cost data have many advantages. The General Ledger is a very reliable system and
the accounting staff are well trained in its application. Cost data from the General Ledger are
available on a monthly basis, so analyses can be fairly current. Capital projects are easier to
monitor because they are well defined and have a paper trail associated with them, except for the
smaller credit card charges. The Maintenance Management System can be used to respond to
custom requests, e.g., VOC monitoring information was successfully generated using this
system.
The systems used to provide environmental cost information are not very effective . They
are primarily high level systems directed toward meeting government requirements, not business
requirements. There is only limited user training, despite difficulties in manipulating the data, the
complexity of the cost structure and the inflexibility in report generation. The system can allocate
costs, but the process is manpower intensive.
The system allows environmental costs to be accumulated primarily at the cost center
level, so detailed cost analysis is difficult. Specialty Refiners is converting a new accounting
system (SAP AG), which should allow for more flexible cost monitoring, not only by cost center,
but also by product line and product code. The allocation mechanism of the system will be
improved and environment costs will be integrated into the facility cost structure. The allocation
mechanism will be facilitated by the installation of better measurement equipment. For instance,
Specialty Refiners is in the process of installing total organic carbon (TOC) analyzers on effluent
streams to allocate back to "pieces" of the plant. Such information would also be useful for
identifying alarm conditions or for source reduction.
Given the shortcomings associated with the high-level nature of the system, it is not
surprising that Specialty Refiners identified "point of generation" environmental expense
assignment to product lines as a future system need. A system that could determine the cost of
spills, disposal costs, over/under treating for lube oils or permitting, etc., would enable field
personnel to understand and take control of specific action or inaction costs to the company.
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Table B - Environmental Cost Accounting : Cost Sheet for product A*
Cost Element
Intermediate Material A
Raw Materials
Raw Material C
Direct Labor
Equipment X
Equipment Y
Equipment Z
Repair/ Maintenance Equipment X
Repair/ Maintenance Equipment Y
Repair/ Maintenance Equipment Z
Electricity
Steam
Auditing and Quality Control
Effluent - How
Effluent -TOC
Incineration - Solids
Incineration - Organic Liquids
incineration- Aqueous
Gen'l Facilities, Services &
Overhead
Unit Overhead
Total
Unit of
Measure
Ib
Ib
Ib
hr
hr
hr
hr
hr
hr
hr
KWhr
ml
hr
MG
Ib
Ib
Ib
Ib
Consumption
per 100 Ibs.
75.3604
125.2400
92.8863
1.3100
0.4400
0.1364
0.4000
0.4400.
0.1364
0.4000
104.9500
4.8000
0.1400
6.0000
35.2182
23.8282
85.2605
65.4289
Unit
Price
$6.0702
$1.5239
$1.7625
$26.3200
$95.3818
$170.6994
$47.9629
$45.2140
$50.3554
$16.9008
$0.0467
$4.2672
$53.3962
$0.3339
$0.4519
$0.4519
$0.4108
$0.7204
Cost per
100 Ibs.
$457.45
$190.85
$163.71
$34.48
$41.97
$23.28
$19.19
$19.89
$6.87
$6.76
$4.90
$20.48
$7.48
$2.00
$15.92
$10.77
$35.03
$47.13
$21.02
$42.33
$1
171.50
* Adapted from (Ciba - Geigy, 1996)
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Environmental Costs
As part of the initial questionnaire, the participating companies were asked to complete
cost matrices, whose results are summarized in Table C. This was requested for three reasons.
First, the degree of effort required to complete the task reflects on the quality of the
current environmental cost accounting system, if any. It is possible to evaluate the quality of the
systems as they currently stand, by reviewing the information provided by each company.
Second, the costs are organized by the type of activity that generated the costs. By
comparing the magnitude of the costs for each activity, the important activities could be
identified. As it turned out, item 3, Environmental Aspects of Ongoing Operating, and item 4,
Remediation Function, contained the most dollars for all participants. This was not surprising.
Many costs associated with the on-going operations are tracked as separate expense elements in
traditional cost accounting systems. As such, they are easily discernible as "environmental."
Similarly, costs associated with remediation are easily identified as " environmental" and more
easily quantified (if not accurately) since SEC regulations governing financial accounting
requires they be reported.
Third, by comparing the costs for each activity across companies, it is possible to
determine whether companies are having similar experiences in dealing with environmental
issues, and whether their accounting systems are having similar success in capturing cost data.
The general results indicate that the participants varied greatly in their reported costs,
although two variables - company size and type of business (refining or chemicals)-- can explain
most of that variation. The level of detail in the breakdowns varied by company. Grupo Primex
and Specialty Refiners provided detailed costs for subcategories in each relevant item, while
Ciba-Geigy and International Refineries provided global totals. However, even Grupo Primex
and Specialty Refiners acknowledged that it was very difficult to accurately complete the
questionnaire, despite having environmental cost accounting systems in place. One problem may
be that the environmental cost accounting systems tend to be, aggregated at the plant level
(especially Grupo Primex and Specialty Refiners), not at the corporate level.
There was general agreement that most costs will not increase drastically over the next
few years. It was pointed out that some of the costs are discretionary, in that the timing of
implementation is partially driven by what the company can afford in the given period.
There was surprisingly little reported investment in Centralized Environmental Activities
(item 1) or Regulatory Affairs (item 2), given that all of the U.S. companies report a centralized
function, including active interaction with federal and state agencies.
In fact, the presentation of the aggregate results to the participants was met with a
surprisingly cool reception. It became clear that the participants do not feel that environmental
costs by themselves are very interesting or important. However, the participants were able to
identify and categorize a number of uses for environmental cost information. Although there
appears to be some degree of overlap between them, three basic types of uses were identified:
1. Decision Making: Environmental cost information can illuminate issues such as
determining the level of value added, use of risk-based versus necessity acquisitions, capital
budgeting including lower Hurdle Rates for environmental projects, product costing and
discretionary versus regulatory investments.
29
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2. Baseline Cost Information: By developing baseline environmental cost information,
managers can improve resource allocation decisions, support lobbying efforts, and improve
cost control. Comparing baseline costs to current costs may help identify cost reduction
opportunities, estimate future project costs, serve as a basis for budgeting, and capture cost
avoidance.
3. Management Incentives; Participants agreed that management's incentives for
environmental stewardship were sometimes complex, and that environmental cost
information might be useful for improving the management performance evaluation process
by incorporating environmental costs into financial performance measures. These costs
could also be used for public relations purposes, by providing evidence of the efforts made by
the company in environmental stewardship. For example,
several Partners discussed community relations problems that may lead to future costs if not
resolved: for example, the legal release of irritating gases; and the "environmental justice"
issue, in which the community which developed around the existing plant now claims
environmental damage from the plant's proximity to the community. There was consensus
that, even if company activities were above legal reproach, building better community
relations can help avoid lawsuits, denied permits, and similar costs. Partners are often
willing to invest in good community relations to avoid these future costs.
Finally, the participants agreed on the difference between production economics, politics,
and the emotions of the press and of private citizens. These differences make "rational
management techniques" somewhat risky, in that public opinion is often far removed from what
is right or fair. In discussing the use of environmental costs for decision making, the participants
differentiated between capital expenditures and routine operating and maintenance costs. All
participants felt that environmental capital expenditures were special, because they are often
mandated by government.
If technologies are mandated, the task is to implement them on a timely basis, even when
mandated technologies represent an excessively expensive, suboptimal solution. Particularly,
mandated technologies tend to represent "end of pipe" solutions, which may be less efficient than
pollution prevention approaches, that depend on redesigning the waste generating processes. The
companies would often rather be given a mandated outcome than a mandated method or
technology for reaching that outcome, but the time horizon for meeting these targets is often too
short to arrive at the best solution.
In addition to selected environmental cost information, all of the participating companies
use non-financial input and output measures, which provide more detailed information more
directly than anything which could be provided by the cost system. Non-financial indicators,
such as number of incidents reported and TRI (Toxics Release Inventory) statistics, are often
more useful for operating managers. Cost information is most useful as a way of determining the
overall economic effects of current methods and of alternatives.
30
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Use of Environmental Cost Accounting in Managerial Decision Making
Decisions using cost data. A number of specific decisions were identified that could
directly make use of environmental cost information. The list is not necessarily exhaustive. In
many of these decision contexts, environmental cost information would be treated as just another
cost of doing business, such as in product pricing or product mix. In other situations, the
environmental cost accounting information may have a unique role in the decision process . This
might be the case in waste management decisions, pollution prevention alternatives or market-
based environmental options. In all cases, identifying and quantifying environmental costs,
whether currently captured by the accounting system, or as part of future liabilities or intangible
costs and benefits will enrich the quality of the following decisions.
1- Internal/External Benchmarking: How are we doing against competitors? How are
individual plants doing, on a comparative basis?
2- Product Pricing: Better environmental cost accounting can lead to better
understanding of what a particular product costs to produce. For products with
price flexibility (differentiated products), this may be reflected in price
adjustments.
3. Product Mix: Better environmental cost accounting can be beneficial even with
commodity products, for which the price is market-driven. The company may
choose to adjust their product mix to maximize overall profitability.
4. Waste Management Decisions: Better understanding of environmental cost structures
will lead engineers and managers to make more cost-effective choices in treating
and disposing waste.
5- Pollution Prevention Alternatives: A better understanding of current environmental
costs, as well as that of prospective alternatives, will result in better capital
expenditure decisions.
6- Materials/Supplier Selection: Companies committed to environmentally responsible
manufacturing understand that a "cradle to grave" mentality is necessary. Through
better sourcing of materials, companies can push environmental responsibility up
the supply chain. They may partner with suppliers to make pollution prevention
options more cost-effective. Also, can significant environmental costs be avoided
through outsourcing?
7. Facility Location/Layout: Companies may find that their by-products can be used as
inputs to other companies. Such companies often co-locate with these Partners.
8- Outbound Logistics: These issues pertain to finished product, by-products and
waste. Packaging of finished product has significant environmental implications,
if the packaging must be destroyed to use the product. Is additional cost of
design and materials worth the investment, if the environmental liability might be
reduced? For by-products and waste, off-site disposal raises the risk of future
liabilities for activities which are currently legal, and off-site transport moves the
material beyond the control of the company.
9- Market-Based Environmental Options: An active market in SO2 and other pollution
allowances is developing. Understanding the cost of reducing these emissions is
key to establishing values for these allowances.
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10. International Environmental Standards: ISO 14000 is expected to be finalized during
1997. This ISO 14000 requires that environmental standards be documented and
followed, though environmental accounting is not explicitly mandated.
Certification may be required to maintain the customer base, especially in Europe.
11. Public Relations / Lobbying: Understanding the cost of this activity, and of the costs
of not participating in this activity, will help to rationalize the level of investment
to be made here.
12. Training: The best level of training (from a cost-benefit point of view) is easier to
determine if the benefits are quantifiable.
Decisions using nonfinancial data. As previously mentioned, one crucial issue is the
degree to which financial indicators, such as environmental cost accounting information, are
used, as compared with non-financial indicators, such as the number of incidents or TRI release
information. The value of non-financial indicators is linked to the specificity and timeliness of
those indicators. The value of financial information is that the net economic effect of the
interplay of complex physical systems can be captured on a summary basis.
Participants seemed to agree that, at the plant level, non-financial indicators are essential,
and cost accounting measures are secondary. Perhaps this is because the decisions that must be
made at the operations level tend to be relatively straightforward, technical and immediate. Plant
operations must be monitored and adjusted more quickly than cost information can be provided.
The value of cost information seems to be limited to decisions requiring a common denominator.
The higher the management level, the more likely that financial information will be used,-
as costs can be seen as a shorthand for multiple factors. It is also likely that, the higher the
management level, the more the manager's performance evaluation will be based on financial
measurements. Thus, the high-level manager will be more interested in summary financial
measurements of environmental activities than will plant operations. This is because the high-
level manager is responsible for more diverse activities, and for activities with longer time spans.
Of course, high-level management will be interested in aggregate nonfinancial data, as well.
Ciba-Geigy presented its use of life-cycle analysis as a method for evaluating relative
environmental impacts of processes and products. This is found in case studies later in this
document.
Company use of environmental cost information for decision making. Four
companies made presentations on this topic: Ciba-Geigy, International Refineries, Grupo Primex,
and Specialty Refiners. Two primary types of decisions were addressed, capital acquisitions and
operating decisions.
Environmental Cost information was used primarily for capital acquisition decisions. The
companies indicated that the processes used for capital acquisitions of environment items tended
to be made using the same process as that for non-environmental items. However, as indicated
below, in individual company coverage, the environmental items tended to be given priority,
especially if the environmental investments were mandated by government regulation. Desirable
environmental projects tended to be given informal priority, in that most companies did not use a
lower Hurdle Rate for environmental investments. This was true of both U.S. and Mexican
companies.
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Identifiability of environmental portion of pollution prevention projects. The
preference for environmental capital items is reflected in an issue also discussed in the "costs"
section: that "end of pipe" sorts of acquisitions are clearly identifiable as environmental
expenditures, but improved technology (which may also result in cleaner processes, thus
addressing environmental issues at least as well, but less directly) are often considered operating
improvements, not environmental. Because integrative solutions, such as improved technology,
are clearly the superior approach to environmental stewardship (pollution prevention being
superior to post-production clean up), the preference for clearly environmental capital
expenditures over non-environmental may inhibit companies' ability to achieve greater
environmental responsibility through pollution prevention.
Perhaps one solution is to identify differential economic benefits to investments that can
be legitimately classified as environmental, whether they represent pollution prevention or end of
pipe investments. The issue of determining what portion of the investment is environmental has
already been tackled by the American Petroleum Institute(API). One company, Specialty
Refiners, systematically allocates a portion of their investment in pollution prevention projects as
being environmental, using API guidelines. It was pointed out that, in some jurisdictions,
environmental projects are currently given special tax status, such as shorter depreciation periods
(U.S.) or immediate write-off of cost (Mexico). These tax concessions may be justified by the
environmental benefit to citizens within these jurisdictions.
The following describes how each of the participating companies uses environmental cost
information:
Ciba-Geigy. Capital Expenditure Decisions. Ciba-Geigy tracks environmental costs
separately as certain cost elements on product cost sheets. However, environmental capital
expenditures are seen as part of normal business expenditures; they are part of viewed as a cost
of doing business. The biggest difference between environmental and non-environmental
expenditures relates to government mandates, whether the project is required, and whether the
government regulation stipulates technologies or performance. Performance-based regulation is
generally preferred, because companies can identify and implement the best alternative solution.
All potential capital projects are evaluated based on traditional capital budgeting criteria,
and are all subject to the same approval levels, Hurdle Rates and other financial test, except in
the case of mandated environmental projects. If the project is governmentally mandated, Hurdle
Rates are meaningless; the project must be done.
Operating Decisions. Ciba-Geigy tracks environmental remediation costs separately.
While significant differences exist, the internal approval process is similar to the capital
expenditure approval process.
Grupo Primex. Grupo Primex tracks environmental costs relating to both capital
expenditures and ongoing operations and maintenance. However, like the other Partner
companies, decision-making with environmental costs focuses primarily on capital expenditures.
Capital Expenditure Decisions. The process for developing cost estimates is the same for
any kind of capital project, whether environmental or not. The Environmental Manager decides
whether a project is to be classified as environmental. However, environmental capital
expenditures are tracked independently of other capital expenditures. Once needs or opportunity
areas are identified, preliminary engineering studies identify critical parameters, leading to an
estimate of the total capital expenditure required. If the project is required to meet regulations,
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the project will be approved in virtually all cases, subject to final approval by the General
Director. If the project is not required to meet regulations, the Payback period and Internal Rate
of Return are determined. If the Payback period is less than three years and the Internal Rate of
Return exceeds the Hurdle Rate, if sufficient cash is available, and other aspects of the project
meet with the approval of senior management, then the project is undertaken. If the project does
not meet the financial criteria, the project is put on hold until regulations change, unless there are
significant intangible benefits associated with the project.
Operating Decisions. Grupo Primex captures the ongoing cost of environmental
activities, but does not exhaustively differentiate between environmental and other operating and
maintenance activities. The company views environmental activities as a part of doing business,
and manages these activities accordingly.
International Refineries. The system has helped International Refineries better
understand where they are spending money. Two areas with unexpectedly high costs proved to
be waste hauling and operations analysis. With International Refineries' system, the cost per
pound of waste'can be estimated. They can breakdown waste hauling costs by vendor as well.
Despite what might be expected, it is not uncommon for the same vendor to charge different
prices for the same services that were negotiated separately. A side project developing around
this system involves coordinating purchases and looking at volume discounts. A refinery
manager could also use this type of information to improve selection or negotiations with
catalyst suppliers, waste disposers, etc.
Improved understanding of environmental costs improves the budgeting process. The
focus on expense codes is particularly useful, since budgets are constructed around expense
codes. As a result of the Enhanced HSE accounting systems, there is a better understanding of
remediation costs, as well as the costs of different types of remediation.
Accounting for environmental costs has also proved useful as a communication tool.
International Refineries is now able to track environmental, health and safety (HSE) operating
expenditures, HSE capital expenses as well as environmental accruals. Superfund expenses are
tracked and are included depending on the information displayed. HSE expenditures are also
tracked according to business sector, i.e., upstream, downstream and chemical..
Capital Expenditure Decisions. International Refineries evaluates environmental capital
expenditures in the same way as non-environmental capital expenditures. However, the priority
of the capital project is directly linked to whether the project is required to comply with
government regulations.
HSE capital and operating budgets are developed by business units with input from on-
site HSE personnel. Included are corporate HSE costs that are allocated to business units, based
on a rough estimate of percentage of time spent by corporate HSE staff on each business unit.
International Refineries has developed a Capital Budgeting Guidelines hierarchy of
projects, ranging from A to G. Category A consists of environmental projects, of which Al
projects are required for compliance with regulations in the current year, and A2 projects will be
required in the future. B projects are health and safety projects, with Bl referring to legal
mandates effective in the current year, and B2 projects referring to future legal mandates. C
projects are expenditures required to avoid the loss of an asset, or to meet the terms of an existing
contract. D projects are discretionary projects with a current year positive net cash flow, E
projects with high returns where delay in investment will significantly reduce future returns, and
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F projects are those with returns that exceed the Hurdle Rate for the year. G projects are projects
with undefined economics. These G projects are virtually never funded.
Operating Decisions. International Refineries has a relatively well-developed
environmental cost accounting system, but does not base ongoing operating and maintenance
decisions on costs specifically identified as environmental. However, International Refineries
uses this system to track all expenditures of HSE functions by category, media, location and line
of business. It functions well in spotting irregularities.
Examples of uses of the International Refineries information include:
Budgeting (by expense code)
Identifying opportunities for Volume discounts / leverage with vendors.
Making business units responsible for their own costs.
Specialty Refiners. Specialty Refiners uses environmental cost information extensively
for both capital expenditure and operating decisions.
Capital Expenditure Decisions. Specialty Refiners' capital budgeting process is similar
to that of the other companies, consisting of a multi-step process. The initial project is often
conceived at the plant level, where the problem is most often identified, but it may originate at
corporate or at the tech center, depending on the specific problem. An initial set of alternatives is
evaluated, and the leading contender(s) are further refined. Process design specifications are
generated, including a detailed Safety and Environmental checklist, which must be approved by
corporate HSE before the project can proceed. A capital budget proposal is generated, consisting
of both the technical and economic evaluations of the alternative. The approval process will be
affected by the size of the project, the economics, and the degree of linkage to other projects in
the current capital budget. As a part of the Authorization for Expenditure, the cost is apportioned
between the environmental part and the non-environmental proportion, using API's guidelines
and Specialty Refiners' experience. These environmental proportions are rough, usually 50% to
100%, but may be as small as 25%.
During the construction of the project, concurrent cost audits are regularly performed,
providing a basis for evaluating both the budget and the actual performance. However, upon
completion of the project, post-implementation audits are rarely, if ever, performed.
Operating Decisions. Specialty Refiners takes environmental costs into account when
making operating decisions. For example, product mix decisions are affected by potentially high
environmental costs of new products. Additional environmental responsibility brings the need
for better environmental performance, which could translate into either more environmental staff,
or larger non-environmental staff which takes responsibility for some environmental activities.
Finally, environmental costs can affect product pricing for specialty products, for which there is
pricing flexibility. One difficulty in using environmental costs for operating decisions is the
accuracy and timeliness of cost assignments to specific products.
In addition, Specialty Refiners is aware of how current practices have a real, future cost
but of uncertain magnitude and timing. For example, environmental liabilities and future
disposal costs are real, but difficult to estimate. Environmental regulations are likely to change,
and may bring about new retroactive liability. Consumer confidence and the support of the
community are essential, but can be influenced either positively or negatively by public relations,
quite apart from real environmental issues. These issues affect operating decisions, but are
difficult to accurately quantify.
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Appendix A
Partner Company Profiles
CELANESE MEXICANA
(Celanese Mexicana participated in only the first, two-day session. Thus, the volume of material
reported in this section is limited, relative to the other Partner companies)
Celanese Mexicana has eight operating locations in Mexico. The company's total 1994
worldwide sales in U.S. dollars were over $800 million. The company employs over 7000
employees worldwide. Its major business segments are chemicals, fibers, and packaging
materials.
In 1990, Celanese Mexicana established a company-wide environmental, health and
safety organization. At about the same time, a company environmental policy was established
and signed by the Board of Directors. Celanese Mexicana employees are expected to take
responsibility for environmental issues as a condition of employment. Environmental
performance of the company affects yearly bonuses, both positively and negatively.
Participation in voluntary programs is limited. Emission reductions of 85% were
established as a goal for Celanese Mexicana in 1991, to be accomplished by 1997. So far, 70%
reductions have been achieved. This program was started on the initiative of the company; there
is no governmental agency requesting voluntary emission reductions.
One aspect of the culture at Celanese Mexicana that affects the company's ability to
establish consistent standards across the company is the difference between fibers and chemicals
personnel. Fibers personnel are more conservative, while chemicals personnel are much less
conservative. One possible approach being considered to lessen this effect is interchanging
personnel, so that each group can better understand the other.
Celanese Mexicana Case Study
Celanese Mexicana's case examined a technological process change which improved
both their environmental and financial performance.
The main products of the this particular plant are acrylates, of which the plant produces
11,000 tons per year. Their old production method used acrylonitrile as its main input. The
process generated 40,000 tons of waste stream every year, of which the main components were
acrylamide, acrylic acid, alcohol and ammonium sulfate.
In 1990, the U.S. EPA released a list of regulated toxic pollutants. There are generally
two to three years between the passage of an environmental regulation in the United States and
the passage of a similar regulation in Mexico. Celanese Mexicana therefore decided to change its
production process in anticipation of similar Mexican regulation.
The new technology uses propylene as an input instead of acrylonitrile, and eliminates the
intermediate production of acrylamide. The waste stream produced consists of unsaturated acid,
water, carbon dioxide and carbon monoxide, and unreacted propylene. In addition to reducing
toxic output, the change has halved the process' production costs. While the investment in the
new propylene based system was originally conceived as an environmental project, it was the
expected fast payback that convinced management to approve the initial expenditure.
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CIBA-GEIGY
At the time of this study, Ciba-Geigy was an international company with 13 operating
units in the U.S., three in Canada and three in Mexico. The company's 1994 worldwide sales
were over $1.5 billion. Ciba-Geigy had 87,000 employees worldwide, 15,000 in the United
States. The company's major business segments were health care, agricultural
products(including crop protection products), animal health care products and seeds, and
industrial products(including additives, textile products, polymers, pigments, chemicals). A
merger with Sandoz was announced by Ciba Geigy in March, 1997. It needs approval from U.S
and Europe authorities in Federal Trade Commission. In this new Novartis business structure,
MET and speciality chemicals will be separately traded.
Ciba-Geigv Case Study
Ciba-Geigy presented a case study that addressed their use of Life-Cycle Assessment
(LCA). LCA is a tool that is used to measure the relative environmental impact of processes or
product uses. It considers all environmental impact occurring during the production and use of a
product, including the raw material acquisition, manufacturing, application, utilization and
disposal functions, within a predetermined boundary ("Battery Limit") for the study.
Ciba-Geigy uses an LCA method that was developed in Europe. It measures emissions in
"pollution units" which are based on acceptable ambient concentrations as issued by government
agencies, e.g., the EPA. The lower the acceptable ambient concentration of a substance, the
greater are its number of pollution units per unit of mass.
The case study covered Ciba-Geigy's LCA of IRGAZIN DPP RED BO, a high
performance pigment mainly used in automobile paint. The LCA considered all the
environmental impacts, starting with the raw material aquisition, manufacturing, the chemical
synthesis, packaging, transportation, as well as all the downstream customer uses (paint
production and car painting) and the ultimate use and disposal of the cars. It shows that driving
the cars has the highest environmental impact, followed by the painting process. Looking only at
the chemical synthesis step (which is under Ciba-Geigy's direct control,) the LCA identifies the
major environmental impact resulting not from the chemicals used, as might be expected, but
from the energy requirements during manufacturing.
Using this information as a guide to prioritize the process improvement efforts; Ciba-
Geigy has already managed to improve the yields by 10%, while reducing waste by 50% and the
energy requirements by 14%. Further improvements are expected. Additional LCAs for major
products are being developed.
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GRUPO PRIMEX
Grapo Primex has one location in Mexico. The company's 1994 total worldwide sales
were $181.1 million. Its worldwide employee base consists of 540 employees. The company's
major business segments involve production of PVC resins, PVC compounds, phthalic
anhydride and plasticizers.
Grupo Primex Case Study I
This case study examined a technological problem regarding the wastewater stream
generated from the production of plasticizers. Plant capacity is 45,000 tons of plasticizer per
year. This amount represents approximately 25% of the total physical output of the plant. In the
plasticizer production sequence, the residual, which consists of water, alcohol and
plasticizer,undergoes separation treatment for reclamation of the plasticizer in the material. The
separation process is complicated by effects stemming from the high temperature of the residual.
To facilitate the recovery of plasticizer, Grupo Primex invested in a process modification
consisting of two additional steps. The first step neutralized the electric charge of the plasticizer
recovered from the previous batch. The second step involved the recovery of excess alcohol after
the second heating step.
The primary advantage of the modification is that the residual wastewater is cleaner and
can be re-used. The change has resulted in a cost saving of US $800,000. In addition, the
unusable waste plasticizer stream was eliminated, resulting in additional production of 300 tons
per year. Finally, downtime reserved for equipment cleaning (50 hours per month) was
eliminated. Although environmental cost accounting did not a play a significant role in
identifying the problem or determining a solution, the benefit of the project is reflected in
improved financial performance.
Grupo Primex Case Study II
This brief case study identified options for treatment of Pthalic anhydride in gaseous
emissions from a chemical plant. Pthalic anhydride is not regulated by the Mexican government,
so there is no urgent need to control its release . However, it is an irritant and there are
environmental benefits to be reaped from its removal. The company considers installing
scrubbers or an incinerator to treat the Pthalic anhydride. Incinerators are the cheaper option, and
Grupo Primex tentatively plans to install them next year.
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INTERNATIONAL REFINERIES
International Refineries has 13 operating locations in the U.S. which include two
refineries, four chemical plants, five product terminals and two oil and gas production units. The
company's 1994 worldwide sales were over $1.5 billion; and worldwide it has over 2000
employees. The company's major business segments include exploration and production of
crude oil, natural gas marketing and distribution, marketing and distribution of petroleum
products, and manufacturing and marketing of chemicals and plastics.
International Refineries Case Study
International Refineries' case study discussed their system for estimating environmental
liabilities. When an environmental liability is identified during the year, the responsible project
managers and International Refineries' environmental advisor jointly determine the amount to be
accrued. Accruals are based on an estimation of how much of the cost of any given incident can
be attributed directly to International Refineries, and how much it will cost to remediate
International Refineries' share. It is uncommon for International Refineries to be wholly
responsible for a site.
Estimated costs include the cost of remediation according to current legal requirements,
and sometimes the predicted cost of litigation as well. Accruals are indicated on the company's
balance sheet as liabilities.
The accruals are reviewed quarterly by a team of International Refineries managers and
outside auditors. The accrual process is fairly elaborate, but there are two caveats associated
with it. First, the outside auditors may not agree with International Refineries' estimated costs.
Second, the environmental liability accrual process is not linked to International Refineries'
capital budgeting process. Thus, estimated liabilities are not directly linked with proposed
capital expenditures for environment.
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SPECIALTY REFINERS
Specialty Refiners has approximately 120 operating locations in the U.S. The company's
1994 worldwide sales were over $1.5 billion and it has over 2000 employees. The major
business segments of the Company are domestic and international motor oil marketing and sales,
refining, the industrial specialties business unit and the base oil marketing department.
Specialty Refiners Case Study I
Specialty Refiners' first case study described a technical problem that was analyzed and
solved at one of their oil refineries. It is a relatively old plant, and its technology problems are
not shared by other Specialty Refiners facilities. The analyzed process involved the removal of
impurities from lube oil feed stock to make food grade white mineral oils. The process results in
a highly acidic oil, which is neutralized with caustic, to protect equipment from acid corrosion.
However, the caustic combines with the oil residue to create an emulsion layer referred to as
"muck."
An excess of muck built up in the plant, and by 1991 the plant was spending a lot on
storage and disposal of the emulsion. In addition, the emulsion chemically trapped by-products,
such as petroleum sulfonate, which would otherwise be salable. The warning about excess
emulsion first came from field operators rather than from the accounting department, but it took
cost documentation from the accounting records to legitimize the concern.
Plant engineers as well as an outside consultant attempted to solve the problem to no
avail. Finally, an operations employee suggested the use of sodium bisulfite to break down the
emulsion. Sodium bisulfite was cheap N(.65/gal), easily available since it was a by product of
current plant processes located near the system, and effective in breaking down the emulsion. So
far, the new sodium bisulfite treatment has saved the company over $180,000.
Specialty Refiners Case Study II
The refinery examined in this case, which dates from the 1930's and refines an average of
50,000 bbl per day. This case deals with a change in their wastewater treatment costs.
The refinery's wastewater treatment system dates from the 1960's. It involves API and
CPI separators, aerated lagoon and settling lagoon sections, stocked with commercially
purchased microorganisms.
In 1993, the company's cost reports showed a yearly expenditure of $600,000 to
replenish microorganisms in the lagoon system. A review board was formed to investigate the
matter, composed of the Environment, Health and Safety manager, a wastewater engineer,
operations management representatives, site managers, and the outside vendor. They examined
the relevant data from 1994 and realized that alkanolamine and N-methylperoladine(NMP), a
lube oil extracting agent in the wastewater were combining to form ammonia in the wastewater,
which was toxic to the microorganisms. Orthophosphate soaps used to clean the system pipes
were also harmful. Operators were unaware of the amine peaking and its effects downstream;
they consider amine a waste product. The operators could only follow the lagged ammonia
peaks.
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In response to this information, the review board recommended that operations managers
minimize their disposal of amines and NMP in the system. To accomplish this, operations
instituted an inventory system. One conclusion was that chemical usage would be a valuable
indirect measure of environmental cost. The operations' vigilance resulted in a reduction of 65%
of the liquid biosupplements and 50% of regular biosupplements. They saved $200,000 per year
on the cost of microorganisms. In 1995 the plant passed the state biomonitoring test for the first
time, because its lagoon system was functioning so well. However, due to reassignment of
personnel within the company, many of the experienced operations managers who enacted the
change have been replaced in their positions by relatively inexperienced employees. This new
group of personnel has not been able to maintain the improvements made by their predecessors,
but Specialty Refiners believes that experience and training will improve their performance in
the near future.
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Appendix B
ENVIRONMENTAL COST ACCOUNTING
COOPERATIVE BENCHM^\RKINGSM STUDY
OVERVIEW
The questionnaire to be used in the Environmental Cost Accounting
Cooperative Benchmarking study serves the following purposes:
Requires the Partner company filling out the questionnaire to
understand the various Factors and Issues that are addressed by
the questionnaire.
Provides a common level of understanding to the other Partner
companies who are participating prior to the actual Cooperative
Benchmarkings^ meetings.
Facilitates discussion during the meetings based on how the
questionnaire is answered by the Partner company.
The questionnaire is comprised of two parts. The first part is a strategic
overview approach to environmental cost accounting within the organization.
The nature of the questions is based on the list of Factors and Issues that were
rank ordered by the Partner companies. In this manner, sufficient exposure is
given to topics that are the highest priority to the Partners.
The second part of the questionnaire is the two case studies that are to be
presented during the benchmarking sessions. The case studies may be
projects that have been previously investigated by the Partner company or an
area in which the company wants to conduct further study. The two case
studies should be differentiated from one another. For example, the case
studies might be on a mature product and a new product or on an old process
and a new process. The distinguishing feature might be geographical,
technical, commodity vs. specialized, etc.
The case studies may highlight a success in investigating environmental cost
accounting or some critical information that was necessary for an important
decision or the case study could highlight how a bad decision was made and
how it might be improved in the future.
Cooperative BenchmarkingSM is a Service Mark of Pllko & Associates, Inc.
©Pilko & Associates, Inc.
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The case studies should be written up as part of the questionnaire with any
appropriate flow diagrams, charts, tables, etc., to fully explain the case.
The agenda for the benchmarking meeting will allow one hour for the case
study presentation, discussion and questions. Each participant will present
one case study each day for approximately 30 - 45 minutes. There will then be
a period of time for discussion and questions to fill out the rest of the hour.
INSTRUCTIONS
The requested information is provided in a Word Perfect 6.0/6.1 file (named
"WORDPERF") and a MS Word for Windows 2.0(c) file (named "MSWORD") on
the enclosed 3 Vz inch floppy and also with a hard copy. Please complete the
questionnaire in one of the provided word processor files or by manually
completing the hard copy and return one hard copy of the questionnaire. Use
of the disk will allow you to expand the answer section if more room is needed.
If you are completing the hard copy, attach additional pages if there is not
enough room to adequately answer the question. Please do not return the disk.
If you answer the questionnaire on disk, print out a hard copy and return to
us.
Cooperative Benchmarking^^ is a Service Mark of Pilko & Associates, Inc.
©Pilko & Associates, Inc.
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PART I - QUESTIONNAIRE
i.
Is the company participating in this study as a parent company, a
subsidiary, a division, etc.? Please describe the relationship.
2. Indicate the number of operating locations for each of the
geographical areas:
3.
United States
Canada
Mexico
South America
Europe
Africa
Asia
Australia
TOTAL
Indicate the company's 1994 worldwide sales in U.S. dollars:
$ (millions!
Indicate the company's worldwide employee base:
employees
4. Indicate the company's major business segments:
5. Attach a copy of the Environmental Organization Chart for the
company.
6.
List the three most significant difficulties the company faces in
attempting to remain in compliance with environmental regulations:
1)
2)
3)
7.
Does the company go beyond compliance? Going beyond compliance
means that the company adopts standards which are more stringent
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than those required by regulation. For example, a company may
institute pollution control equipment prior to a regulatory deadline to
take advantage of pollution credits. Another example might be that a
company that adopts standards that exceed local standards.
Yes
No
If yes, under what conditions?
Does the company adopt "cleaner" technologies or methods that
exceed requirements:
Yes
No
If yes, provide examples:
Does the company adopt "cleaner" technologies or methods before
they are required?
Yes
No
If yes, provide examples:
Does the company participate in voluntary environmental programs?
Yes
No
If yes, provide examples:
8. In terms of environmental issues, how is the North American Free
Trade Agreement (NAFTA) expected to affect the company?
In terms of environmental issues, how is the General Agreement on
Trade and Tariffs (GATT) expected to affect the company?
Will the company participate in ISO 14000?
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Yes
No
If yes, please describe:
9. What incentives (financial or other) are provided for employees to
participate in improving the environmental performance of the
company?
Is environmental performance recognized in an employee's annual
reviews? Employees include senior management, facility
management, supervisory and operations personnel. Is participation
in pollution prevention efforts encouraged? Provide examples:
10. If the company has faced reorganization/reengineering/downsizing in
the last three years, how has this affected your environmental
performance and cost monitoring abilities?
11. Does the company generate environmental cost information?
Yes
No
If yes, which of the following statements (a-e) best describes how you
generate this information:
a) Generated as a part of your general ledger system.
b) Generated as a part of your management accounting system,
separate from your general ledger system.
c) Generated by a free standing system, using data electronically
transferred from your general ledger or management accounting
system.
d) Generated by a free standing system, which does not directly
access data in other systems, including non-automated, ad-hoc
methods.
e) Generated by some other type of system. Please describe:
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Who are the recipients of the information?
12. What internal barriers affect the ability of the company to collect
environmental cost information?
What systems or organizational structures are in place that facilitate
collecting environmental cost information?
Please provide examples of problems or successes encountered in
collecting environmental cost information:
13. Does the company make estimates of the less tangible environmental
costs or benefits such as liabilities from past operations, the indirect
cost of regulation, the benefits of environmental proactivity, etc?
Yes
No
If yes, please elaborate:
14. If the company has attempted to identify these less tangible costs and
benefits, was this attempt done as a pilot project, company-wide or on
some other basis? Please elaborate:
15. Describe the environmental cost accounting system the company
would like to have in place five to ten years from now. Describe what
information would be gathered, to whom it would be distributed, and
for what the information would be used:
16. List the five most important performance measures that the company
uses to track/monitor environmental performance. Examples include
both Output Measures such as: number of spills, number of permit
exceedences, tons of hazardous waste minimized, dollar of
environmental fines and penalties, and Input Measures such as
training, compliance, audits, and drills for emergency preparedness:
1) Output:
Input:
2) Output:
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Input:
3) Output:
Input:
4) Output:
Input:
5) Output:
Input:
17. Which, if any, of these performance measures have been translated
into monetary units?
How is this information used within the company?
18. Are environmental operating expenditures tracked independently of
other operating expenditures?
Yes
No
Why?
19. Are environmental capital expenditures tracked independently of
other capital expenditures?
Yes
No
Why?
20. Who or what level decides whether a project should be classified as
environmental? What criteria are used in the decision?
What criteria are used by the company to differentiate between capital
and operating expenses?
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21. Please describe the process of developing cost estimates for
environmental projects utilized by the company:
22. Are estimates of current or future environmental costs utilized in new
product design and development decisions?
Current Environmental
Costs
Yes
No
Future Environmental Costs
Yes
No
In product mix decisions?
Current Environmental
Costs
Yes
No
Future Environmental Costs
Yes
No
In what ways are they used?
23. Describe the process used by the company to determine whether a
capital environmental expenditure should be undertaken:
24. At what organizational level in the company are capital environmental
expenditures approved?
Is this the same level at which these projects are managed? If not,
where are these projects managed?
Does this level differ for non-environmental capital expenditures?
25. When financial analysis of capital environmental expenditures is
performed, are numeric estimates included for intangibles such as
goodwill, improved community or employee relations, fines or
penalties?
Yes
No
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Describe:
26. What techniques (Return on Assets (ROA), Internal Rate of Return
(IRR), Net Present Value (NPV), payback period, etc.) are used to
evaluate the feasibility of the project?
Do these techniques differ from those used to evaluate non-
environmental projects?
Yes
No
Are there different performance levels (i.e., Hurdle Rates) for
environmental projects versus non-environmental projects?
Yes
No
Describe:
27. Is it easier to obtain approval for projects labeled as "environmental?"
Yes
No
Explain:
28. Describe the methods used to estimate future environmental liabilities
that arose due to past activities or operations:
What outside support, if any, does the company rely on to estimate
these liabilities?
What are the primary difficulties involved in estimating these
liabilities?
29. How does the company estimate liabilities for future activities e.g.,
acquisition of sites with existing contamination, future spills, etc.?
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What are the primary difficulties involved in estimating these
liabilities?
30. Under what conditions would the company revise an estimate of a
liability created from past operations or activities?
Would the company revise estimates of past liability as part of a
periodic review process?
Yes
No
Describe:
Would the company revise estimates of past liability based on
anticipated changes in regulations?
Yes
No
Describe
31.
How does your company monitor future environmental regulations?
Who is involved in the environmental regulatory monitoring process?
What individuals or organizations outside your company are used to
help forecast regulatory changes and their potential impacts to the
company?
How does the company link environmental regulatory monitoring with
the environmental budgeting process?
32. What activities does the company engage in to influence regulatory
changes?
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APPENDIX C :DEFINITION OF FACTORS
ENVIRONMENTAL COST ACCOUNTING COOPERATIVE
BENCHMARKINGsM STUDY
RANKING OF FACTORS AND ISSUES
Ranking Factors and Issues
* Cross-Border - NAFTA/trade related -
Effect of NAFTA on environmental
issues facing companies. Will NAFTA
result in changes in laws and
enforcement levels?
* Environmental capital costs vs.
environmental operating costs
Differences between environmental
capital and operating costs in terms of
method of classification, size, timing,
and visibility.
- Effects of differences on process
utilization or redesign
- Effect on management behavior
* Management control - Environmental
Cost Accounting (EGA) can provide
management with tools for making good
internal decisions which integrate
economic and environmental concerns.
* Other metrics/proxies for
environmental cost information - Is an
EGA system set in the traditional mode
of quantifying performance in terms of
dollars the most effective, or is some
other system which measures
performance in terms of, say chemical
pollution units, better?
* Full cost accounting - How to identify
and quantify all the costs (direct, indirect
and intangible) associated with
products/processes or activities within
the boundaries of the organization?
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Environmental cost information for
external-focused issues - Using EGA
information for dealing with issues
external to the company like lobbying,
regulations, providing information to the
community, marketing, etc.
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Ranking Factors and Issues
* Environmental cost information for
decision support - EGA can be used for
decision making, cost monitoring and
control and motivation.
* Environmental cost
drivers/environmental cost inventory -
Identifying basic activities that cause
environmental costs.
* Remedial/cleanup costs
Environmental remediation costs (e.g.,
Superfund) for current and past
operations.
* Environmental cost monitoring - Is it
important to quantify in absolute terms
(dollar amounts) al environmental costs?
* Public financial disclosure statements
- Is it important to have specific
state/national rules regarding disclosure
of financial liability?
* Environmental compliance costs vs.
Environmental voluntary costs - Is it
important to differentiate between the
two categories and deal with them
separately?
* Future environmental liabilities -
Liabilities on the company for 1) Past
activities/products 2) Current and future
activities/products.
* Budgeting processes - Political
documents - Are environmental
projects treated differently than other
(non-environmental) projects?
* Reporting systems - Accounting
system - What kind of management
information system is needed? How
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does it capture environmental cost
information?
* Life cycle cost accounting - Identifying
all cost bearing activities that are
associated with a product/process
through its lifetime, from acquisition
through disposal.
(Note: Full cost accounting only
captures costs internal to the company
whereas, life cycle cost accounting
captures cost external to the company
also. Full cost accounting is thus a sub-
set of life cycle cost accounting)
Ranking Factors and Issues
* Accounting information systems
environmental accounting information
systems - Many companies are
publishing separate environmental
reports. But the reports are not always
consistent in what and how much the
say. I there a need to develop a uniform
system for environmental reporting to
outside constituents?
* Environmental cost allocations
Allocating costs correctly to
environmental activities that cause them.
Ideally everything should be charged to a
product/process rather than to overhead.
* Other
* Other
* Other
COMPANY COMPLETING FORMfc
INDIVIDUAL COMPLETING FORM:
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