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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.
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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
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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.
                                           27

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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)
                                       28

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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.
                                          33

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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.
                                           34

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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,
                                           35

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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
                                            36

-------
 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.
                                           37

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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.
                                           38

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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.
                                 44

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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.
                                   45

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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?
                                   47

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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:
                                   49

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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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