This is a rewrite of an old blog post with a specific focus on Higher Ed. At the end of the article is a link to a whitepaper discussing the prototype Carbon Accounting model implemented at Weber State University.
Managing Environmental Issues and Mission
The Problem – Every institution’s operations have an environmental impact. There are numerous pressures – strategic, regulatory, etc. – that call for responsible environmental stewardship from institutions worldwide. There are real costs associated with addressing these issues. Accurately quantifying the costs of environmental impacts and remediation efforts has proven to be a daunting challenge.
Why It Matters – Faculty, staff, students, families and other stakeholders have become increasingly aware of environmental concerns and are pressuring institutions to consider environmental issues and how they relate to an institution’s mission. Understanding the costs of addressing environmental issues can help institutions make informed decisions which can support their mission, in a financially and environmentally sustainable way.
What Should You Do About It – Expand the culture of your institution by integrating environmental issues into your overall decision-making framework. Use proven strategic management tools such as activity based costing to better manage the environmental sustainability costs of delivering teaching and research.
An environmentally sustainable institution operates in a way that balances natural resource preservation and usage with its strategic and financial objectives.
Every institution’s operations have an environmental impact. There are numerous pressures, strategic, regulatory and otherwise that call for limiting these impacts through responsible environmental stewardship. These pressures require institutions to change their behaviour. This change in behaviour requires an institution to adjust the way it operates, and thus assigns additional costs to addressing the environmental impact.
Accurately quantifying the costs of environmental impacts and remediation efforts is challenging because they do not show up as part of traditional cost accounting models. The true costs associated with environmental stewardship are lost as “overhead” and ignored in traditional accounting. Understanding these costs and layering them into an institution’s decision-making processes will allow the institution to effectively and efficiently utilize its resources. Using activity based costing (ABC) is one way institutions can better understand this competitive advantage.
How can ABC be applied to environmental sustainability?
An emissions inventory is a form of accounting. Accurately understanding the amount of emissions and tracking that amount over time is not unlike financial accounting performed by virtually every institution on the planet. For this reason, tracking and managing environmental emissions such as greenhouse gases (GHGs) can be addressed in much the same way – and employ the same tools and techniques – as financial management.
As in financial accounting, only having an “inventory” provides little insight into how particular activities are performing. Performance indicators provide information that allow for effective management. In order to make management decisions about resources it is necessary to understand what is driving them. Building models that show how activities drive resources to products and services provide this insight – it shows how, why, and by whom resources are consumed. ABC models are a proven methodology that can help an institution effectively manage its GHG emissions.
ABC was originally used to track overhead costs by assigning those costs to particular activities, it is also widely recommended as a means to track environment-related costs. ABC is a proven method to uncover “hidden” costs by directly assigning those costs to activities. The “Environmental Management Accounting Procedures and Principles” paper from the United Nations Division for Sustainable Development advocates the allocation of environment-related costs directly to the activity that causes the cost.
‘Whenever possible, environment-driven costs should be allocated directly to the activity that causes the costs and to the respective cost centers and cost drivers. Consequently, the costs of treating, for example, the toxic waste arising from a product should directly and exclusively be allocated to that product. Many terms are used to describe this correct allocation procedure, such as environmentally enlightened cost accounting, full cost accounting or ABC. ABC, “is a product costing system… that allocates costs typically allocated to overhead in proportion to the activities associated with a product or product family”’1
Simply put, ABC can help move GHG costs from the catch-all line item of “overhead” and directly assigned to particular activities and cost objects which can be analysed for performance.
Using ABC to address an Institution’s GHG emissions
The true power of the ABC methodology comes by integrating value items that are not part of traditional accounting into an ABC model. An ABC model can combine cost, revenue, and GHG emissions into the same model. This allows the correlation of GHG emissions to other specific cost and performance metrics, providing a more robust assessment of environmental performance to management.
A model that includes cost, revenue, and GHG emissions would provide GHG/cost/revenue metrics that would allow institutions to measure margin and GHG emission impacts for Programs / Courses and Research projects.
Decision-makers will be able to know which Programs/Courses and Research projects have a high GHG footprint but low margin versus those with a lower GHG footprint but high margin. This will enable managers to evaluate whether their institution is environmentally as well as financially sustainable.
A model such as this can be extended further to cover an institution’s supply chains.
How do we analyse GHG in our ACE modelling engine?
ACE allows unlimited items of Value to be flowed through a model and also allows additional information to be assigned or tagged to entities within the system. GHG emissions can simply be another “cost” that flows through the model and calculates the Carbon cost on: vehicles, offices, lab equipment etc.
The cost drivers for the entities remain, so the standard ABC analysis of cost assignment remains valid.
This enables a GHG analysis for Programs/Course and Research projects – built on top of the conventional cost analysis and data.
Such analysis enables the potential for evaluation of total cost – including carbon costs. This could show that cheaper equipment might have a higher cost of carbon compared to more expensive equipment that has lower power consumption and needs fewer field repair trips.
Moreover, the model can flow GHG Emissions down to individual Programs and Courses so that the appropriate Tax or Trade amounts can be applied to tuition and the student has full disclosure of the environmental impact of the Program or Course undertaken.
The Benefits of the Approach
An ABC model for GHG emissions provides an institution with the tools to address these decisions. The benefits of this approach include:
- identifying the GHG footprint of particular Programs/Course and Research projects;
- providing a detailed understanding of the energy consumption and emissions of particular activities within a company;
- better defining the “boundaries” of emissions for which a company is responsible;
- understanding how energy and GHG intensity effects cost and how those costs are passed to the student;
- engaging staff in targeted energy reduction steps;
- building a valuable knowledge-base to help measure and justify future executive environmental and financial decisions;
- setting the example and expectation to suppliers and contractors to do the same; and
- enhancing public profile and reputation as a good corporate citizen.
Weber State University Proof of Concept Model
The article link below was written by David Malone Ph.D,2 which details the proof of concept Activity-Based Cost model developed at Weber State University to create a detailed Environmental Footprint of university operations.
Since this was a new implementation, the proof of concept required the development of an initial ABC model before we could flow Environmental Costs through it. Institutions with existing models don’t have to worry about this step and can focus on the additional Environmental data that can be included in your existing model.
- United Nations Division for Sustainable Development. Environmental Management Accounting Procedures and Principles. New York: United Nations, 2001 (p. 75)
- David Malone, Ph. D., is chair of the School of Accounting and Taxation in the Goddard School of Business and Economics at Weber State University. He previously taught at the Universities of Wyoming and Idaho and most recently at Texas Tech University. He earned a Ph. D. in accounting in 1987 from the University of Arkansas. Dr. Malone teaches primarily financial and managerial accounting. He is an active participant in the Consortium for Advanced Management – International, working with their Environmental Sustainability Interest Group. He previously participated in the work of the Knowledge Management Interest Group.