Sunday, 5 April 2009

Sustainable Economic Growth

An increased in profit can be achieved when environmental quality is included in a firm’s management objectives.

Sustainable Economic Growth is the nature of economic growth and how this concept relates to the environment. The management of natural resources involves three important social objectives. These are : Economic Growth (EG), Environmental Quality (EQ) and, Intergenerational Concern (IGC). The objective of conventional EG is to maximize income. EG is a combination of higher productivity and higher consumption of raw materials. In an attempt to reach the target, the activities may exhaust stock of natural resources. A world would face food shortages because the population was rising, but the available land is not. Yet, economic growth does not have to involve greater consumption of raw materials and more land.

Better technology can enable higher output with the same amount of raw materials – or even less. Even with finite source, it is possible to have sustainable economic growth. Growth can occur without depleting more non renewable resources. However, just because growth can theoretically occur with increased productivity / technology does not mean there are not constraints on growth. The externalities of growth may negatively affect living standards much more than anticipated. Besides that, technologies as investments are of high cost. It is therefore necessary to include Environmental Quality (EQ) in the management objectives.

Environmental Quality is a set of properties and characteristics of the environment, either generalized or local, as they impinge on human beings and other organisms. It is a general term which can refer to varied characteristics that relate to the natural environment as well as the built environment, such as air and water purity or pollution, noise and the potential effects which such characteristics may have on physical and mental health caused by human activities. EQ objective is concerned with attempt to restore, enhance and preserve the quality of natural resource and ecological systems. To include EQ in the management objectives, there are actions to be done such as providing water treatment installation to conserve water quality, enforce strict emission controls, etc. These of course cost a lot and, in term of resource requirements for the next generation it elicits Intergenerational Concern (IGC).

There is a degree of moral obligation across generations in every society. The notion of an intergenerational contract – an implied agreement between younger and older generations – dates back to Greek philosophers and has formed a central societal pillar throughout history. The contract supposes that each generation takes care of others at differing stages of the life cycle, and is upheld in various forms across societies. Future generations should not be made to carry the costs of today’s economic, environmental and social policies, nor the ramifications of actions undertaken by previous ones. Every generation is the custodian for the next and the behaviour of one will affect others. Intergenerational issues are multifaceted, extending across a range of sociocultural, economic and psychological conditions. There is a substantial amount of complimentary between the objectives of EQ and IGC. Preservation of environmental resources must also ensure that these resources are made available to future generation. These objectives together are often in conflict with Economic Growth. To include the EQ and IGC objective in the objectives of Economic Growth would of course become difficult when there are too many polluters and too many affected parties. The expenditure on EQ and IGC will technically reduce the profit margin of the firm, which may lead to discouragement of to include EQ in EG objective. The questions then arise whether or not an increase in profit can be achieved when environmental quality is included in a firm’s management objectives.

Economic Growth caused by increased productivity, and better technology can enable higher living standards and higher Gross Domestic Product without depleting the earth’s resources. There is no reason why this growth cannot be sustainable forever. The impact of nonrenewable resources on existing theories of economic growth have continuing significance for the economics of sustainability. In managing environmental resources with sustainability in mind, the trick will be to find a concept for this term which is sufficiently broad to embrace most acceptable usages, and also sufficiently practicable to be applicable in the everyday management of the environment. Several areas must be addressed in maintaining distinctions between economic efficiency and equity, more thoroughly about prospects for resource substitution and resource-enhancing technical change, and encouraging the empirical investigation of sustainability issues. Concern about sustainability helped to launch a new agenda for development and environmental economics and challenged many of the fundamental goals assumptions of the conventional economics of growth and development. There are many ways can be implemented to increase profit when the management includes Environmental Quality and Intergenerational Concern in its objectives. One of them is to increase “efficiency” in all aspect of management.

There are many ways in which environmental costs. Loses or benefits may go unrecorded in traditional accounting systems. One broad approach to calculating full environmental cost is to distinguish between internal costs (those borne by the organization) and external costs (those passed on to society e.g. environmental and health costs). In this approach, internal environmental costs to the firm are composed of direct costs, indirect costs, and contingent cost. These typically include such things as remediation or restoration costs, waste management costs or other compliance and environmental management costs. Internal costs can usually be estimated and allocated using the standard costing models that are available to the firm. Direct costs can be traced to a particular product, site, type of pollution or pollution prevention program (e.g., waste management or remediation costs at a particular site). Indirect costs such as environmental training, Resource & Development, record keeping and reporting are allocated to cost centers such as products and departments or activities. External costs are the costs of environmental damage external to the firm.

These costs can be “monetized” (i.e., their monetary equivalent values can be assessed) by economic methods that determine the maximum amount that people would be willing to pay to avoid the damage, or the minimum amount of compensation, that they would accept to incur it.

Full environmental costs = (internal + external costs)

where: Internal costs = (direct + indirect + contingent)
External costs = the costs of external environmental and health damage
(e.g., the costs of uncompensated health effects and environmental impacts –Stratospheric ozone depletion; biodiversity loss; climate change)

From the perspective of society as a whole (i.e., the firm and the rest of society), economic efficiency is achieved (i.e., full environmental costs are minimized) when the firm takes internal measures to protect the environment up to the point where the sum of internal and external costs is minimized. Contingent or intangible environmental costs are costs that may arise in the future to impact the operations of the firm. Contingent costs can fall into both internal and external cost categories, and include:
• changes in product quality as a result of regulatory changes that affect material inputs, methods of production, or allowable emissions;
• an unforeseen liability or remediation cost;
• employee health and satisfaction;
• customer perception and relationship costs; and
• investment financing costs or the ability to raise capital.

Source : Whisler Center for Business and the Arts Environmental Accounting prepared by Berry and L. Failing, 1996

Viewed from Environmental Management Strategy, there are three motivating factors to account for implementing environmental accounting in order of priority :
1. Compliance with standards;
2. A moral commitment to environmental stewardship; and
3. The desire to promote good relations with the residents of local communities.
Within the corporation, environmental accounting concerns the definition, assessment and allocation of environmental costs and expenditures for the purposes of cost and resource management, compliance reporting, and capital budgeting, planning, and. operational decision making. Environmental accounting can be further delineated into two main areas: financial environmental accounting and managerial environmental accounting.

Financial environmental accounting emphasizes the analysis and reporting component of internal costs and liabilities related to environmental matters. This is typically the domain of an accountant who prepares financial reports for lenders and investors. The assessment and reporting of environmental risks and liabilities, capitalization for environmentally related expenditures and the treatment of environmental debt, all fall into this stream of environmental accounting. In these matters accountants are guided by professional accounting standards such as the Generally Accepted Accounting Principles (GAAP).

Managerial environmental accounting has a different focus. It supports the internal management and decision-making process through various techniques of cost allocation, performance measurement and business analysis. This type of environmental accounting is interdisciplinary in scope. On the one hand, scientists, economists, and policy advisors can identify internal and external environmental costs. On the other hand, the management accounting profession can use its expertise to allocate these costs within existing and emerging environmental and sustainability accounting frameworks. Given the two main areas of environmental accounting and the fact that
both accountants and environmental experts are required to delineate and allocate internal and external costs, it is not surprising to find different methods related to environmental accounting in the literature. These include:
• Activity-Based Costing/activity-based management
• Total Quality Management/total quality environmental management
• Business Process Re-engineering/cost reduction
• Design for Environment/life-cycle design and assessment
• Life-Cycle Assessment/life-cycle costing
• Total Cost Assessment
• Full Cost Assessment

Managerial environmental accounting provides a comprehensive means for incorporating environmental considerations into business decisionmaking. The inclusion of internal environmental costs in its accounting will assist a company in working to maximize its current profitability. A firm can further be guided in maximizing its long-run profitability by taking into account external environmental costs, especially to the extent that it may be required to internalize these costs in the future. The adoption of these methods can help put a firm in a stronger competitive position in relation to firms that apply only conventional accounting. The extent of this advantage will depend on how extensively and creatively the firm makes use of these methods in its decision-making.

There are many ways in improving profit of the firm when the management includes EQ and ICG in the management objectives. Improving efficiency in all aspect of management will optimize the costs and hence can be expected to improve both short-term and long-term profit. Efficiency can be achieved by delineate and allocate internal and external costs, and implement the most suitable method related to environmental management and environmental accounting.

1. Barbera, A. J. and V. D. McConnell (1990). The impact of environmental regulation on industry
productivity: Direct and indirect effects. Journal of Environmental Economics and Management 18, 50–65.

2. Environmental Cost (1999), FACO Alternatives for the Joint Strike Fighter. pg. 84
3. Gale, Robert J.P. and Peter K. Stokoe (2001) ‘Environmental Cost Accounting and Business
Strategy’, in Chris Madu (Ed.) Handbook of Environmentally Conscious Manufacturing
(Kluwer Academic Publishers).
4. John C. V. Pezzey and Michael A. Toman (2002) ‘The Economics Sustainability : A Review of
Journal Articles” Discussion Paper 02-03. Resources for the Future, Washington DC
5. Lecture’s handouts, Chapter Four : Resource Management
6. Morgenstern, R, William A. P and Jhih-Shyang Shih. (1998) “The Cost of Environmental Protection”,
Resources for The Future, Washington DC

7. Sustainable Economic Growth (2008) , can be accessed at
/2008/12 /sustainable-economic-growth.html
8. Thomas Schindlmayr (2006), Reconsidering Intergeneration Concerns, Int J Soc Welfare pp : 181–184
9. Wang, S. (2006), Environmental Quality, and Economic Well-being : Are They Related ?

Thursday, 4 December 2008

Subjective notion on garbage

Waste or garbage, can be seen from many different point of view. It can be perceived in totally different ways depending on who you talk to. For some, waste is a source of income, for many waste is a dirty things, a potential risk to health or something worthless, while for some waste is something that is discarded by someone, implicating uselessness. How waste can be perceived in totally different ways depending on who you talk to. People in general, can be categorized as waste producers. When we think of waste and garbage we might think of consequences for public health and the environment. The perception of waste as posing a health hazard is widely spread and promoted, and is sometimes also reinforced by experiences of garbage as constituting a real health problem. It is not surprising that, besides often has a strong negative aesthetic aspect, the characteristics of most waste, the unpleasant looks and smell, makes it easy to relate to waste as a risk for health. Unless is forced to, or as a part of his/her source of income, nobody wants to live nearby garbage.

At the junction of jl. Cirebon & jl. Bandung one of the business district in Medan.
Take a closer look at the woman selling food near garbage mount (below).

Waste in the street can be perceived as a social contagion, an artifact of negative aesthetics. In the mind of people a dirty street is assumed to add some of its qualities to the characteristics of the people living nearby. Thus a dirty street is feared because it could give the impression that people living in that street are also dirty in the eyes of other living in the cleaner district. No one likes to be branded dirty in the eyes of another and some people seem to fear being categorized as dirty due to someone else’s behavior.

Not one single man thought it would be convenient to litter in a very clean street. People were likely to respond that in a very dirty place, where there already was a pile of garbage, there would be nothing stopping them. Although some people expresses concern about the risk of throwing certain types of waste in the street, the main reasons for not littering or throwing garbage in clean streets apparently have more to do with social conventions than worrying about the garbage. Self control is rather directed towards not destroying aesthetic aspects than being normative in the way of ‘never litter’

For some, garbage constitutes a significant problem. They live in districts without a garbage collection service or in neglected neighborhoods. They also take the trash out on the street, but when they wake up it is still there. Their children play in it and occasionally suffer from the health effects, and dogs and cats rip open the bags and spread around the contents. Flies and other vectors accumulate, and foul odours fill the air.

A hut of garbage collector for whom garbage is a source of income

Despite such unpleasant characteristics, garbage is for some the only source of income and can truly be a blessing from God. One man’s waste may be another man’s livelihood.

Tuesday, 28 October 2008

Garbage : between problem and risks

There are many definitions of what we constitutes waste. It eludes any objective definitions. In the Microsoft Encarta Encyclopedia 2003, waste is defined as rubbish or materials that are not needed and are economically unusable without further processing. While in The Concise Oxford Dictionary - 1995, the definition of dirt is an ‘unclean matter that soils’, ‘excrement’, ‘a dirty condition’ or ‘a person or thing considered worthless’. It may be in liquid, gas, or solid form and originate from a wide range of human operations, such as industry, commerce, transport, agriculture, medicine, and domestic activities.
Waste is widely known as a potential source of problem, as well as risk to public health and the environment. It is necessary to distinguish between problem and risks.
A problem is something that has occurred or is presently taking effect. It imply that a compromise has to be made, consciously or unconsciously, between the experienced drawbacks and the possible gains of unchanged behavior. Problems are therefore distinctly separated from risks and are bestowed with different motivational qualities.

Risks, on the other hand, are something that has not yet occurred, but very well may do so in the future. A problem is something that has occurred or is presently taking effect. A risk can turn into a problem, when the forecast of risk actually takes place, or when previously unknown effect of a risks generating issue disclose themselves as having negative effects. Risks project only one possible future. However, since they have not yet developed into problems they do not always generate the same motivational force for a change in behavior as problems do. The way risks are perceived and how grave they are considered to be, surely depends on how they speak to the individual. Most risks is we probably do not even bother with as long as they don’t bother us.

There is much debate today revolving how we can eliminate risks. Eliminating risks is a part of waste management. It is a kind of prevented action as to minimize problems occur in the future on the expectation to prevent waste to cause harm to human health and the environment.

Saturday, 28 June 2008

Industrial Ecology

Concept of Industrial Ecology represents a relatively new and leading edge for manufacturing and business, which has just been intensively considered within the last 10 years. The concept of Industrial ecology was made popular since it was published in Scientific American by Frosch and Gallopoulos (1989) and was first formalized in 1993 by Indigo Development, a team of people from Dalhouse University in Nova Scotia and Cornell University’s Work and Environment Initiative. The concept was further developed by Ayres and Ayres (1996) as well as Ehrenfeld and Gertlet (1997).

Dramatic improvement on knowledge and technology has made levels of consumption on goods and services globally increase. This led to the increase of consumption on material and energy resources while, the biosphere’s capacity to provide resources is limited. At the limits to material throughput, sustainability requires that the growth in the consumption of goods and service be accompanied by a proportional decline in the energy and material intensity of that consumption. This is one of the ideas behind development of Ecological approach to industrial system.

Another consideration is an awereness that the move to the ‘sutainable development’ needs to include industrial sector in their economic activities. However, to include industry in reaching ‘sustainability’, basic development to increase quality on industrial environment and resources efficiency is required, as well as an integrated industrial activities with their community. Implementing industrial ecology involves such things as life cycle analysis, closed loop processing, reusing and recycling, design for environment and waste exchange.

Industrial ecology adapts the ecosystem analogy in industrial system, which is principally concerned with the flow of materials and energy through system at different scale, from product to factories and up to national and global level. In a concept of industrial ecology, industrial system is not viewed as a single system isolated form its neighborhood, but as a unity. It refers to the exchange of materials between different industrial sectors where the waste output of one industry becomes the feedstock of another. In this system, material cycle is optimized, from raw material, components, products and final waste, including resources, energy and capital. Ecology on industry, manufacture etc. is aimed to begin reducing in using energy and material (dematerializing) in a frame of global economy.

One of the elements of industrial ecology is industrial symbiosis. Industrial sysmbiosis focus on flow of materials and energy through network of businesses and other organizations in local and regional economies. It consists of place-based exchanges among different entities that defer a collective benefit greater than the sum of individual benefits that could be achieved by acting alone. Such collaboration can also increase social capital among the participants enganging in exchanges. This collaborations also examines technical and regulatory considerations that have come into play in various locations that can facilitate or inhibit industrial symbiosis. Finally, it considers future directions with regard to industrial symbiosis based on historical and current experience.

Source :
1. Chertow, M. Uncovering Industrial Symbiosis, Journal of Industrial Ecology vol. 11 no. 1
pg 11-30 MIT and Yale University, 2007
2. Korhonen, J. Some Suggestions for Regional Industrial Ecosistems – Extended Industrial Ecology. Eco Management and Auditing 8, pg 57-69, John Wiley & Sons, Ltd. And ERP Environment, 2001
3. Peck, Steven W. Industrial Ecology : From Theory To Practice can be accessed at

Saturday, 21 June 2008

Rearrangement on Public Transport System to Increase Energy Efficiency

The fact that the sale on motor vehicles in this country increase dramatically every year brings a rise to national income. What is concerned regarding this is fuel energy crisis we are facing, when purchasing on fuel will be limited and controlled using smart card system which is being prepared by the government. The increase of motor vehicles will increase demand on fuel (read : ‘fossil’ fuel). Until today it is remained unknown whether or not this tendency on increasing demand has been followed by projection analysis on fuel energy needed as a consequence. Today, just to fulfill the need on fuel energy for industries, transportation, and house electricity, the government faces difficulties due to limited amount of in country fuel stock.

Most motor vehicles sold in developing countries are vehicles that high consume fuel. This is based on consideration that these motor vehicles of high consume fuel are of relatively cheaper technology, so the vehicles can be sold in an affordable price for people in developing countries; compared to motor vehicles with high technology which are much more expensive. Imagine when the number of motor vehicles increase every year, energy crisis will be much worse than what we are facing today. When this crisis affects industrial sector, the social impact will accelerate the plunge of this nation. Industrial sector will collapse which will followed by increasing the number of unemployment; and the social costs will be very exspensive.

The World Business Council for Sustainable Development, an organization representing over 50 large multinational corporations, in 1993 had held a workshop on the parameters of an ‘eco-effisien’ economy, and concluded …. “reductions in energy use of over 90 percent will be required by 2040 to meet the needs of a growing world population ….” In practical term, what this means is that if for example, you currently drive a car that achieves a fuel efficiency of 10 kilometers per litre, by the year 2040, your new, super light car will achieve 10 kilometers from one tenth of a litre. There must be reductions of energy throughput by factors of 9 and 10 over the next 32 years. Today, manufacturer of motor vehicles from developed countries has been developing their technology to produce light energy cars refered to this recommendation.

What is going to happen on highly consume fuel motor vehicles on developing countries then? Will these motor vehicles turned into useless cars prematurely, caused by unsufficiency of fuel stock? Emerging effort in fuel energy efficiency has to be done in many ways. Development on technology to convert fuel energy to alternative energy which is environmentally friendly is one of the many ways. Another way is to remanage public transport system. The good public transportation and its system will reduce the use of private motor vehicles which will increase fuel energy use efficiency and moreover, will reduce air emission.

In most developed countries, the ministry of transport in cooperation with local transport authority have make use of information technology in managing their transportation system. For example, public transport system in Sydney implements Public Transport Management System (PTMS), Real Time Passenger Information Systems, Priority Systems, Timetable Management, Schedule Adherence and Vechilcle Tracking System Motorway Management System. Malaysia, since the year 2005 has put into practice an Integrated Transport Information System, Advanced Traffic Management System, Automatic Incident Detection System and Automatic Vechicle Location System on some local public transport system. The goal is to optimize service on public transport by providing optimal number of bus, adjusting cycle lengths, splits and offsets between intersections to maximize throughput, minimize delays and reduce the number of stops en route, to provide accurate, reliable, consistent and intelligible information to bus passengers while providing low cost easy to use management tools for bus operators.

It is obvious that to use high technology would cost a lot. However, the compensation from reducing subsidy on fuel can be diverted to buying high technology in order to get a long term solution in overcoming fuel energy crisis. This might be a better choice to do than distributing the money as Direct Cash Aid (Bantuan Langsung Tunai) and Student Financial Aid (Bantuan Keuangan Mahasiswa) which probably cannot be done regularly and does not solve the core problem.