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 ?

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