The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/2514-9369.htm

IJOES
35,4 Economic analysis of using green
accounting and environmental
accounting to identify
504 environmental costs and
Received 14 March 2019
Revised 11 April 2019
sustainability indicators
Accepted 7 June 2019
Mohammad Mahdi Rounaghi
Department of Accounting, Mashhad Branch, Islamic Azad University,
Mashhad, Iran

Abstract
Purpose – Manufacturing and service companies are likely to make a variety of costs possible.
Environmental costs are one of those costs. Environmental performance is one of the most important factors
in assessing a company’s success. For environmental accounting, companies need to work together as teams
of system designers, chemists, engineers, production managers, operators, employees, purchasing circle and
accountants (those who may have never worked together before).
Design/methodology/approach – Nowadays, most of the companies are facing environmental issues
and are seeking an appropriate way to report and disclose the information to the public. The environmental
pollution issue is among the most important problems of today’s human society. Therefore, this is very
important to use environmental accounting as an attempt towards protecting the environment.
Findings – Green accounting is a type of accounting that attempts to factor environmental costs into the
financial results of operations. Apart from answering the question whether the economy has performed
sustainably during one or more accounting periods, green accounting indicators [green gross domestic
product (GDP)] can be used in policy formulation and evaluation. Green GDP calculations can contribute to
raise awareness for sustainability concerns among national governments/policy-makers, who tend to
concentrate on their countries’ fast economic development.
Practical implications – Environmental accounting can be applied to large and small companies in
various industries, as well as in manufacturing or service sectors. Environmental accounting can be applied
on a large or a smaller scale in a systematic manner for the required bases.
Social implications – Environmental accounting requires the collection of information from all the
groups. People of various groups need to talk to each other to achieve a common vision and understanding of
environmental accounting and to realize this vision.
Originality/value – Undoubtedly, to establish an ideal system of environmental accounting in the country,
accountants can become a powerful forearm of the government regarding economical and financial controls. To
achieve this goal, environmental accounting objectives and tasks should be identified and defined in detail, and the
standards, rules and criteria should be grounded and codified based on reasonable and practical principles.
Keywords Sustainability indicators, Green accounting, Environmental cost,
Environmental accounting, Green GDP
Paper type Literature review
International Journal of Ethics and
Systems
Vol. 35 No. 4, 2019
pp. 504-512
1. Introduction
© Emerald Publishing Limited Sustainability contains three pillars; they are environmental, social and economic parts.
2514-9369
DOI 10.1108/IJOES-03-2019-0056 These three pillars of sustainability overlap and are interconnected (Hamoud Ismail et al.,
2018). Environmental accounting is a wide area of accounting science. This approach Identify
provides reports for internal use that is called environmental management accounting; this environmental
helps management to decide about pricing, fixed costs control and capital budgeting, and its
external function is to disclose environmental information favored by public and financial
costs
communities. Environmental accounting includes production, analysis and the use of
information related to financial matters in the environment regarding the economic and
environmental performances of a company. It is aimed to create a better relationship
between financial and environmental performances, including environmental constancy in 505
the organization’s culture and performance by providing needed information for decision-
makers to reduce commercial costs and risks, thereby adding value. Economic savings only
constitute part of the business for sustainable development (SD). The higher value relates to
non-obvious advantages that are related to the social and environmental responsibilities of
the company. Among the non-obvious advantages, value of the brand and its popularity, the
ability to attract and maintain the best people, higher efficiency of the workforce, etc. could
be mentioned. Environmental accounting instruments especially for industrial accounting
(that includes both social impacts and environmental impacts) can help financial managers
to respond to the increasing volume of legislation development and voluntary actions.
Waste recovery has become one of the most important strategies to reduce
environmental issues and improve economic performance in an industry. Thus, different
systematic approaches have been developed for waste recovery. With increasing resource
scarcity and environmental impacts resulting from inefficient resource utilization,
accounting for resource consumption along the life cycle of a product or service becomes
critical for designing production–consumption systems. Many environmental costs can be
significantly reduced by making better business decisions for investing in more
environment-friendly technologies (green industries) and re-designing processes and
products because some of these costs may not add value to the system or product (Wan
et al., 2015; Leung Pah Hang et al., 2016; Özokcu and Özdemir, 2017).
All recent analyses acknowledge that environmental resources are in short supply and
that the “carrying capacity” calculations ought to be based on them. The financial sector
plays a significant role in the mobilization and utilization of savings, facilitation of
transactions and monitoring of resources towards productive activities in developing
countries. An efficient financial sector is expected to increase economic efficiency in general
and growth process in particular. The sustainability is characterized by several aspects and
so it is not simple to define one representative value. SD rests upon three pillars: economic,
social and environmental sustainability. After its first appearance on the international scene
in the1980s, the SD concept gradually gained more space in public discussions. SD requires
that the development programmes should not only focus on economic sustainability but it
should also take into account the complex and dynamic interactions among economic
growth, environmental degradation and intra/inter-generational equity in the society (Chen
ıcı, 2015).
et al., 2014; Nasreen et al., 2017; Cucchiella et al., 2017; Atıl As
Environmental accounting can be applied to large and small companies in various
industries, as well as in manufacturing or service sectors. Environmental accounting can be
applied on a large and a smaller scale in a systematic manner or based on the required bases.
The form of environmental accounting selection by companies reflects the purposes and
reasons for using it. In each company, the organization’s top management support is
essential for the success of environmental accounting, because it may create a fresh look at
environmental costs, performance and company’s decisions in this regard. Disciplinary
investigation of environmental problems by both economists and ecologists is at least two-
century old (Turner and Tschirhart, 2017). National accounts comprise the sale and
IJOES purchase of goods and services in the economy at the cost of their weight to reach an
35,4 accumulated sum of gross domestic product (GDP). These accounts alone have no practical
meaning, and the type of data used in calculating GDP is usually characterized by
specifications and units of measurement, such as products and services produced by firms
because these goods and services are traded on specific markets. Governments usually
calculate these kinds of goods and services in terms of GDP. Everyone knows what a car or
506 house is. But what if we calculate environmental products and services? Therefore, we will
encounter a problem and that such a definition of environmental products and services does
not exist. Because many environmental services are public goods, transparent markets are
not available for their units. Therefore, the market for ecosystem services will be challenged.
In practice, such markets tend to violate standard business units. When legislators attempt
to compensate for ecological losses, they have to rely on unconventional units such as a
cubic metre of moisture, a pound of nitrogen or the number of wild ecosystems. These
measurement units are irrelevant because they are a combination of multiple goods and
services, that is, moisture includes numerous public and private benefits. The unreality of
these measurements is understandable and is problematic from a procedural point of view.
In general, they must be measured and calculated for the calculation of GDP and national
budgets. But it should be considered that when these combined measurement units are
adjusted to adapt to business units, there is no guarantee that these services and ecological
products will be maintained.
With changing customer preferences and volatile economic–technological environments,
firms have accelerated the rate of new product introductions (NPIs) to sustain corporate
growth. However, NPIs have adverse impacts on the environment (Palmer and Truong,
2017). A new system of sustainable accounting known as green accounting has emerged. It
permits the computation of income for a nation by taking into account the economic damage
and depletion in the natural resource base of an economy. ‘Green accounting’ is the popular
term for environmental and natural resource accounting, which incorporates environmental
assets and their source, and sink functions into national and corporate accounts. The United
Nations first issued a handbook on a System of Integrated Environmental and Economic
Accounting (SEEA) in 1993. SEEA introduces nature’s environmental and economic assets
and the “environmental cost” of their degradation and depletion into the System of National
Accounts (SNA) (United Nations, 1993).
Applying “green” accounting to value the commercial contribution and depletion of a
forest is only a short-run variation of the traditional approach to the net national product
and arguably provides less information. When the green accounting is used, it is necessary
to identify and quantify the environmental impact of the investment project and the cost of
annulating this impact (soil remediation, water purification and other clean-up action).
Without these calculations, investment managers may make very expensive wrong
decisions, especially from the perspective of future generations. The costs treated by the
standard accounting are insufficient if the environmental and social responsibilities are
considered (Cairns, 2001; Stanojevic et al., 2010).
Industries are becoming progressively more aware of the environmental and social
liabilities pertaining to their operations and products, with associated financial effects (De
Beer and Friend, 2006). Environmental accounting is a wide area of accounting science. This
approach provides reports for internal use that is called environmental management
accounting; this helps the management to decide about pricing, fixed costs control and
capital budgeting, and its external function is to disclose environmental information
favoured by public and financial communities.
2. Green accounting Identify
The operational performance of an organization can be determined with the help of certain environmental
processes such as documentation and reporting the emissions of greenhouse gases. However,
the conventional accounting system is determined not to be considered for new or existing
costs
demands for natural resources. This demand on natural resources may destabilize the
sustainability of economic performance and growth, depletion of natural capital, environmental
degradation as a social cost of economic activity and also the account of non-market goods in
GDP. Through the lens of conventional national accounting, resource depletion and natural 507
environment degradation often appear misleadingly as desirable economic growth. The old
SNA has been revised and a set of environmental “satellite accounts” has been proposed.
Certain weaknesses, however, pervade the new proposals. The conventional measurements
remain largely unaltered, and the satellite accounts are of unclear purpose and unnecessarily
complex. As proposed, they rely on the valuation of environmental stocks, whereas the
economically more important flow accounts, to their detriment, are to be derived indirectly
from changes in stock values. SNA, the paper stresses, is primarily an economic framework,
incapable of capturing all environmental change, and the national accounts are far more useful
economically than environmentally (El Serafy, 1997; Farouk et al., 2012).
Considering the growing population and the limited availability of natural resources, the
issue of environmental protection has been raised as one of the most important issues of
human society today. Knowledge of “environmental economics” or “green accounting” is, in
fact, a science that helps to develop the sustainable use of natural resources. Knowledge of
the environment explores how to manage and develop environmental resources. This science
tries to help humans achieve SD and environmental considerations in advancing
technological and socio-economic development. The goal of environmental economists is to
better understand the relationship between economic activities and nature and make us more
informed about environmental issues. The basic point in this science is that the economy and
the environment are not separate from each other, there is no economic decision that does not
have an effect on the environment and there is no environmental change in which there is no
economic impact. The environmental economist tries to reconcile “environmental protection”
and “economic activity” with the help of tools and economic theories. Therefore, the issue of
environmental protection requires an environmental management system that is integrated
with other management systems. The environmental management system is a tool that
enables the organization to achieve the level of environmental performance it requires and to
control it systematically. The accounting information system, as an integral part of the
management information system, can play a significant role in helping to protect the
environment from polluting manufacturing companies.
Green accounting is a system to create costs and obtain environmental benefits
(environmental). It provides information that helps managers in evaluating, operating,
controlling, deciding, reporting and protecting the environment. At the beginning of the
emergence of accounting issues, environment companies did not want to disclose
environmental damages in their financial statements, but companies were forced to comply
with these issues because of time lapse and increased damage. Recognizing the
environmental costs associated with the products of a company or organization is very
important for a good management decision. The use of environmental accounting in issues
such as costing, investment analysis and strategic management decisions has increased.
Today, many companies are facing environmental issues and are looking for an appropriate
way to report and disclose information to the general public and use this information in the
direction of developing and protecting the environment. As a result, the use of
environmental accounting is an effort to protect the environment.
IJOES 3. Opportunities of green accounting: It is superiority over conventional
35,4 accounting system
Conventional national income accounting does not fully take into account pollution-
preventive expenditure. Green accounting considers pollution-preventive expenditure and
also environment-impact studies. Conventional national income accounting does not
measure the depletion of natural resources and the degradation of the environment. Green
508 accounting considers the costs of depletion of natural resources and changes in
environmental quality. Conventional national income accounting does not fully report
different types of resource expenditure such as:
 consumption of environmental goods such as exhaustible resources; and
 conflicting uses of environmental services such as the atmosphere used by
producers as an input into production and by household as a consumption good.

On the other hand, green accounting expands and complements the conventional SNA with
regard to costing:
 the use (depletion) of natural resources in production and final demand; and
 the changes in environmental quality, resulting from pollution and other impacts of
production, consumption and natural events.

4. Environmental accounting
Environmental accounting includes a set of activities that increase the power of accounting
systems to identify, record and report the effects of environmental degradation and pollution.
Environmental accounting is based on environmental integration as a source of capital and the
inclusion of environmental costs as one of the acceptable costs in the economic and
computational processes. The objective of environmental accounting is to provide information
that helps managers evaluate performance, decision-making, control and reporting.
Environmental accounting is based on economic and environmental concepts, and the use of
market-based values requires the creation of a change in culture. Environmental accounting
delivers some of these changes to the organization and its wider community and contributes to
the determination of the goal of continuous development as a specific approach by providing
more basic knowledge and engaging in day-to-day activities. Companies to run environmental
accounting needs, operating teams, including system designers, chemists, engineers,
production managers, operators, employees, purchasing circles and accountants (those who
may have never worked together before), have to work together to implement environmental
accounting, because environmental accounting is not a controversial issue solely in the field of
accounting and requires the collection of information from all the groups. People of various
groups need to talk to each other to achieve a common vision and understanding of
environmental accounting and to realize this vision. Companies with an official environmental
management system may also want to recognize environmental accounting because it is a
supportive tool for making reasonable decisions on these companies. How companies define
environmental costs depends on who wants to use this information. Although profit companies
bear costs for the environmental issue, it is difficult to provide an illustration of the
environmental performance of the benefits of bearing these costs, given the existing accounting
structure. For this reason, many profit-making enterprises incorporate the cost of
environmental activities without addressing their benefits as cost items and do not effectively
disclose them in financial reporting. The disclosure of environmental costs to maintain the
wealth of shareholders increases the value of the firm.
 At the moment, there is a new attitude towards the environmental impacts of the Identify
industry’s fortunes, which has changed the perception of for-profit organizations from environmental
designing products and processes to after-sales services. Hence, management is not only
responsible for the effectiveness of the activity of the institution under its supervision, but it
costs
is also responsible for any kind of profit-making activity in relation to environmental
problems. A profit unit, along with economic responsibility, also has to accept
environmental or social responsibility. The disclosure of environmental costs to maintain
the wealth of shareholders will increase the value of the corporate entity.
509
Management accounting as a decision support system in dealing with actual costs incurred
by the business firm inevitably separates environmental costs from other costs and provides a
different look at providing financial information in this regard. On the one hand, managing
costs involves external factors and, on the other hand, involves internal factors of the firm.
Although the external factor is environmental satisfaction, reducing costs by identifying its
factors with the aim of eliminating activities without economic value is difficult. In other words,
environmental costs are sometimes devoid of value addition, and the firm does not have the
desire to eliminate environmental degradation, but it controls and reduces the cost of such
activities, it is necessary to differentiate the cost and select the appropriate indicators.
Environmental costs are one of several types of costs that companies incur to produce goods
and services, and subsequently, environmental performance in today’s world is one of the
important criteria for measuring commercial success. Environmental costs and their function
have attracted the attention of managers for the following reasons:
 Many of the major environmental costs could be reduced very much or be removed
as the result of business decisions.
 Environmental costs may be ambiguous in overhead account or may not be
considered at all.
 Many environmental costs can be removed through gaining income from sale of
useless byproducts or receiving “green technology” certification.
 Better management of environmental costs can cause the development of
environmental performance and has major benefits for human health and, on the
other hand, can cause the success of the business unit.
 Understanding environmental costs and performance of product manufacturing
process can cause more detailed costing and more accurate pricing and thus can
help companies to design their process of production of goods and services with
more emphasis on environmental issues.
 Environmental accounting and environmental performance can support the
development of a company and its operations in terms of the environmental
management system.

4.1. Types of environmental accounting

According to the report of the US Environmental Protection Agency in 1995, the broad term
of environmental accounting is divided into three distinct parts to show that their focus and
users are different (Table I).
For different users who require environmental information related to the company, there are
various ways and tools for environmental accounting to fulfil this informational needs.
However, there is broad agreement on two main groups of environmental impacts related to
companies:
IJOES (1) environmental effects of companies on the economic system of companies
35,4 (monetary information) and
(2) the effects of the company on environmental system (physical information).

4.2 Benefits of environmental accounting

510 Although environmental accounting can focus on environmental management accounting
or financial accounting, the most prominent benefits come from the application of
environmental management accounting methods. This type of accounting focuses on
gathering, estimating and analysing costs associated with the use of energy and physical
materials such as timber, metal or coal. Standard accounting practices tended to place these
costs in the catch all category of overhead, but environmental management accounting
allows accountants to apply activity-based cost principles to more accurately associate these
costs with various projects or events. Decision-makers who can see exactly where these
natural resources are used across various projects can locate areas of synergy that allow
them to reduce the amount of wasted materials at the programme or enterprise level.
Environmental accounting should also have environmental reporting on its side and this is
important for users of environmental reporting to be aware of environmental performance
(users of information want to know that what have been the company’s achievements about its
relationship with the environment and the community) and the disclosure of information about
environmental costs to increase (maximize) shareholder’s wealth that causes the increase of the
firm’s value. So ultimately, environmental (green) reporting will cause the increase of corporates’
value, maximizing shareholders’ wealth, sustainable growth of the company and so on.

4.3 Environmental auditing

Environmental audit has a decisive role, and the reliability of environmental audit is very
important. In principle, first, environmental scientists conduct the audit process. This kind
of audit specifies the amount of adherence to regulations and then it is guided to a higher
level and promotes adherence to environmental controls of management. To promote
regulations, environmental auditors’ training should be considered apart from financial
auditors. Assets and liabilities are reliable criteria about environmental impacts; in this way,
auditing relies on the accounting report to provide a clear picture of environmental
performance. Environmental audit types include:
 observance audit: guarantees that the company observes all environmental
regulations;
 systems’ audit: considers the issue that how these systems are used internally to
manage environmental risks;
 estates’ exchange and transfer audit: this is used for buying estates and identifies or
reduces the potential risks interfering in these deals in terms of environmental risk;

No. Types Focus of each part Users

1 Income accounting National, nationalities Outside the organization

2 Financial accounting Business companies Outside the organization
3 Management accounting Business companies, production Inside the organization
line, managers of different sections
Table I.
  production facilities audit: this is the audit of storage and sales in order for tracking Identify
risky materials during the life cycle from the origin to the destination; environmental
 audits which consider the dissuasive actions and that can reduce the risk that the costs
company will have to bear in the case of performing an action;
 audits which determine the amount of obtained debts and costs related to
environmental damages; and
 audits which evaluate the production process solely to guarantee that these 511
products create specific requirements.

5. Conclusion
Businesses and academics worldwide agree regarding the benefits of sustainable
development (SD). Improving reputation and branding and increasing revenues by reducing
costs are the primary strategic objectives of any entity. Green accounting initiatives and
strategies for SD comprise the results of a decade research work within an interdisciplinary
team of academics, with all concerned about the global crises.
Environmental accounting is a comprehensive tool for introducing environmental
considerations into business decisions. The introduction of internal environmental costs in the
accounting system will help companies make decisions that, in addition to increasing long-term
profitability, will improve the environmental performance and, by introducing themselves as
the green industry to the capital market, will increase the shareholder’s wealth and will provide
an environmental accounting system based on the idea of classical accounting evolution. In this
regard, the costs of pollution and their elimination as a function of production or services, along
with the profit and the cost of goods and services themselves, are calculated. An environmental
management system should be a method for accounting for all environmental costs and will
use social and domestic environmental costs together to share costs and design products and
processes and other future corporate decisions. Companies, with limited resources and small-
scale frameworks, can increasingly advance in environmental accounting. They can start
environmental accounting for costs that they have the most information about and then move
on to activities that are more difficult to determine for their environmental costs. Where it is
difficult to estimate the internal environmental costs of the company or the senior management
of the organization is not remarkable about determining and tracking these costs, it would
probably be better to estimate and assess these costs qualitatively. In this regard, the cost of
pollution and its elimination as a function of production or service should be calculated along
with the profit and cost of goods and services themselves. The environmental management
system should be a method for accounting for all environmental costs, and it will use social and
domestic environmental costs together to share costs and design products and processes and
other future corporate decisions. Companies, albeit with limited and small scale and
frameworks, can increasingly advance in environmental accounting.
Undoubtedly, to establish an ideal system of environmental accounting in the country,
accountants can become a powerful forearm of the government regarding economical and
financial controls. To achieve this goal, environmental accounting objectives and tasks
should be identified and defined in detail, and the standards, rules and criteria should be
grounded and codified based on reasonable and practical principles. Thus, the competent
professional conventions should undertake the task of codifying and adjusting professional
rules and especially environmental accounting standards, so that the companies will be
required to observe the approved processes.
IJOES References
35,4 ıcı, A. (2015), “On the sustainability of the economic growth path of Turkey: 1995 – 2009”,
Atıl As
Renewable and Sustainable Energy Reviews, Vol. 52, pp. 1731-1741.
Cairns, R.D. (2001), “Seeing the trees as a forest: what counts in green accounting”, Ecological
Economics, Vol. 36 No. 1, pp. 61-69.
Chen, B., Dai, J. and Sciubba, E. (2014), “Ecological accounting for China based on extended exergy”,
512 Renewable and Sustainable Energy Reviews, Vol. 37, pp. 334-347.
Cucchiella, F., D’Adamo, I., Gastaldi, M., Lenny, K.S. and Rosa, P. (2017), “A comparison of
environmental and energetic performance of european countries: a sustainability index”,
Renewable and Sustainable Energy Reviews, Vol. 78, pp. 401-413.
De Beer, P. and Friend, F. (2006), “Environmental accounting: a management tool for enhancing
corporate environmental and economic performance”, Ecological Economics, Vol. 58 No. 3,
pp. 548-560.
El Serafy, S. (1997), “Green accounting and economic policy”, Ecological Economics, Vol. 21 No. 3,
pp. 217-229.
Farouk, S., Cherian, J. and Jacob, J. (2012), “Green accounting and management for sustainable
manufacturing in developing countries”, International Journal of Business and Management,
Vol. 7 No. 20, pp. 36-43.
Hamoud Ismail, A., Abdul Rahman, A. and Ahmed Hezabr, A. (2018), “Determinants of corporate
environmental disclosure quality of oil and gas industry in developing countries”, International
Journal of Ethics and Systems, Vol. 34 No. 4, pp. 527-563.
Leung Pah Hang, M.Y., Martinez-Hernandez, E., Leach, M. and Yang, A. (2016), “Towards a coherent
multi-level framework for resource accounting”, Journal of Cleaner Production, Vol. 125,
pp. 204-215.
Nasreen, S., Anwar, S. and Ozturk, I. (2017), “Financial stability, energy consumption and
environmental quality: evidence from South Asian economies”, Renewable and Sustainable
Energy Reviews, Vol. 67, pp. 1105-1122.
Özokcu, S. and Özdemir, O. (2017), “Economic growth, energy, and environmental Kuznets curve”,
Renewable and Sustainable Energy Reviews, Vol. 72, pp. 639-647.
Palmer, M. and Truong, Y. (2017), “The impact of technological green new product introductions on
firm profitability”, Ecological Economics, Vol. 136, pp. 86-93.
Stanojevic, M., Vranes, S. and Gö Kalp, I. (2010), “Green accounting for greener energy”, Renewable and
Sustainable Energy Reviews, Vol. 14, pp. 2473-2491.
Turner, P. and Tschirhart, J. (2017), “Green accounting and the welfare gap”, Ecological Economics,
Vol. 30 No. 1, pp. 161-175.
United Nations (1993), Handbook of National Accounting System of Integrated Environmental and
Economic Accounting – System of Integrated Environmental and Economic Accounting.
Wan, Y.K., Ng, R.T.L., Ng, D.K.S. and Tan Raymond, R. (2015), “Material flow cost accounting
(MFCA)–based approach for prioritization of waste recovery”, Journal of Cleaner Production,
Vol. 107, pp. 602-614.

Corresponding author
Mohammad Mahdi Rounaghi can be contacted at: [email protected]

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: [email protected]