environmental management accounting as a reflexive modernization strategy in cleaner production

Abstract

Understanding the material purchase value of wastes and emissions and related processing costs is the essential contribution of an Environ-mental Management Accounting methodology proposed by a United Nations expert working group organised through the Division for Sustain-able Development (UNDSD). Tracing costs and benefits according to this UNDSD methodology, considered as a reflexive modernizationstrategy in this article, sheds new light on cleaner production initiatives for corporate sustainability. Information on the first category of costs,waste and emission treatment, is generally the most accurate. Information on the second category, prevention and environmental managementcosts, is more difficult to determine because this category overlaps with, or is confused with, the first category of costs. Data for the two noveland innovative cost categories of the material purchase value of waste and emissions and related processing costs are even harder to obtain.Frequently, the costs are either hidden in overhead accounts or are not recorded because they are not required in conventional accounting sys-tems. The outcome is that companies, even though they may profess otherwise, have very little knowledge about their full environmental costs,cost saving opportunities, or how best to achieve cleaner production initiatives to promote corporate sustainability. A more systematic applica-tion of the UNDSD EMA methodology would provide a better record of costs and act as a catalyst in promoting cleaner production processes.This application inevitably requires reflexive institutions including reflexive corporations, that is, corporations with the capacity to exam-ine the side effects of their operations as modernization rebounds upon them. 2005 Elsevier Ltd. All rights reserved.

Keywords: Environmental management accounting; Cleaner production; Corporate sustainability; Reflexive modernization; Reflexive corporations

1. Introduction

In 2001, Environment Australia, EPA Victoria, and the In-stitute of Chartered Accountants of Australia, funded a studyto explore the introduction of environmental management ac-counting (EMA) at four different enterprises across Australia:Methodist Ladies College, Perth (education); CormackManufacturing Pty Ltd, Sydney (plastics manufacturing);Services at AMP (the provision of office services e AMP,

(wool processing). On the basis of the findings, a report wasprepared by Deegan [1] in which he stated that:

The available evidence shows that the majority of managerswithin organisations have very little knowledge about the en-vironmental costs associated with conducting their operations(although some accountants and other managers might not be-lieve this to be the case) and this lack of information is, inlarge part, due to deficiencies in the accounting systems. Itis clear that many cost saving opportunities are being lost be-Environmental management accoustrategy in clea

Robert

Institute of Environmental Studies, The University

Received 14 April 2005;

Available online

Journal of Cleaner ProductionAustralia-wide); and GH Michell & Sons Pty Ltd, Adelaide

* Tel.: C61 2 9385 6998; fax: C61 9663 1015.E-mail address: r.gale@ecological-economics.org

0959-6526/$ - see front matter 2005 Elsevier Ltd. All rights reserved.doi:10.1016/j.jclepro.2005.08.008nting as a reflexive modernizationner production

Gale*

of New South Wales, Sydney, NSW 2052, Australia

accepted 24 August 2005

19 October 2005

14 (2006) 1228e1236www.elsevier.com/locate/jcleprocause of the lack of information about environmental costs.

This conclusion supports findings reported in the UnitedNations Division for Sustainable Developments [2] guidelinedocument Environmental Management Accounting: Principles

and Practices as well as specific case studies from the US andEurope.1 It also confirms a more important finding: companiesare not using an internationally agreed upon approach to theidentification and allocation of environmental costs. Thismeans that other environmental costs at the Methodist LadiesCollege, Cormack Manufacturing, AMP, and GH Michell &Sons have yet to be discovered. The costs are either unrecordedor hidden in overhead accounts.

Research on EMA is based on the view that wastes andemissions (non-product output) that leave a company, oftencreating an externality elsewhere in the economy, represent in-efficient service delivery and operations. The only thing thatshould leave an enterprise is a product or service for sale. Un-less waste can be sold as a feedstock to another industry it rep-resents a cost to the company of an inefficient productionprocess, one that is likely to become increasingly expensiveas regulatory pressures rise. What this indicates is that thereis a poorly coordinated effort at collecting information onthe full range of environmental costs because the conventionalestimates of waste disposal costs and emission licences areless than the costs of elimination.

The point about inefficiency is critical. It means that a com-pany pays three times for non-product output (that is, itswastes and emissions) [2].

1. The company pays the cost of purchasing raw materials(say, for example, fuel, water, and chemicals), a proportionof which ends up as wastes and emissions;

2. The company pays for the operational use of raw materialsthrough labour and infrastructure investment costs, a pro-portion of which ends up as wastes and emissions; and

3. The company also pays for the disposal of the costs ofwasted materials purchased or for the licences which per-mit emissions of a proportion of the material purchasecosts of wasted materials.

The costs of off-spec products that have to be reproc-essed or treated as solid or liquid wastes or sold at lower pricesthan obtainable from selling first quality products adds an ad-ditional level of complexity.2

In aggregate, the range of costs means that the MaterialsPurchase Value (MPV) of waste materials is a major environ-mental cost, accounting for 40e90% of total environmentalcosts in certain sectors as reported by Christine Jasch fromcompany surveys in Austria and Germany [2]. Additional

1 See, for example, studies available at the Environmental Management Ac-

counting Research and Information Center (EMARIC accessed 24 January

2005 at http://www.emawebsite.org/about_ema.htm).2 In response to a referees question about production that does not meet

specifications, the costs of producing off-spec products are also vastly

underestimated and require more attention in EMA. Although in some indus-

tries the off-spec materials can be reprocessed, costs would nevertheless in-

clude reprocessing time, energy, employee time and perhaps new chemical

additives. In other industrial sectors, the materials are not readily recyclable

R. Gale / Journal of Cleaner Pwithin the facility and must either be sold at a much lower cost than top quality

products or buried or burned.studies are required to clarify which sectors have the lowerand higher percentages.

Given this situation, the purpose of this paper is to report ona recognised practical problem concerning the lack of infor-mation about environmental costs that has implications forcleaner production as well as the transition towards corporatesustainability. Cleaner production is a management strategy toreduce resource use, waste and pollution. It is a preventativestrategy to minimize the impact of production and products onthe environment [3]. As noted by the United Nations Envi-ronment Program (UNEP), It is a broad term that encom-passes what some countries/institutions call eco-efficiency,waste minimization, pollution prevention, or green productiv-ity, but it also includes something extra [4]. Its proper imple-mentation depends on an understanding of environmentalcosts in organisations and overcoming the broader challengesand barriers that conventional accounting represents to newaccounting initiatives.

In the following account, a link between EMA and cleanerproduction is proposed at the level of strategy development.While there is debate about the meaning of the terms ecolog-ical modernization and reflexive modernization [5e7], thetwo terms refer to theories of social change. At a general level,one can argue that EMA is a modernization strategy in cleanerproduction given the claim that modern society possessesa capability to carry through an institutional reflexivity andto build a capacity in society enabling it to handle its ecolog-ical crisis [8]. The term institutional reflexivity is intendedto convey both self-reflection and self-confrontation [6]. In thefollowing account, ecological modernization may be a minorresponse if reform initiatives are considered only in terms ofeco-efficiency and other weaker forms of sustainability prac-tice. This stream is particularly evident in the view that envi-ronmental problems represent one crisis rather than an array ofcrises: an unduly optimistic and nave view about the ability ofsimple solutions such as eco-efficiency to deliver sustainabilityoutcomes is counter-productive. The second and more potentstream of modernization advanced herein as reflexive mod-ernization, is the view that reflexivity represents a responseto the turbulence brought on by an array of crises and in-creases in the relevant uncertainty of the causal texture ofthe organizational environment. In this view, the interactionbetween the corporation and its environment challenges theadaptive capacity of the corporation to address sustainabilityissues. This view is intended to complement and extend thecomplexity and multiple character of the causal interconnec-tions of dynamic organizational environments identified asturbulent fields by Emery and Trist [9].

2. Environmental management accounting: principlesand practices

The guideline document Environmental Management Ac-counting: Principles and Practices was proposed in 2001 byThe Expert Working Group on Environmental Management

1229roduction 14 (2006) 1228e1236Accounting e a group created by the United Nations Division

are already familiar given the costs of regulatory compliancefor Sustainable Development [2]. This guideline (hereinafternoted as the UNDSD EMA methodology) has become theExposure Draft of the International Guidelines on Environ-mental Management Accounting (EMA) released by the Inter-national Federation of Accountants (IFAC) in November 2004for comments. This new document provides the following an-swer to the important question Why EMA? [10].

First of all, various stakeholders, such as business customers,investors, local communities and government are applyingpressure on organisations to continually improve on and reportenvironmental performance. Second, as a result of this stake-holder pressure, environment-related costs, earnings and ben-efits are on the rise and becoming a more important part ofthe organisational decision making. And finally, there is in-creasing recognition that conventional MA practices often donot provide sufficient, and sufficiently accurate, informationfor environmental management and environment-related costmanagement. As a result, many organisations significantly un-derestimate both the costs and benefits of sound environmentalmanagement.

The difficulty of accounting for costs and benefits is thetopic of much debate and innovation in EMA and relatedtopics such as Total Cost Assessment, Life Cycle Assessment,and Environmental Cost Accounting [2,11e16]. On the onehand, three categories of costs are already well establishedin the EMA literature. These include the assessment of totalannual expenditure on waste and emission control costs, pre-vention and other environmental management costs, and re-search and development. On the other hand, two novel andinnovative categories of costs have been identified by theUNDSDs Expert Working Group on Environmental Man-agement Accounting: Principles and Practices. These costsare the material purchase value of non-product output andthe processing costs of non-product output. More simply put,the two costs are the material purchase value of wastes andemissions (i.e., non-product output) and the processing costsof wastes and emissions (i.e., non-product output).

Jasch [14] states that the sum of all these costs (all the abovecategories) often provides a frightening picture of total annualcosts of inefficiency. Given the significance of a frighteningpicture to operational managers, there is a need to discoverthe extent of these inefficiencies through novel practical appli-cations of EMA. The lack of original research on Categories 4and 5, that is, the material purchase value of wastes and emis-sions and related processing costs, needs to be addressedthrough case study analysis. In this regard, while technologicalfixes may yet transform industries, companies cannot rely onnew technologies alone as a source of competitive advantage.There is also a compelling need to promote cleaner productionthrough new management techniques. Companies need break-through environmental management accounting to address thevexing question of how to ensure that their industries transitionto an environmentally sustainable footing. EMA providesa company with more accurate information to increase its effi-ciency in pollution prevention, environmental supply chain

1230 R. Gale / Journal of Cleaner Promanagement, environmentally preferable purchasing, andenvironmental management systems [15]. On this point, theEMA methodology is an original, albeit largely unexploredtechnique. It provides a unique approach to accounting for en-vironmental costs through a systematic and rigorous methodthat genuinely sheds new light on the costs of production pro-cesses, products and activities from an environmental perspec-tive. It is essential to note, however, that beyond conventionallyaccounted for environmental costs, only a handful of pilot stud-ies address the material purchase value of wastes and emissions(i.e., non-product output) and related processing costs [14,17].

Gale [17], for example, has applied the UNDSD methodol-ogy at an Abitibi-Consolidated Inc. pulp and paper mill inCanada. The results of this study showed that conventional ac-counting costs underestimated natural resource and environ-mental costs by about half. Although the barriers tointegrating the material purchase value of wastes and emis-sions and its processing costs into corporate decision making,which really means incorporating environmental strategiesinto financial issues, were not explored, it is essential to con-sider specific barriers to such integration within corporations.This includes the barriers identified by the World ResourcesInstitute that risk is not an explicit variable in most valuationmodels, that the many diverse sources of small earnings im-provements do not attract attention, and that the quantificationof competitive advantage is difficult to calculate (see details inReed [18]).

3. EMA methodology

The UNDSD EMA methodology consists of four categoriesof environmental expenditures (costs) and one category of en-vironmental revenue (earnings). In addition, the EMA frame-work consists of checklists of costs or other performancemeasures for eight environmental media. The EMA processis to calculate and report on costs or other metrics for eachof the four cost categories according to these eight environ-mental media as set out in Table 1. If no part of the operationor maintenance involves a medium such as radiation, for ex-ample, it is dropped from the analysis. A detailed method ofresearching costs (or revenues) for each of these categoriesis provided in the UNDSD report [2].

Special attention is given to avoid double counting errors.The conceptual approach to EMA is thus well designed anddeveloped. What remains is the testing of the methodologythrough case study analysis and the resolution of the variabil-ity in cost allocation methods by the establishment of agreedconventions.

3.1. Category 1: waste and emission treatment costs

This category covers many traditionally identified environ-mental costs e the so-called end-of-the-pipe solutions thathave dominated environmental issues for many years andwith which lawyers, environmental managers and accountants

duction 14 (2006) 1228e1236or non-compliance. Some companies are already addressing

On balance, while a few progressive companies provide

EMA data, most avoid the topic and indeed may not be wellinformed about current trends in the EMA literature. It is dif-ficult to see how even the most well-meaning companies canprogress towards sustainability without detailed cost informa-tion structured according to an internationally agreed frame-work. With regard to waste and emission treatment costs(Category 1), the UNDSD is proposing that the identificationand allocation of costs include the following seven items,the details of which are provided in its report [2]:

1. Depreciation of related equipment;2. Maintenance and operating materials and services;

costs, prevention and environmental management costs are of-ten distorted because they are combined with waste and emis-sion treatment costs (Category 1). For example, a report on the400-bed US Dartmouth-Hitchcock Medical Center showedthat all waste disposal costs are allocated to the functionalarea of Environment, Health and Safety rather than allocatedto the departments that produced the wastes [26]. Responsibil-ity for the safe and proper disposal of medical and hazardouswaste was deliberately assigned to E,H&S to ensure that wastegenerating departments did not dispose waste improperly inorder to reduce costs [26]. Environmental management re-sponsibilities thus often conflict with financial managementthese costs in detailed tables on their websites or through an-nual Sustainability Reports (see, for example, Canon [19,20],Fuji Xerox [21,22]). In a radical departure from the end-of-the-pipe approach, Fuji Xerox now has several zero emissionfactories [21,22]. Such a business development requires de-tailed knowledge of environmental management costs. A keystarting point promoted by the US Environmental ProtectionAgency (EPA), is to implement a full cost accounting (FCA)approach where FCA is the allocation of all direct and indi-rect costs to a product or product line [23]. Case experiencereported by the US EPA [24], for example, shows that the re-accounting of costs under appropriate service categories ratherthan in general overhead costs at the Public Works Departmentof Columbia, Missouri, are consistently higher. The full costsof recycling, composting, residential collection, commercialcollection, roll-off collection, university collection and landfillwere 29%, 17%, 28%, 22%, 19%, 53% and 124% higher, re-spectively, than previously calculated [24]. There are also pub-lished studies of spending on pollution control costs at Canon,Pitney Bowes, and Texas Instruments [24]. More recently,Canon [20] has been following the Japanese Ministry of theEnvironments environmental accounting guidelines [25].The guidelines consist of cost categories for the followingconsiderations: business area; upstream/downstream; adminis-tration; R&D; social activity; remediation; and other costs.Canon identified 17.1 billion yen of environmental costs in2003 and 23 billion yen in environmental savings [20]. The5.9 billion yen differential is evidence of both a positive finan-cial effect and a positive environmental effect.

Table 1

Overview of the environmental cost scheme in EMA

Environmental media Air/

climate

Wastewater Was

Environmental cost/expenditure categories

1. Waste and emission treatment

2. Prevention and environmental management

3. Material purchase value of non-product output

4. Processing costs of non-product outputP

Environmental expenditure

5. Environmental revenues

R. Gale / Journal of Cleaner P3. Related personnel;4. Fees, taxes and charges;5. Fines and penalties;6. Insurance for environmental liabilities;7. Provision for clean up costs and remediation.

In his study of an Abitibi-Consolidated Inc. owned papermill in British Columbia, Canada, Gale [17] reported, inpart, on some of these costs as well as costs for othercategories in the UNDSD EMA framework. He discoveredthat the most difficult item in this category was insurancefor environmental liabilities, which clearly warrants furtherinvestigation.

3.2. Category 2: prevention and environmentalmanagement

This category of costs covers the prevention of environmen-tal impacts and the management of corporate environment pro-grams. These costs include operator inspections, maintenanceof alarm systems, operator training, process changes, followup actions from incident reports, follow up from environmen-tal audit teams, development and implementation of operatingprocedures, and preventative monitoring and analysis. Infor-mation that is not readily available can be derived from furtherresearch with the application of time sheet studies. Costs mayalso include conservation and biodiversity values. Activitiesthat degrade or contravene biodiversity and other conservationvalues indicate inadequate prevention and natural resourcemanagement and hence poor management practice.

Although appearing as a plausibly independent category of

te Soil/ground

water

Noise/

vibration

Biodiversity/

landscape

Radiation Other environmental

costs

Total

1231roduction 14 (2006) 1228e1236responsibilities at the operational level if the functional areasare not aware of their wastes and emissions costs.

In contrast, Fuji Xeroxs prevention and environmental man-agement costs, although not detailed, are broken down intothe following cost and investment categories [21]: pollutionprevention costs (292 and 36 million yen, respectively); globalmanagement costs (208 and 68 million yen, respectively);research and development (3622 and 72 million yen, respec-tively); and upstream/downstream (9445 and 79 million yen,respectively). Canon sets out its own figures for the sameyear for the following considerations [19]: pollution preven-tion costs (3540 million and 2740 million yen, respectively);global environmental protection costs (740 and 2940 millionyen, respectively); management activities costs (2650 and300 million yen, respectively); research and development(230 and 20 million yen, respectively); and upstream/down-stream (3 million yen (no investment)). It is clear from thesefigures that in the absence of standard metrics (including a met-ric for a production unit or a service delivered), little, if any,efficiency performance information can be reliably inferred.Although Category 1 and 2 costs are intended to force organ-isations to segregate costs typically hidden in overhead ac-counts, the broad array of costs and differing interpretationsof which costs are properly included, and where, means thatthere is little consistency among companies in reporting infor-mation in either of these two cost categories.

3.3. Category 3: material purchase value of wastes andemissions (i.e., non-product output)

The calculation of the material purchase value of wastes andemissions represents both a conceptual and a practical challengeand in this regard is an important research issue. At the concep-tual level, issues related to the efficiency of production pro-cesses are critical. The idea that inputs to a commercialproduct either leave as environmentally responsible productsor as inefficient waste is a critical conceptual aid to challengeconventional ideas about the acceptability of the products forsale and the level of inefficiency to be permitted. At the practicallevel, however, there are difficulties in collecting information.Detailed research is required on the following items: raw mate-rials; packaging; auxiliary materials (part of a product that is-neither a main component nor obvious to the consumer);operating materials (materials essential to the operations butnot part of the product itself); energy; water; and other waste.

Research on this category of costs is sporadic. A generallack of segregation makes it difficult to identify and allocatethese costs. If they are captured at all, they are located in othercategories. One US EPA [24] study of the material purchasevalue of wastes and emissions in the electroplating industryis instructive. The EPA study uncovered wasted material costsin electroplating operations (coating materials, process chem-istry, addition agents, cleaners and water). The results of thestudy indicated that hidden costs in terms of materials wastecan be traced to two sources e a differential between theamount of coating materials purchased and the amount ofmetal that actually goes out on parts, and another differential

1232 R. Gale / Journal of Cleaner Prbetween the amount of metal that goes out on parts and theamount that is actually needed to meet the desired productionrequirements [27].3

Another example of the material purchase value of wastesand emissions is evident in Xeroxs approach to the packagingused to ship products to customers. At one point, the companyused 23 different pallet and pack sizes as reported by Rogersand Kristof [28]. The recognition that the purchase of this pack-ing represented auxiliary materials not associated with the corebusiness led to the conclusion that cost savings could beachieved if the number of packaging containers could be re-duced. The result was that Xerox reduced the number of con-tainer types to just two adjustable and reusable sizes withpackaging costs of US$12.08 less per shipping unit than previ-ously and overall savings estimated to be US$1.2 million [28].

3.4. Category 4: processing costs of wastes andemissions (non-product output)

The material purchase value of wastes and emissions hasjust been explained. To this material purchase value mustnow be added the costs of processing wastes and emissions.Processing refers to the wasted labour and capital costs in-volved in inefficient production. An Australian case study ofGH Michell & Sons provides instructive experience in thisarea [1]. Michell generates over Aus$500 million in annualsales from 30 to 35 million kilograms of annual wool produc-tion at various factories across Australia. Lower quality woolat Michell is subject to a wool carbonising process to re-move dirt, vegetable matter and water soluble salts. The vari-ous inputs in the cleaning process are water, detergent, acid,sodium, bicarbonate, hydrogen peroxide, energy, labour andmachinery use. The by-products are wool grease, sludge (veg-etable matter with 45% water content), wastewater and dam-aged fibres (broken ends). The study discovered that the saleof dirtier wools was being subsidised by cleaner wools.Since the price wool traders pay for wool depends on process-ing costs, the decision to purchase and process certain ship-ments of wool is critical to the financial bottom line. Thedirtier wools needed to bear more of the processing costs.However, none of the costs were related to the quantity ofwool recovered from each processed bale of wool. On this ba-sis, Deegan [1] was able to state that if these costs are recal-culated to reflect recovery rates then projected margins willprobably change, with consequent implications for trading de-cisions. Another example comes from a study of the printingcompany Bovince Limited in England [29]. Bovince produceslarge format advertising posters for display boards and busshelters. The benefits from improved production, that is, greater

3 The second differential refers to the coating thickness on the parts. To meet

the minimum coating thickness on critical surfaces, a much thicker coating de-

posit may be required on other surfaces. The reverse situation also applies such

that some surfaces can have thinner coatings than the minimum required for

critical surfaces. There has been considerable improvement in coating deposit

distribution in recent years through better process chemistry, equipment, rack-

oduction 14 (2006) 1228e1236ing and technique. Where these improvements have taken place, there may be

a substantial reduction in the differential noted in the EPA example.

efficiency would lead to the production of fewer defectivescreens, thus reducing the processing costs of non-product out-puts such as labour time on manufacturing spoiled products. Itwould also reduce waste treatment and disposal costs (Category1 costs).

3.5. Category 5: environmental revenues

Actual earnings from recycled materials, sharing energyproduced on site to an external grid, or sharing an on-site sew-age treatment plant with a local community, can be included inthis category. Actual income in terms of subsidies and awardsshould also be included here. With regard to recycling, prod-ucts with the highest recycling rates include paper, cardboard,bottles, toner cartridges, xylene and NiCd batteries. Althoughone might expect companies to report revenues from recy-cling, it appears to be an untracked category. Embarrassinglylow revenues may account for much of the silence on this mat-ter. For example, Tellus [30] reports that improvements in re-cycling at one facility produced revenues of $500 from mixedpaper and $62 from plastic and glass recycling. Compared tothe total cost savings of $23,859 for the project, the revenuerepresents just 2.4% of the total savings, most of which wasfrom reduced waste handling costs (Category 1 costs). This re-sult may suggest that recycling generally leads to cost savingsrather than the generation of revenues. While costs savingsmay appear to be the same as revenues in the sense that apenny saved is a penny earned, the focus of the environmen-tal revenue category is on actual external sources of income,a field of inquiry that includes industrial ecology.

An excellent example of environmental revenues is the saleof waste by-products. For example, Deegan [1] reported thatthe wool carbonising of low quality wool at Michell led toa number of unavoidable by-products such as wool greaseand broken ends. Michell could treat these by-products aswaste and pay for their disposal or they could treat them as as-sets and sell them as products. Wool grease sells for aboutAUS$2 per kilogram and has many uses. Broken ends aresold as a lower grade wool product for various processesand products.

4. EMA as a reflexive modernization strategyin cleaner production

The financial performance of a company is judged accord-ing to accounting and auditing practices for which there areprofessional experts and international standards. It is not a dif-ficult step to imagine social and environmental performancejudged in an analogous way. EMA, however, has not caughtindustrys attention, and the efforts of professional accountingbodies are largely at the margin. Elsewhere, EMA has not beenactively promoted by advocates of other environment and sus-tainability-related tools or frameworks such as The NaturalStep, the Ecological Footprint, Eco-efficiency, Factor 10;ISO 14001, and EMAS. It is thus incumbent on EMA practi-tioners to communicate more effectively with advocates of

R. Gale / Journal of Cleaner Prothese tools and frameworks to ensure that EMA is includedin discussions of strategic sustainable development and corpo-rate sustainability [31]. EMA needs to be linked more system-atically with cleaner production, industrial ecology and greeningof industry initiatives as well as to prescriptive and analyticalaspects of modernization [5,8,39]. Draft international EMAguidelines represent a critical development and communica-tions initiative [10].

A key communications point is that EMA research providesoriginal insights into the costs hidden by conventional ac-counting. Hidden costs represent lost opportunities for costsavings on the one hand and hamper innovations regardingproduct offerings on the other. Decision makers using theEMA technique have a superior analytical framework for iden-tifying cost savings and for considering a fuller range of costsin manufacturing processes, product redesign or new productofferings. The success or failure of its application leads to atleast three possible outcomes: (1) EMA has pioneering signif-icance as a modernization strategy in cleaner production byyielding better cost and benefit figures on which decisionscan be made; and (2) EMA has a long-term capacity to pro-mote the transition towards corporate sustainability throughinstitutional reflexivity; or (3) EMA fails to take root and callsinto question ideas of modernization in the solution to environ-mental and sustainability problems.

The first outcome, the pioneering significance of EMA inmodernization, is about how the technique of EMA providesa superior set of cost and benefit figures about business perfor-mance (including figures on physical flows not discussedhere). EMA is a tool of pioneering significance because itbrings environmental managers and accountants together toidentify a fuller range of costs, benefits and opportunities, par-ticularly in resource and manufacturing industries. It providesthese decision makers with more accurate costing on which tobase operational decisions, including decisions about capitalinvestment and the benefits and costs of new technology. Ef-forts at identifying the environmental costs of cleaner produc-tion in corporations have typically been piecemeal. Thesignificance of EMA is that through its application a businesscan discover hidden costs and savings by implementing theEMA categories as a whole rather than through a piecemealapproach. EMA is significant because it addresses the vexingproblem of discovering, categorising and pricing environmen-tal costs in organisations [2,10,12,17,32e37].

Understanding the material purchase value of wastes andemissions and related processing costs helps companies createnew visions about what can be achieved in terms of process,products and services. EMA thus promotes positive changewithin cleaner production initiatives: it leads to strategies ofstructural reform rather than superficial change in companyoperations. It is important to restate that waste treatmentdoes not fall under the definition of cleaner production be-cause it does not prevent the creation of waste [38]. Compa-nies locked into waste treatment solutions are also locked intoenvironmental costs that they cannot imagine reducing. Envi-ronmental impacts and costs need to be integrated into corpo-rate performance evaluation as a starting point in the

1233duction 14 (2006) 1228e1236understanding of sound environmental technologies and what

cleaner production processes might involve, even if not immi-nent at the company.

The second outcome e the long-term potential of EMA topromote corporate sustainability e is about industry transfor-mation. Transformation refers to institutional reflexivity whichcan be defined as the modernization of modern society, thatis, re-modernization, made necessary by the side effects ofmodernity [6,39]. The transition towards corporate sustainabil-ity requires a reflexive corporation, one which is capable ofexamining the side effects of its operations as modernizationrebounds upon itself. An EMA system is pivotal to the elimi-nation of corporate environmental side effects and, hence, thetransition from unsustainable to sustainable production.Whereas EMA addresses the environmental performance as-pects of such a transition in part, social accounting for work-place issues could be applied to address the socialperformance aspects of corporate sustainability [40], a consid-eration beyond the scope of this paper.

EMA contributes to corporate sustainability by acting asa catalyst for performance-based environmental managementaccounting and reporting systems. Occasionally, a managementtechnique emerges that fundamentally affects the way inwhich organisations operate. The European Unions Eco-Man-agement and Audit Scheme along with the ISO 14000 series ofenvironmental standards and guidelines, for all their weak-nesses, have improved the performance of many enterprises(though this by no means necessarily makes them sustain-able). An important point to note is that organisations withouta performance-based EMS and performance-based reportingsystem are unable to provide evidence of performance im-provements thus making any claims about performance sus-pect. Gale and Gullett [41], for example, have reported onthe failure of an Australian Commonwealth organisation toimplement an EMS and to support its performance claimswith evidence. In this regard, the development of the GlobalReporting Initiatives Sustainability Reporting Guidelines[42] is considered to be an increasingly important pressureon public and private sector organisations to adopt a reportingstandard. Reporting, to be effective, requires a suite of envi-ronmental and other performance measures, and ultimatelyone would expect the development of internal EMA systems.The evidence about reporting, however, shows that boards ofdirectors fail to identify how environmental and social issuespose both risks and opportunities at the enterprise level [43].As Burritt [16] states with regard to the Australian experience,three specific issues are important to further progress in envi-ronmental accounting and reporting: sustainable development;education, training and communication; and environmentalaccounting.

On this latter point, Schaltegger, Burritt and coworkersmake the case that the central purpose of environmentalaccounting is to enhance corporate sustainability and eco-efficiency [12,16,44e46]. At the operational level, EMA hasthe potential to be an extraordinarily transformative approachto eco-efficiency and eco-effectiveness, particularly when com-bined with an EMS and a sustainability report. Given the broad

1234 R. Gale / Journal of Cleaner Prissue of accounting and corporate sustainability, Wilmshurstand Frost [47] note that accountants can play a greater role ina companys environmental management system. Deegan [48]states that social and environmental disclosures have afavourable legitimising effect for a corporation, and Cagnoet al. [49] believe that the environmental management of pro-duction processes is a strategic issue for a companys longerterm competitiveness (i.e., not just a compliance issue). Theseviews underpin, in part, transitional initiatives towards corpo-rate sustainability; initiatives that are likely to become increas-ingly important as governments around the world seek a rangeof economic instruments and green budget reforms, includingthose summarized by Gale and Barg [50], to provide the impe-tus for organizational change.

The third possible outcome is that corporations do not havethe capacity for reflexivity envisioned in modernization strat-egies and fail to adopt EMA and other tools and strategiesfor cleaner production. This outcome is flagged as an issueof corporate power in which business cultures of environmen-tal denial and corporate self-justification override pressing en-vironmental and sustainability concerns. There is nothinginevitable about sustainability: it would be nave to think oth-erwise. The emergence of the reflexive corporation isa work in progress.

5. Conclusions

Polluting companies pay three times for non-product out-put, that is, wastes and emissions. First, the company paysthe cost of purchasing raw materials (say, for example, fuel,water, and chemicals), a proportion of which ends up as wastesand emissions. Second, the company pays for the operationaluse of raw materials through labour and infrastructure invest-ment costs, a proportion of which ends up as wastes and emis-sions. Finally, the company also pays for the disposal costs ofthe wasted materials purchased or for the licences, which per-mit emissions of a proportion of the material purchase costs.

These costs can be categorised according to a UNDSDEMA methodology. For the purposes of this journal article,the methodology can be considered as a reflexive ecologicalmodernization strategy to help understand the acceptance orrejection of EMA by corporations. Although there is a shortageof high quality published environmental cost information fromvarious industry sources, an analysis of case information pro-vides evidence to support the argument that the UNDSD cat-egories provide environmental managers and accountantswith a clearer picture of costs on a line item basis that far ex-ceeds what is available from conventional accounting; a pointalready verified by Jasch [14] and Gale [17].

The absence of a plethora of systematic EMA studies sug-gests that the most important interim strategy to promote EMAis the publication of detailed information on the different UN-DSDs cost (and revenue) categories. This will create knowl-edge about the environmental costs of business operations aswell as the need to provide a systematic and holistic EMAframework essential to both the promotion of cleaner produc-

oduction 14 (2006) 1228e1236tion and corporate sustainability. This application inevitably

requires reflexive institutions including reflexive corpora-tions; that is, corporations with the capacity to examine theside effects of their operations as modernization reboundsupon them.

Acknowledgements

I am very grateful to Dr. Roger Burritt, Australian NationalUniversity, for his comments on an earlier version of thispaper. Two anonymous reviewers also provided instructivecomments. I am, of course, responsible for any errors orshortcomings.

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Environmental management accounting as a reflexive modernization strategy in cleaner productionIntroductionEnvironmental management accounting: principles and practicesEMA methodologyCategory 1: waste and emission treatment costsCategory 2: prevention and environmental managementCategory 3: material purchase value of wastes and emissions (i.e., non-product output)Category 4: processing costs of wastes and emissions (non-product output)Category 5: environmental revenues

EMA as a reflexive modernization strategy in cleaner productionConclusionsAcknowledgementsReferences