Environmental Full Cost Accounting: Definition & Example

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  • 0:05 The Environment
  • 0:44 Environmental Full…
  • 3:09 Benefits and Challenges
  • 4:41 Lesson Summary
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Lesson Transcript
Instructor: Rebecca Gillaspy

Dr. Gillaspy has taught health science at University of Phoenix and Ashford University and has a degree from Palmer College of Chiropractic.

Environmental full cost accounting recognizes the economic, environmental, health and social costs of an activity. In this lesson, learn why the use of environmental full cost accounting is important during the decision-making process.

The Environment

Let's say that a small town in Wyoming wants to build an electricity-generating plant. Because the area gets a lot of wind and has plenty of coal under the ground, the town is locked in a debate over which energy source should be used. Half of the town feels that a wind-energy power plant is the way to go and the other half feels that a coal-burning power plant is the best option.

Even though the town is split over this debate, they all want to come to the best decision and take into account all of the direct costs of the project as well as the indirect costs to the environment and people's health.

Environmental Full Cost Accounting

To do this, they utilize environmental full cost accounting. In this lesson, we will take a look at this concept and how it helps in the decision-making process. Environmental full cost accounting can be defined as a method of accounting that recognizes the direct and indirect economic, environmental, health and social costs of a project or action.

Environmental full cost accounting considers more than just the basic direct costs associated with a project, such as the costs of building supplies, production and distribution. Environmental full cost accounting also factors in indirect costs, including externalities. Externalities are side-effects or costs of an activity that affect otherwise uninvolved parties. While externalities can be positive or negative, the other party does not intend to incur the effects.

Therefore, it might help you to remember this term by thinking of an externality as an extra cost that the third-party player did not incur on his own. For example, a coal-burning power plant will emit greenhouse gases that could impose health costs on society. And, the noise that comes from wind power generation could cause sleep disturbances, anxiety and stress in susceptible individuals. These indirect costs are important considerations for a community to examine during the decision-making process.

Other costs that might be considered with environmental full cost accounting include the economic and environmental costs of using natural resources or making infrastructure changes. Infrastructure changes may include the building of new roads or bridges to support a project. Yet another consideration is the environmental and social costs of altering previously undisturbed land for the building of a project or supporting structures. For example, if trees were cut down to make room for new roads, how would the environment and society be impacted?

As you can see, environmental full cost accounting is complex. It analyzes all aspects of a project and answers the question, 'What does a project really cost in the long run in terms of damage to the environment, human health and social well-being?'

Benefits and Challenges

As we see from our example, there are benefits of environmental full cost accounting. For one thing, it aids in the decision-making process by helping interested parties see beyond the direct economic costs of a project and consider the environmental, health and social impact that could be incurred. Environmental full cost accounting also helps educate citizens who will be impacted by a project, and it reveals the best service for the least cost.

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