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20th China SIF: Internalizing Enternal Environmental Cost: Risk and Opportunity

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Update time : 2014-11-04 12:00:00

 

 

The ‘Study Report on the Accounting of the External Environmental Costs of Coal and Internalization Plan’ by Chinese Academy for Environmental Planning (CAEP) has attracted wide social attention. According to the report, the external environmental cost of coal per ton is 204.76 Yuan, about 28% of the coal price for the same year. On the other hand, increasing number of institutions, globally, has begun to take external environmental costs into account when making investment decisions.

In the ‘Study Report on the Accounting of the External Environmental Costs of Coal and Internalization Plan’, the external environmental cost of coal is defined as the part of economic loss, due to pollution and other damage to the ecosystem caused in the process of coal-mining, transporting and burning processes, but cannot be internalized by the benefited companies. According to Dr. Long Feng, even though the traditional business activities will pay for the cost of waste management and water supply, the wider environmental impacts have not been considered. The estimation in the report shows that the total external environmental costs of coal in China in 2010 was 555.54 billion Yuan,about 2.3 times of the environmental expenditures from the national public finances for the same year. The study by CAEP has updated the cost measurement method established by the Energy Foundation and several other international institutions. However, the problem of measuring environmental cost still exists in that the index will change tremendously with different indicators.

Should companies bear all the environmental costs? The answer given by our experts is NO. Dr. Long Feng said that even though the public has paid much more attention to the scarcity of oil energy and environmental pollution, and the internalization of external environmental cost has become a trend, the tax burden of the oil energy industry would definitely increase in a short term. Dr. Long also suggested that the measurement of environmental cost is quite different from that of the pollution loss, as companies normally pay more attention to cost-benefit analysis when considering the environmental cost. The companies should take an active part in the evaluation and prediction in environmental risks and take actions ahead.

The State Council has issued a plan for the air pollution prevention and governance recently. Even though the plan is being implemented by local governments, some environmental cost cannot be internalized immediately. Additionally, there will be more stranded assets due to environmental constraints. Mr. Zhao Lijian suggested that companies will gain a competitive advantage and stronger market position in the future if they could be well prepared for the change and internalize relative cost through management innovation and technology development.  

The environmental profit and loss account is a new concept raised by the international public accounting firm PwC. It intends to reflect the environmental impacts of the whole supply chain by financial numbers, regarding the positive activities as income, while the negative environmental activities as loss. In this method, the environmental influence of a company’s operation could be reflected directly.

According to Ms. Xiao Hong, the senior advisor of risk assurance, PwC, the firm created an environmental profit and loss account for PUMA in 2011, which was also the first trial across the world. PwC reviewed the operation as well as the whole supply chain of PUMA, the globally-operated company, and concluded that the company had a huge environmental loss by shoes-production in the Asia-Pacific market. The program was highly recognized by the management of PUMA and has contributed to the improvement of the internal risk control. In addition, it helped improve the transparency of sustainable development, enhance the interaction between the company and relative interested parties, and more importantly, show the determination to reduce the environmental foot prints.

Ms. Xiao also pointed that, the choosing of evaluation method of environmental profit and loss is very complicated. As she said, the plan for PUMA was not fixed. It was based on a model and huge amount of assumptions. The model was developed by Trucost, an environmental data management company and 88% data were determined by the model. On the other side, the monetization of the environmental value was also a difficult process. The method applied by PwC was to consider the cost of minimizing the environmental influence. According to Ms. Xiao, in China, the environmental information data may be more unavailable than that abroad, and the loss evaluation is also a challenge to implement. Currently, main international public accounting firms have already developed tools to measure the sustainable development and creativity of listed companies.   

Guests:

Long Feng, Doctor in Chinese Academy for Environmental Planning (CAEP)

Xiao Hong, senior advisor of Risk assurance, PwC

Zhao Lijian, project director, The Energy Foundation (EF)

 

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