Full-Cost Accounting and the Value of Nature

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In business theory, the ‘bottom-line’ is a well-established metric to represent economic success. This simple equation adequately accounts for financial profits and losses, but cannot always reflect external costs on natural landscapes, social structures, and other considerations that lack monetary representation.

Transportation-based air pollution is an example of such indirect impacts. Motor vehicles burn fossil fuels that negatively affect air quality, leading to hazardous pollutants, diminished agricultural productivity, and atmospheric instability. In our current economic system, these costs are not borne by the producers of these pollutants- auto companies, the oil industry, and drivers - but instead, these befall third parties grappling with chronic health problems, or the effects of climate change.

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To fully capture hidden expenses, organizational models have adopted full-cost accounting practices to identify potential impacts on environmental conditions and human systems. At the core, these models are not strict guidelines for measuring benefits, aggregating losses, or redistributing budgets; instead, they are informational mechanisms to demonstrate the wider implications of doing business.

In practice, full-cost accounting raises pertinent questions on ascribing value to natural and social systems. For example, the triple bottom line theory conceptualizes environmental implications as additional ‘bottom lines’, thereby integrating the natural realm into a world of financial metrics established to allocate resources and justify trade-offs.

There is little doubt that healthy communities and robust ecosystems are inherently valuable; but can desirable social components and beneficial environmental functions be monetized? Do price tags accurately capture the intrinsic value of a cultural tradition, a threatened species, or a spectacular vista?

In some cases, natural functions can be fiscally evaluated by their benefit to human communities. For example, wetlands provide water filtration, shoreline stabilization, and a buffer zone for high water events. Without wetlands, artificial enhancement would be necessary to provide the same functions, and the dollar cost of filtered water, sediment retention, and flood control may provide a strong economic argument for wetland conservation.

US Wetlands. Attribution: Wikimedia Commons

 

This methodology could be helpful to calculate the economic consequences of environmental disasters. For example, monetizing ocean resources may persuade oil companies to employ stringent operational safeguards to avoid the costs of catastrophe. Full-cost accounting may also be used to anticipate future expenses: could highlighting the long-term cost of lowering atmospheric CO2 stimulate action to stabilize the climate in the present? But eventually, the environmental fallout of unbridled human activity cannot be measured with dollar signs, and there can be no fiscal substitution for permanently altered ecosystems. As rainforests are converted into timber and rangeland, how do we price the global loss in biodiversity and habitat?


Embedding socio-environmental repercussions into our financial decisions is a necessary step on the path to corporate sustainability. However, business managers and consumers must tread carefully when converting non-market systems into commodities; when can nature’s value be adequately measured in dollars?


Further Reading:

EcosystemValuation.org

Yale Environment 360 - What’s Wrong with Putting a Price on Nature?

Worldwatch Institute - Putting a Value on Nature’s ‘Free’ Services

Network for Business Sustainability - Understanding Ecosystems: How Businesses Can Manage Risks and Opportunities from “Natural Capital”