To Identify Benefits of Eco-Efficiency and Cleaner Production in a Paper and Pulp Manufacturing Organization

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Doorasamy, Mishelle

Article Using material flow cost accounting (MFCA) to identify benefits of eco-efficiency and cleaner production in a paper and pulp manufacturing organization

Foundations of Management

Provided in Cooperation with: Faculty of Management, Warsaw University of Technology

Suggested Citation: Doorasamy, Mishelle (2016) : Using material flow cost accounting (MFCA) to identify benefits of eco-efficiency and cleaner production in a paper and pulp manufacturing organization, Foundations of Management, ISSN 2300-5661, De Gruyter, Warsaw, Vol. 8, Iss. 1, pp. 263-288, http://dx.doi.org/10.1515/fman-2016-0021

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https://creativecommons.org/licenses/by-nc-nd/3.0 www.econstor.eu Foundations of Management, Vol. 8 (2016), ISSN 2080-7279 DOI: 10.1515/fman-2016-0021 263

USING MATERIAL FLOW COST ACCOUNTING (MFCA) TO IDENTIFY BENEFITS OF ECO-EFFICIENCY AND CLEANER PRODUCTION IN A PAPER AND PULP MANUFACTURING ORGANIZATION Mishelle DOORASAMY University of Kwa-Zulu Natal, Westville, Durban South Africa e-mail: [email protected]

Abstract: The aim of this study is to use material flow cost accounting (MFCA) to assess the level at which cleaner production (CP) can improve both environmental and economic performance of an organization. Higher energy and raw material prices are causing CP to grow in relevance and importance. The amount of waste to landfill is increasing steadily. Most companies are using inefficient processes and technologies that are obsolete resulting in higher production costs, which, in turn, affect their profitability and competitiveness. This study was a case study based on a paper manufacturing company using an exploratory qualitative and quantitative research methodology. The MFCA approach was used to assess the efficiency of the steam production process using coal-fired boilers. The results indicated that the process was inefficient resulting in significant negative environmental and economic impact. Environmental costs were hugely underestimated by management, as non-product output costs were not included as part of environmental costs calculated by company. Benefits and barriers to CP was also brought to the forefront at the conclusion of this research. Keywords: cleaner production, eco-efficiency, inefficient processes, environmental costs, and non- product output costs.

1 Introduction the use of clean technologies that reduce their raw material input, thereby resulting in lower amounts Waste and emissions are a sign of inefficiency in of waste or at times no waste at all. This will ulti- production. Waste is expensive because of wasted mately result in improved environmental perfor- material purchase value and not because of disposal mance and increased economic performance fees (Jasch, 2009). Although most companies are (Andrew and Pearce, 2011). ISO14001 certified because of strict environmental Eco-efficiency results in the company saving on their regulations and market pressures, they are still not input material as well as having reduced costs for prepared to change production processes by moving disposing of waste to landfill. Hence, there is likely toward cleaner production (CP) technologies. Many to be financial and environmental benefits related have adopted end-of-pipe technology as part of their to clean production technologies. sustainable practices. However, end-of-pipe technol- The question then raised is that if there are both envi- ogies only address the problems after the process; ronmental and economic benefits to cleaner technol- they do not address the cause of the problem. This ogies, why are companies reluctant to adopt such leads to eventual accumulation of waste in landfill technologies as part of their business process- sites, which only shifts the focus of the real problem. es/operations? In order for a company to remain sustainable and to achieve eco-efficiency in their production processes, Managers are more focused on cost-reduction op- there is an urgent need to adopt CP techniques and tions using existing technology. Cleaner technologies technologies as part of the strategy toward sustaina- are more efficient, as they prevent emissions at ble development. As part of the requirement of source. If a solution that does not reduce environ- ISO14001, it is critical that companies look at ways mental impact by 100% is adopted, then it is most to achieve sustainable competitive advantage by likely to be an end-of-pipe treatment, which does not improving their production process by implementing solve the problem at its source but shifts it to another environmental media, for example, dust filters that 264 Mishelle Doorasamy reduce emissions to the air by capturing components for CP saving with particular emphasis on non- that are washed out by rainwater and when the filters product output (NPO) costs and to make decisions are dry, they are disposed of on landfill. These ap- to choose the right CP options have been established proaches are costly and inefficient (Jasch, 2009). in several business cases. However, the level of im- However, relatively newer technologies are unlikely plementation of EMA in practice is low because to be replaced by cleaner technologies even if they of the significant gap in academic knowledge con- can result in improved environmental and economic cerning EMA and its role in identifying inefficien- performance. Therefore, when benchmarking envi- cies in a production process and benchmarking ronmental costs, life cycle of existing technology environmental costs to yield superior environmental must be considered. In the short term, good house- and economic performance (Ferreira, Moulang, and keeping measures or minor improvements are pre- Hendro, 2010; Christ and Burritt, 2013; Schaltegger, ferred as part of CP strategy. In the medium term, et al., 2010; Van, 2012). it makes sense that a company may change technolo- Although CP has proven to be a good tool, it has not gy and get closer to state of the art of the industry. yet been well implemented internally. South Africa’s It is only in the long term that companies will con- commitment to CP led to the formation of the United sider changing state of the art to get closer to the Nations Industrial Development Organization ideal world of zero emissions where all inputs be- (UNIDO) National Cleaner Production Center come part of the product. Theoretical standards are (NCPC). The National Cleaner Production Centre used to reflect this ideal world with no waste of South Africa (NCPC-SA) strategy, which focuses (Schaltegger, et al., 2012). on assisting industry to implement cleaner produc- This study will add to the body of knowledge on CP tion which requires investment in cleaner technolo- and sustainable development. At the conclusion gies, was confirmed at the Cleaner Production of this study, managers will be able to evaluate conference that took place in Gauteng in June 2013 and analyze how they can improve both their envi- (Delano, 2013, pp.4). Resource efficiency and clean- ronmental and economic performance in the future er production (RECP) has been integrated into and attain their sustainability targets, hence the “tri- NCPC-SA’s services. RECP includes energy effi- ple bottom line.” Improved competitive advantage ciency, life cycle assessments, and environmental will result in higher profitability, which in turn will accounting (South African Cleaner Production Cen- benefit employees, managers, and other stakeholders tre, 2013). in the company. 3 Background of company 2 Problem statement The paper and pulp manufacturing process of the Managers of paper mills perceive investments company, on which the case study is based, con- in pollution abatement technologies as “unproduc- sumes large amounts of natural resources and also tive” because they have “no marketable and quantifi- generates excessive waste. The rising costs of input able effect in terms of productivity” (Bras, Realff, resources and increasing environmental cost have and Carmichael, 2004), resulting in the omission had a negative impact on the companies’ profitability of the use of CP opportunities (Baas, 2007, p.121). (Cost Accountant, 2013). Large savings potential and opportunities for CP The company has invested large amounts of money to address environmental issues successfully are not on end-of-pipe technologies and the wastewater easily identified by companies because there is no treatment plant to reduce the negative impact of their monitoring and data collection in place. production processes on the environment. This has, The benefits of using environmental management however, not solved their environmental issues nor accounting (EMA) in practice as an environmental has it reduced their resource use in production. and sustainability tool to collect, evaluate, and inter- The technology used in the steam production process pret the information needed to estimate the potential is outdated and obsolete and generates between 20 Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 265 and 60 tons of unburned coal ash as hazardous solid 5 Research Methodology waste daily. The company also uses large amounts of water in their production process, resulting A case study research methodology involving quanti- in even larger amounts of wastewater effluents, tative data assessment and exploratory qualitative a sign of inefficient production (Environmental man- research analysis technique that will be applied ager, 2013). to generate theory from collected data was followed To ensure their future sustainability and competi- in this study. The CP assessment framework will be tiveness, management needs to consider adopting CP used to capture data during the CP audit process as techniques and technologies that will address waste per the CP model. issues at its source. According to the CP philosophy, The study is based on a case study following a mul- which focuses on resources and resource flows, any timethod approach. The researcher implemented both reduction in material and energy used will result qualitative and quantitative data analysis methods in fewer emissions (Christ and Burritt, 2013, p.163). during the study. Case study research leads to more CP is perceived by management as a costly strategy informed basis for theory development. According that requires innovation with no financial returns to Zikmund (2004, pp.173), this methodology pro- to the company in the short term. They are unaware vides data for building theory that contributes of how high their environmental costs are, because to existing knowledge by analysis from another per- the company uses conventional accounting methods spective. to allocate costs. EMA can be used as a tool to sys- Although the company employs approximately 300 tematically trace and accurately reallocate environ- employees, the study will target only those involved mental costs to the relevant processes and products in environmental management issues, production, to enable managers to identify opportunities for im- operations, accounting, and cost control. plementing CP and thus improve their environmental and economic performance. Information needed 6 Research limitations to estimate the potential for CP savings was facilitat- ed by making use of material flow analysis, a tool It should be noted that case studies provide little of EMA to allocate environmental and material flow basis for statistical generalization. Analytical gener- costs (Jasch, 2009). alization can be applied to case studies in which existing theories can be used as a template with 4 Aim and Objectives which to compare findings of a particular case. The researcher used a theoretical framework to study To conduct a cleaner production assessment (CPA) the case in depth. of the companies’ current production process using The richness and complexity of data collected during process flow sheet analysis in order to identify any case study research means that data is open to differ- operational inefficiencies and barriers to CP imple- ent interpretations and potential “researcher bias.” mentation, assess their current environmental man- Struwig and Stead (2013, p.137) confirm that it is agement practices, and benchmark the company’s not possible to be 100% unbiased in a qualitative environmental costs by comparing energy and mass study and generalizability of findings is often diffi- balance indicators against technological standards cult to achieve. and best-available technology using the MFCA approach. 7 Practical implications To identify barriers to CP implementation and highlight the potential benefits of adopting cleaner pro- The aims of CP are to use resources more efficiently, duction technology as compared to end-of-pipe reduce the amount of undesired outputs, and improve technology based on primary and secondary litera- monetary returns by reducing material and energy ture as well as empirical findings. consumption.

266 Mishelle Doorasamy

In the case study, the boilers used are obsolete, is on CP technology implementation. Bosworth et al. which could lead to inefficient steam production (2001) in his publication of CP in a dairy industry incurring high environmental costs and poor eco- clearly stated that the most significant CP benefits nomic performance. CP is not being adopted by the are only attainable through both lateral thinking company. The results of the study shows that there and technological change. A change in attitude of are opportunities to improve the environmental management and employees of a company are cru- and economic performance of the organization cial in gaining the most out of CP. The Academy of by ensuring that technological standards are achieved Science of South Africa (2011, p.111) identified in the short term and by moving closer to state-of-the implementing CP processes as an opportunity to art technologies in the medium term. avoid solid waste and reduce greenhouse gas (GHG) emissions in the eThekwini Municipality. The pro- 8 Literature Review motion of CP will need to be driven by a champion, together with support from the Municipality and 8.1 Cleaner production commitment from the organization in order to signif- a) Definition icantly reduce wastage and quantities of waste going CP was defined by the United Nations Environment to landfill. Program (UNEP) in 1991, and this definition still CP has gone a step further to now establish the mon- holds (Cleaner Production, 2013). etary value of data for material flows to identify Traditionally, most organizations dealt with envi- potential opportunities for savings, and strategic ronmental degradation and pollution problems by decisions can now be made to invest in CP technolo- ignoring the problem, dispersing the pollution so that gy, which could ultimately reduce environmental its effects are less harmful, or controlling pollution impact of residual materials and improve resource using “end-of-pipe” treatment. efficiency. This system overcomes the weakness of the previous environmental methods that are used CP is an approach to environmental management to calculate material balance purely on volume basis. that focuses on the causes of environmental prob- This method requires an initial capital outlay and no lems rather than the symptoms with the aim of im- cash inflow or net present value (NPV) calculations proving environmental performance of products, (Schmidt and Nakajima 2013, pp.358-369). processes, and services. Traditional pollution control approach focused on “react and treat” approach Research in a milk processing company by Dvari- which is after-the-event; however, CP is proactive oniene, Kruopiene, and Stankeviclene (2012, technique that is based on the “anticipate and pre- pp.1037-1045) aimed at identifying the effect on vent” philosophy. environmental efficiency by the application of CP and eco-design as sustainability tools. It had been It has been estimated that through the use of techni- realized that in order to ensure that production pro- cally sound and economically profitable procedures, cesses are sustainable, improvement of process effi- 70% of all waste and emissions from industrial pro- ciency is an important element. Hence, the need cesses can be prevented at source (Bosworth, et al., for CP became apparent. The milk industry similar 2001). to the paper manufacturing industry is very resource Application of CP to production processes means intensive and also generates many by-products and conservation of resources, the elimination of toxic wastes during each process. Thus it does have a pol- raw materials, and the reduction of wastes and emis- luting impact on the environment. The Lithuanian sions. This is applied throughout the life cycle of the milk processing company used in the case analysis product from the initial design phase through to the was found to have used technologies that were obso- consumption and disposal phase. CP can be imple- lete, low working productivity, and ineffective use mented by improved housekeeping practices, process of raw materials, and they did not meet modern mar- optimization, raw material substitution, new technol- ket requirements. The case study being done in this ogy, and new product design. Focus of this research research also has the same problem with regard Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 267 to old obsolete technologies being used in their pro-  Technology change: technology replaced to reduction processes. To survive in a dynamic business duce waste and emission generated during pro- environment, innovations play an important role. duction, Technological and organizational innovations are  On-Site Recovery/Reuse: wasted material reused crucial in order to change a company’s profile into in the same process or another useful application becoming environmentally, economically, and so- within the company, cially sustainable. The methodology applied by  Production of Useful By-Products: previously Dvarioniene, Krupiene, and Stankeviclene (2012, discarded material being transformed into reusa- pp.1037-1045) was the use of environmental effi- ble product, ciency indicators to evaluate the company’s environmental performance, and for comparison with  Product Modification: product modification in Best Available Technology (BAT) values. It had order to reduce environmental impact of its pro- been concluded that sustainability improvements duction processes. were possible but only through technological process b) Cleaner Production Assessment innovation. Eco-design was used to improve packages and the environmental impact of packages. A CPA involves the systematic implementation of procedures to identify inefficient resource con- Alexopoulos, Kounetas, and Tzelepis (2012, pp.6- sumption and poor waste management. This infor- 23) investigated the possible link between the envi- mation is then used by companies to develop CP ronmental performance and the level of technical options (Delana, 2013). The UNEP and UNIDO efficiency achieved by Greek listed firms by using developed basic steps to conduct CPA: their corporate financial data to gauge their environmental performance. Empirical evidence suggests  Planning and organizing the CPA, that higher environmental performance is a direct  Pre-assessment (gathering qualitative data about result of more efficient processes, improved produc- the organization and its activities), tivity, and reduced regulatory or compliance costs.  Assessment (gathering quantitative information Hence, in order to improve efficiency of production about the organization and its activities), processes, there is definitely a need to ensure optimal  Evaluation and feasibility assessment of CP op- technical efficiency. This in turn leads to new market portunities, opportunities and increased competitive advantage  Implementation of CP opportunities identified for the organization. and a plan to continue with CP efforts. CP implementation techniques in developing coun- Bosworth, Hummelmose, and Christiansen (2001) tries are as follows: were actively involved in producing the guide on  Good Housekeeping: prevention of leaks and “Cleaner Production Assessment in Diary Pro- spills by proper maintenance procedures and cessing,” from which the information on CPA was standardized operations, obtained and mentioned in this report. The aim  Input Material Change: replacement of hazardous of this publication was to enable organizations and non-renewable material inputs by less haz- to enjoy the benefits that CP had to offer. ardous and renewable material,  Better Process Control: working procedures and c) Types of cleaner production options process record keeping to ensure higher efficien- Bostworth, et al. (2001) provided a list of the types cy and reduced waste generation by optimal oper- of CP options available to organizations as stated ational processes, below:  Equipment Modification: production equipment  housekeeping  proper maintenance and im- modified to achieve higher efficiency and lower provements to work practices can produce bene- rates of waste and emission generated, fits at low costs to the organization, 268 Mishelle Doorasamy

 process optimization  optimizing existing pro- standards. In order to minimize ash and gas emis- cesses can reduce resource consumption at low sions, waste water discharge, and other environmen- to medium cost, tal impact, pollution control methods should be  raw material substitution  replacing hazardous substituted by CP techniques (Liu et al., 2013). materials with more environmentally benign ma- e) Empirical studies conducted on Cleaner Pro- terials can reduce environmental problems. duction (CP) and Environmental This may require changes in process equipment, Management Accounting (EMA)  new technology  minimum waste generation, reduced resource consumption, and improved op- Numerous pilot studies have been undertaken by CP erating efficiencies are achievable by adopting experts and have demonstrated that CP is a sign new technologies; this is a capital-intensive op- of more efficient production and companies that tion; however, payback periods are short, have adopted CP have reported reduction in cost and environmental impact at the same time  new product design  changing product design (Schaltegger et al., 2010, pp.4-11). can bring about benefits throughout the life cycle of the product such as reduced waste disposal, re- There is a growing demand of raw materials by pa- duced energy consumption, and more efficient per industries as a result of worldwide increase in the production processes; this is a long-term strategy production and consumption of paper and paper- and may require new production equipment. board. It is expected that paper consumption will increase to over 490 million tons per year by 2020 d) Benefits of cleaner production (Mousavi et al., 2013, pp.420-424). Strict environmental legislation, market pressures, and the urgent “Cleaner Production Assessment in Dairy Pro- need for sustainability have created a major chal- cessing” by Bosworth, et al. (2001) reported the fol- lenge for the paper and pulp industry (Despeisse, lowing as reasons to invest in CP: Oales, and Ball, 2013, pp.31-41). This has led to the  product and process improvement, introduction of sustainable development in business  reduced production cost through savings on raw practices (Persson and Berntsson, 2010, pp.935-943). materials and energy, In order to achieve sustainable competitive ad-  new and improved technologies increase competi- vantage, businesses need to adopt CP processes. tiveness of the organization, According to the UNEP, CP is defined as “the con-  environmental legislation and regulatory compli- tinuous application of an integrated preventative ance, environmental strategy to processes, products,  treatment, storage, and disposal of hazardous and services to increase overall efficiency and reduce waste liability is reduced, the risk to humans and the environment” (Fore and  health, safety, and morale of employees as well as Mbohwu, 2010, pp.314-333; Pons, et al., 2013, company image are improved, pp.134).  end-of-pipe solution costs are reduced. Although a growing number of organizations in both manufacturing and service sectors demonstrated CP is seen as a “win–win” strategy that enables the potential to successfully reduce both their operat- a company to achieve sustainability goals while also ing costs as well as environmental impact, the im- improving industrial efficiency, profitability, plementation of CP has been slow and lagging. Pilot and competitiveness. Developing countries and those studies by CP experts remain merely as niche exam- undergoing economic transition can especially bene- ples and decision makers in companies have failed fit from CP that provides an opportunity to “leap- to adopt this as a corporate strategy because of the frog” those more established industries. shortcoming in the discrimination of information CP technologies and equipment have been developed about the economic and environmental potential by many industrialized countries to decrease pollu- of CP (Schaltegger, 2010, pp.5-11). tion and emissions quantities and to meet regulatory Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 269

The United Nations Development Programme, aimed at “enhanced resource productivity” that could as part of the Department of Sustainable Develop- make companies more competitive (Bras; Realff and ment, reports EMA as an important management tool Carmichael, 2004; Foelkel, 2008, p.4). This change for businesses to adopt while responding to envi- toward CP processes may require investment in CP ronmental challenges and still focusing on the triple technologies (Christ and Burritt, 2013, p.163; bottom line (Ambe, 2007, p.7). UNEP educates Schaltegger, et al., 2012, pp.11-15). Actions generat- and encourages companies on the benefits of using ed in clean technology should no longer be seen only EMA. Following these international developments, as costs, as they represent a number of benefits South African companies have considered environ- to industries by assisting them in their endeavors mental issues in their decision-making processes in sustainable development and achieving their goals regarding products and processes. South African of the “triple bottom line” (Mendes, 2012, p.100). companies have identified potential savings of im- The Cleaner Production conference, which was held plementing good environmental management by in Gauteng in June 2013, illustrated the impact and using EMA to accurately trace and identify environ- profitability of the RECP program and highlighted mental costs (Ferreira, et al., 2010; Christ and Bur- that materials and resource efficiencies can improve ritt, 2013, p.165; Ambe, 2007, pp.11-12). A study competitiveness, sustainability, and profitability conducted by Jonall (2008, p.2) by reviewing articles of local manufacturing industry (Delano, 2013, p.3). in academic journals revealed that the EMA method identified material purchase value of NPO costs to be f) Role of Environmental Management the largest cost category. Accounting (EMA) in cleaner production im- A test project undertaken by Schaltegger, et al. plementation (2010, pp.17-19) to assess the sustainable perfor- The United Nations Development Programme, as mance of companies after a combined application part of the Department of Sustainable Development, of EMA, CPA, and EMS (Environmental Manage- reports EMA as an important management tool for ment Systems) generated positive outcomes and businesses to adopt while responding to environmen- contributed to the enhancement of CPA/EMS pro- tal challenges and still focusing on the triple bottom jects by increasing awareness of the economic impli- line, which is achievement of environmental, social, cations of the environmental impact of NPO and economic benefits by the company (Ambe, and costs and provided a systematic method of con- 2007, p.7). UNEP educates and encourages compa- trolling these costs in the short, medium, and long nies on the benefits of using EMA. Following these terms. EMA also helped to quantify monetary bene- international developments, South African compa- fits of adopting alternative CP options (Van, 2012, nies have considered environmental issues in their p.5). decision-making processes regarding products and Cleaner technologies shared environmental gains processes. South African companies have identified of less pollution and reduced waste generated at the potential savings of implementing good environmen- end of the production process and financial gains tal management by using EMA to accurately trace of lower maintenance costs and more efficient use and identify environmental costs (Ferreira, et al., of raw materials. Positive results were concluded 2010; Christ and Burritt, 2013, p.165; Ambe, 2007, in all departments in the environmental management pp.11-12). system whereby the clean technology had been de- Fig. 1 illustrates a tool of EMA used to measure ployed (Promoting Sustainable Use of Industrial the physical and monetary unit flows of material Material, 2013; Acemoglu, et al., 2012, p.1). in the manufacturing process to identify accurate The “Porter Hypothesis” of the win–win scenario cost of waste and emissions for substantial cost re- suggests that well-designed environmental regulation duction. can inspire innovation and strategy formulation

270 Mishelle Doorasamy

CONVENTIONAL ACCOUNTING SYSTEM EMA SYSTEM INPUT (100KG) INPUT (100KG) MATERIAL COST R1000 MATERIAL COST R1000 PROCESSING COST R600 PROCESSING COST R600 TOTAL R1600 TOTAL R1600

OUTPUT (PRODUCT) OUTPUT (PRODUCT) PRODUCT (80KG) PRODUCT (80KG) MATERIAL R1000 MATERIAL COST R800 PROCESSING COST R600 PROCESSING COST R480 TOTAL R1600 COST OF POSITIVE PRODUCT R1280

OUTPUT (WASTE)* OUTPUT (WASTE) WASTE (20KG) WASTE (20KG) MATERIAL COST R0 MATERIAL COST R200 PROCESSING COST R0 PROCESSING COST R120 TOTAL R0 COST OF NEGATIVE PRODUCT R320

Figure 1. Model of material flow cost accounting (source: Model first developed in Germany in 1999; thereafter, it was modified by Ministry of Economic, Trade and Industry of Japan, 2007)

managers view investments in pollution abatement 8.2 Contextual factors of paper and pulp technologies as “unproductive with no marketable manufacturing and quantifiable effects in terms of productivity”. Excessive production capacity, high fixed costs, According to Porter, the cost of environmental cutthroat pricing schemes, increasing competition equipment is made up of capital cost and cost of non- from foreign impacts, yet still producing more paper value-added activities (associated with regulatory even though this meant higher marginal cost implica- compliance, operation and maintenance of equip- tions of the law of diminishing returns (Bras, et. al., ment, permitting and reporting). The United States 2004) had installed pollution-control technologies to re- Paper and pulp manufacturing operates in a cyclical move specific substances from the air and water industry with global economic conditions causing releases since the 1970s. However, recently, pollu- volatility in paper and pulp prices. Therefore, cost tion prevention technologies, a more conservative reduction and improving efficiencies are considered approach to environmental protection than pollution a priority. Finding lower-cost raw materials and al- control, has been introduced. Total composition of ternative fuels, minimizing waste, improving manu- effluents discharged and its potential environmental facturing efficiencies, and implementing energy impacts is not completely known to many; therefore, saving initiatives are some measures implemented by pollution prevention is the only solution to help re- the industry to mitigate risks (Zarkovic, et al., 2011). duce the probability of unwanted surprises being The paper and pulp industry has improved their envi- released into the environment (Zarkovic, et al., ronmental performance dramatically since 1970. Mill 2011). Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 271

However, changing from pollution-control to pollu- Investing in technologies to improve the company’s tion-prevention technologies takes time, money, and ability to identify and quantify “win–win” capital a holistic approach to managing the environmental investment and operational improvement opportuni- issues associated with pulp and paper manufacturing. ties through improved access to and analysis of pro- Pollution-prevention technology investments can be duction and environmental accounting information costly and often compete for capital funds together can support decisions of a corporate commitment with other projects that would also improve the com- to profitability and sustainability. pany’s profitability. In order to remain competitive, mills will have to respond with new technologies, 8.3 Non-Product Output and if this decision results in the firm incurring high The most significant share of total environmental costs, these costs are most likely to be passed on to costs is usually non-product output costs. An EMA purchasers. Therefore, paper companies must con- system can provide information needed that could be sider how much capital needs to be invested in order used for directing decisions toward the adoption to reduce operating costs. of CP measures by implementing new technologies Minor renovations, replacement of individual pieces to reduce these costs (Peres, Domil and Pere, 2010). of equipment, and the elimination of bottlenecks will The purpose of material flow balance as explained have to proceed at a greater rate than major renova- by Jasch (2009, p.832) is to completely understand tions or expansions. It can be concluded that inte- how much of what is put into the system becomes grating pollution-prevention strategies into pulp and a product and how much becomes NPO. He suggests paper manufacturing need to be part of the capital that understanding NPO is the best way to manage planning process that integrates a long-term vision environmental issues. The generation of waste or for environmental progress with improvements in NPO is a sign of inefficient production. Therefore, quality, productivity, and lower operating costs material flows is important not only for the assess- (Zarkovic, et al., 2011). ment of environmental cost but also for the produc- Bras, et al. (2004) suggest that capital expenditures tion-oriented cost assessment. It had been concluded on pollution abatement result in a loss of productive that material flow cost accounting (MFCA), although capital. The general view is that “every penny spent in its imperfect form, is a powerful tool to ensure the complying with green rules means a penny less spent future sustainability of a business. Schmidt and on building more mills.” Porters’ hypothesis of the Nakajima (2013) concluded that a key concept “win–win” scenario states that if environmental of MFCA is to distinguish between product cost regulation were properly designed, it can inspire and NPO and to evaluate which streams of material innovation that will allow companies to use their ends up as part of the final product and which inputs more productively to offset the costs of im- streams of material are NPO. Once material losses proving environmental impact. Empirical studied are quantified, improvement measures and opportu- conducted on paper and pulp industry found that nities to reduce costs by avoiding material losses are paper industry input use and pollution could be re- identified. Monetary savings are higher if the com- duced from between 2% and 8% without adverse pany assessed only direct costs of waste disposal for effects on productive output. Porter suggested that the residual materials. Knowing the complete costs a strategy aimed at enhanced resource productivity allows for scope for technical measures in order will make companies more competitive. The two to reduce material loss. This is made possible impediments that were identified to using environ- by MFCA analysis. mental issues to gain competitive advantage were One of the major cost drivers reported during com- ignorance about direct and indirect environmental pany workshop studies was the material purchase impact and limitations of conventional accounting value of NPO (Jonall, 2008, p.32). NPOs are a major systems for tracking environmental costs (Zarkovic, cost factor for companies considering that polluting et al., 2011, pp.1139-1145). companies actually pays three times for NPO. 272 Mishelle Doorasamy

First, the cost of purchasing the raw material which highly dependent on what efficiency is possible with end up as wasted material. Second, the company the best affordable technology. Neither the best incurs costs for operational use of raw material, available technology nor the best affordable technol- for example, labor and investment cost. Finally, ogy would be able to achieve 100% efficiency the company then pays for the disposal of this wast- in output in relation to the input. Processes without ed material (Jonall, 2008, p.42). This is the actual losses of energy and material are nearly impossible cost of the wasted material that most companies fail to achieve. However, practical research in business to realize. Making them aware of this can create organizations reveals examples where proactive pre- the need to improve material efficiency by investing vention initiatives have brought about both environ- in newer, CP technologies. mental and financial benefits for firms as compared It is suggested that these costs have to be calculated to reactive end-of-pipe approaches, which are expen- annually for internal reporting purposes and to assist sive and camouflaged through hidden costs. managers in making important investment decisions. From the mid 1970s, pollution prevention was realized to be the desired environmental management 8.4 End-Of-Pipe technology versus Cleaner strategy (Environmental strategies, 2013). The re- Technology duction and possible elimination of waste makes “Timing” is the key difference between pollution good environmental and business sense. Clean tech- control and cleaner production. Pollution control is nologies reduce emissions below required levels, after the event, whereas CP is a proactive approach hence, lower compliance and liability costs. End-of- focused on prevention. Bosworth et al. (2001) men- pipe technologies results in higher investment costs tioned that there should not be a misconception that with no increase in the efficiency of production, “end-of-pipe” technologies will never be required. as pollution-control technologies are non-productive Using CP to handle the waste problems would mere- assets. Environmental technologies lead to sustaina- ly reduce the dependence of “end-of-pipe” technolo- ble cost advantage, as they are difficult to imitate gies or, in some cases, eliminate its use completely. by competitors as compared to end-of-pipe technolo- Jasch (2009, p.833) states that focusing on end-of- gies that are off-the-shelf solutions and can be easily pipe solutions rather than cleaner technologies that acquired in any market. Environmental technologies prevents emissions at its source will not provide (clean technologies) require a firm’s production pro- an accurate assessment of opportunities for potential cess to be changed, whereas end-of-pipe technolo- savings of resource use. Bosworth et al. (2001) con- gies are added to existing production processes. cur that CP options are more cost effective when compared to pollution control options and savings 9 Data analysis and Findings are generated through reduced cost of raw materials, 9.1 Review of company data on steam energy, and waste treatment. Market opportunities production process for “greener” products are identified as an environmental benefit of CP. This section deals with primary data collection and analysis of the steam generation process to iden- Jonall (2008, p.42) stated that although prevention tify the possible saving opportunities and improved and environmental management costs have been high environmental performance by adopting CP tech- in the cases studied but considered low when com- niques. The first step in the process involves a CPA pared to waste and emission treatment, which is by of the steam generation process. far the largest cost category constituting of about three-fourth of estimated EMA costs. This ultimately Coal input and steam production output of boilers: means that the company has spent a lot on end-of-  Data from the input/output schedule of the steam pipe treatment. production process for the period under review It should be, however, noted that improvements with (October 2012 to September 2013) are used existing technology is possible but with minimum to test the efficiency of the boiler technology amounts of savings. Production process efficiency is against technological standards. Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 273

 According to technological standards of the com- This was used to identify potential savings options pany’s current boiler technology, the standards for the company should they adopt CP processes. input/output ratio of coal and steam generated is Schaltegger et al. (2010) highlighted the following 1:7. However, the input/output schedule indicates warning signs of inefficiencies that become evident the actual amount of coal used for the 12-month during the CPA: higher raw materials cost compared period. This ratio is compared to technological to those prescribed by technological standards, high- standards of 1:7 to identify technological ineffi- er energy costs, maintenance needs, and higher level ciencies of the steam generation process. of undesired output. The first step of CPA involves the process flow chart 9.2 Cleaner Production Assessment (CPA) analysis of steam generation process, to identify The qualitative review was conducted during the waste generated resulting in negative environmental CPA stage. It involved an overview of the compa- impact. ny’s production and environmental aspects. The CPA framework was used to capture data during 9.3 Ash Disposal the CP audit process as per the CP model. Analysis Fig. 2 is a design process flow chart of the boiler. of the process flow chart shows inputs, outputs, It depicts the steam production process and ash dis- and environmental problem areas of the steam gen- posal from the boiler plant. eration process. Quantitative data analysis involved calculation of NPO using MFCA, a tool of EMA.

Figure 2. Coal-fired steam boiler technological process flow chart

274 Mishelle Doorasamy

Burnt coal of the grate, dust from the dust cyclones, conveyor A is powered by C086, while main ash grit particles from the Riddling Hopper (mainly grit), conveyor B is powered by C86A. and fine ash from soot blowing are waste products Ash is then deposited into the ash hopper where it is that are disposed via the ash disposal system. Before then loaded onto trucks and disposed onto landfill being deposited onto the ash conveyor, the ash from sites. the main ash conveyor is first cooled. The ash and burning coal is drops into a containment facility. a) Coal input and steam production output Here water is added to cool and quench the burning of boilers coal. A paddle ash extractor is used to transfer the Data from the input/output schedule of the steam resulting waste onto the ash conveyor. This consists production process for the period under review (Oc- of a paddle disc that is powered by a motor. tober 2012 to September 2013) is used to test the  Boiler 1: Ash conveyor is powered by motor efficiency of the boiler technology against techno- C081, logical standards and BAT standards.  Boiler 2: Ash conveyor is powered by motor Table 1 indicates the one-sample Kolmogorov– C082, Smirnov test, which is performed to determine the  Boiler 3: Ash conveyor is powered by motor nature of the distributions. C083, and As all of the p-values are greater than 0.05, it implies  Boiler 4: Ash conveyor is powered by motor that the distributions are all normal. Hence, paramet- C084. ric testing (t-tests) were performed. The ash of each boiler ash conveyor is deposited Fig. 3 illustrates comparative results relating to out- onto the main ash conveyor A and then B. Main ash put and input ratios.

Table 1. One-sample Kolmogorov-Smirnov test

Boiler 1 Boiler 2 Boiler 3 Boiler 4

N 12 12 12 12

Mean 6.7062 6.5326 6.4092 6.5773 a,b Normal parameters Standard devi- 0.25947 2.61052 0.71007 0.36191 ation Absolute 0.198 0.341 0.144 0.133

Most extreme differences Positive 0.155 0.336 0.110 0.099

Negative −0.198 −0.341 −0.144 −0.133

Kolmogorov–Smirnov Z 0.688 1.180 0.500 0.461

Asymptotic significance (two-tailed) 0.732 0.123 0.964 0.984 a Test distribution is Normal b Calculated from data

Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 275

14,00

12,00

10,00

8,00

6,00 (Output/Input)

Ratio 4,00

2,00

0,00 Oct‐12 Nov‐12 Dec‐12 Jan‐13 Feb‐13 Mar‐13 Apr‐13 May‐13 Jun‐13 Jul‐13 Aug‐13 Sep‐13

Boiler 1 Boiler 2 Boiler 3 Boiler 4 Figure 3. Output-to-input ratio (source: Doorasamy, 2014)

The mean ratio values per boiler (Table 1) were then material consumption, avoiding scraps and wastes, determined and compared to the standards (convert- and reducing energy and water consumption. This ed to a ratio as well). information needs to be generated on a monthly basis Only boiler 2 is not significantly different. The other for companies to react faster. three boilers are different. The three means are sig- b) Breakdown and calculation of losses incurred nificantly less than the standard of 7. This implies in steam generation process for period under that the company’s current technology is not operat- review, October 2012 to September 2013. ing according to design specification. This is, therefore, a sign of an inefficient production process. Table 2 shows the variance in coal usage by comparing the actual usage to allowed usage. The NPO costs at this level can be reduced by better housekeeping, for example, better monitoring of raw Table 2. Year-to-date variance in tons and Rands (source: M. Doorasamy, 2014)

Allowed Actual usage Variance Allowed usage Actual usage Variance usage in tons in tons in tons in Rands in Rands in Rands

Coal 74,065 76,022 −1,956,696 R69,106,650 R70,923,659 −R1,817,009.25

Table 2 shows that the actual usage of coal was in a loss of R1, 817,009.25 according to accounting higher than the allowed usage of coal for the amount records, could be attributed to the inefficiency of of steam generated, resulting in a negative variance their current technology used in the steam production of R1, 817,009.25. Note: Gross production of steam process. The excess usage of coal impacts negatively for the period under review was 517,938.000 tons on the environment and decreases the economic per- per year. formance of the company in terms of more costs for It should be noted that a negative variance in coal raw material used in the steam production process. usage for the year ended September 2013, resulting

276 Mishelle Doorasamy c) Causes of waste generated during steam The investigation showed significantly high produc- production process tion costs because of wasted energy and higher steam costs. A thorough investigation was done on the During the steam generation process, large amounts process involving the two underperforming boilers of unburned coal are found in the bottom of the boil- to identify possible causes of the inefficiencies iden- er ash. Hence, the steam production process is ineffi- tified during the CPA. It had been found that the cient, resulting in excessive raw material wastage. boiler operating staff had difficulty in operating Input/output ratio according to technological design the boilers to meet steam demand. The company is not being achieved. Therefore, the amount of coal conducted an in-house training program to develop used to generate steam is in excess to what is pre- operating and management skills of staff involved scribed in the technological flow chart manual. in operating the boilers. The program was successful, The information above indicates that the three of the resulting in immediate reduction in percentage four boilers are functioning well below test standards of unburned coal from 25% to 2% and improved of 1:7 and state-of-the-art technological standards boiler efficiency from 70% to 98%. Coal usage de- of 1:8. The only boiler that is functioning close to the creased by 27%, resulting in a savings of approxi- design specification is boiler 2. In order to identify mately $65, 000. An added benefit was reduced ash operational savings, managers need to look at ways disposal to landfill by 275 tons per year. It is im- to reduce the NPO costs caused by suboptimal func- portant to note that the case study cited above had tioning of boilers. a similar problem as the study currently being re- It should be noted that the total cost of material loss- searched. es was limited to raw material flow only. No energy costs or water costs will be included in the calcula- d) Current accounting practices for managing tion. Material purchase value of NPO is the most environmental cost of the company significant of all costs incurred in process steam. The standard accounting information system is used Cost categories such as material cost, system cost, for both financial and management accounting. Only and energy cost are included in the total cost of the monetary information is provided for environmental steam production process. Unburned coal/carbon costs. For the steam generation process, no environ- content of boiler ash (solid waste) has been estimated mental costs were included. Production costs for the to identify NPO costs of raw materials that do not process included raw material (coal), electricity, form part of the final product (steam). Material water, and fixed cost. All coal purchased was includ- loss/waste is quantified and calculated using the ed as part of production costs. Raw material lost purchase price of coal. Monetary value of NPO is during production was not calculated and measured calculated using the following equation: in monetary and physical terms. The NPO is an envi- Monetary value of loss = (Quantity loss in tons) × ronmental cost to the company, as this loss repre- (Input price of coal) sents waste that is a sign of inefficiency in production. Case study findings reported by The Cleaner Produc- tion Case Studies Directory EnviroNET Australia Depreciation of environmental equipment should be (2003) presented results of a CPA that was done recognized as part of environmental costs and not on coal-fired boilers used by the AMH group, which fixed overhead costs. Labor cost of handling operated five coal-fired boilers, situated at different and disposal of waste including the salary of the sites. The CPA revealed differences in coal burning environmental manager should be allocated to envi- performances of the boilers and opportunities to ronmental cost. However, this is not being done by improve boiler performance were identified. It had the company. Environmental costs are allocated been found that between 2% and 29% of coal used to overhead accounts and key managers are not held were not combusted. The unburned coal that reliable for these costs. This tends to discourage man- mained in the boiler ash was disposed to landfill. agers from actively managing environmental costs. Two of the five boilers revealed poor performance. There is limited environmental accountability. Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 277

Based on the above information regarding account- costs remain unidentified. In order to build a link ing practices for managing environmental cost, it can between physical and monetary information systems be concluded that because of the inadequacies of the and improve environmental and economic perfor- company’s current accounting systems, environmen- mance, it is essential that there be regular interaction tal costs reported by the company are significantly and information sharing between the environmental underestimated. The environmental costs included in and accounting departments. financial statements are not a true and accurate re- flection of the actual environmental costs. 9.4 Data analysis of Questionnaire There seems to be poor communication between the All of the sections have reliability scores (Table 3) management accountant and the environmental man- that exceed the minimum required value of 0.700, ager. Management accountants tend to be con- except for investment in environmental performance, strained to thinking within the existing chart of which is slightly below the standard value. This was accounts and pay less attention to environmental due to a negatively worded statement in this section. costs (Chang, 2007). Owing to this break in commu- The first question only had one statement that does nication, opportunities for reducing environmental not allow for a reliability calculation.

Table 3. Reliability scores on questionnaire Number Cronbach's Alpha of Items Company’s environmental performance - -

Environmental issues addressed 8 of 8 0.948

Investment in environmental performance 3 of 4 0.621

Benefits of a system designed to measure and manage environmental 7 of 7 0.927 performance Challenges of applying a systems to measure and manage environmental 6 of 6 0.797 performance overall 24 of 24 0.823

The data analyzed above indicates that all of the uses a traditional cost accounting system. This sys- environmental issues stated above are recognized tem is adequate to provide additional information and being addressed by the company to improve needed to make future investment decision to reduce environmental performance. environmental costs. Shaltegger et al. (2010, p.144) Fig. 4 illustrates benefits of cleaner production in concur that a company will only adopt an EMA sys- KwaZulu-Natal (Doorasamy, 2014). tem if they are made aware of what can be gained by using it. They argue that more accurate awareness The analysis detailed above indicates that 85.75% of process and product cost is an insufficient reason of the respondents agree that the company has in- and offer uncertain benefits. Accountants need to vested sufficiently in improving its environmental know how much they can save with particular em- performance. It can be perceived that managers may phasis on NPO costs. consider further investments to improve environmental performance in the future. However, not much The results of chi-square test are shown in Table 4. can be done to improve environmental performance with the above information as the company currently 278 Mishelle Doorasamy

14,29 77,14 Using environmentally friendly 8,57 products/suppliers 11,43 60,00 Minimizing physical impacts of operations 28,57

14,29 77,14 Reducing energy consumption 8,57

14,29 71,43 Minimizing marine or water pollution 14,29

14,29 80,00 Minimizing air pollution 5,71

14,29 Minimizing the use of hazardous materials and 77,14 chemicals 8,57 20,00 71,43 Recycling materials 8,57

14,29 71,43 Reducing amount of waste produced 14,29

0,00 20,00 40,00 60,00 80,00 Percent Strongly agree Agree Neutral Disagree Totally disagree Figure 4. Benefits of cleaner production  case study (source: Doorasamy, 2014)

Table 4. Test Statistics Minimiz- Minimiz- Redu- Using environ- Reducing Minimiz- ing the use ing physi- Minimiz- cing mentally friend- energy ing marine of hazard- Recycling cal impacts ing air pol- amount ly products consump- or water ous materi- materials of opera- lution of waste /suppliers tion pollution als and tions produced chemicals a a a a a a a a Chi-square 30.400 12.743 30.400 22.857 34.686 30.400 23.543 22.857

df 2 2 2 2 2 2 2 2

Asymptotic 0.000 0.002 0.000 0.000 0.000 0.000 0.000 0.000 significance a 0 cells (0.0%) have expected frequencies less than 5. The minimum expected cell frequency is 11.7.

Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 279

All of the p-values are less than 0.05, the level of The results of chi-square tests are shown in Table 5. significance. Hence, the scoring patterns for each statement across the options were not similar. Fig. 5 illustrates investment in environmental performance.

2,86 0,00 The company does not feel a need to invest in 8,57 improving its environmental performance 74,29 14,29

0,00 The company is willing to invest in improving its 8,57 environmental performance , but only a small 11,43 amount 65,71 14,29

5,71 31,43 The company is willing to invest what is necessary to 34,29 improve its environmental performance 20,00 8,57

14,29 71,43 The company has invested sufficiently in improving 11,43 its environmental performance 2,86 0,00

0,00 20,00 40,00 60,00 80,00 Percent Strongly agree Agree Neutral Disagree Totally disagree Figure 5. Investment in environmental performance

(source: Doorasamy, 2014)

Table 5. Test statistics The company The company does The company is will- The company has is willing to invest not feel a need ing to invest what is invested sufficiently in improving its envi- to invest in improving necessary to improve in improving its ronmental perfor- its environmental its environmental per- environmental mance, but only performance formance performance a small amount a a b a Chi-Square 46.257 31.171 11.714 41.229

df 3 3 4 3 Asymptotic signif- 0.000 0.000 0.020 0.000 icance a 0 cells (0.0%) have expected frequencies less than 5. The minimum expected cell frequency is 8.8. b 0 cells (0.0%) have expected frequencies less than 5. The minimum expected cell frequency is 7.0.

280 Mishelle Doorasamy

All of the p-values are less than 0.05, the level of illustrates benefits of a system designed to measure significance. Hence, the scoring patterns for each and manage environmental performance. statement across the options were skewed. Fig. 6

34,29 62,86 Increased competitiveness of the company 2,86 31,43 Comparison of environmental performance with that 65,71 of competitors 2,86 77,14 20,00 Cost savings and increased profitability 2,86

77,14 Gaining customers who prefer using environmentally 20,00 2,86 friendly goods/services

85,71 8,57 Contribution to sustainability issues 5,71

80,00 Protection of the environment 17,14

77,14 20,00 Improved image of company 2,86

0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 80,00 90,00 Percent

Very Important Important Neutral Not important Not at all important Figure 6. Benefits of a system designed to measure and manage environmental performance (source: Doorasamy, 2014)

The average level of agreement is 96.73%. This is a formance by taking into consideration the expected high level of agreement with the statements that con- benefits to the company. The results indicate that stitute this section. Only one statement has a 4% majority of the respondents consider sustainability difference to the other levels of agreement of issues as very important, followed closely by level 97.14%. of environmental protection. The analysis aimed to identify criteria implemented The results of chi-square tests are shown in Ta- by the company to evaluate and select a system de- ble 6. signed to measure and manage environmental per-

Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 281

Table 6. Test statistics Comparison Gaining cus- Cost sav- of environ- tomers who Im- Increased com- ings and Contribution Protection mental per- prefer using proved petitiveness increased to sustaina- of the envi- formance environmental- image of of the company profitabil- bility issues ronment with that of ly friendly company ity competitors goods/services a a a a a a a Chi-Square 18.914 20.800 31.771 31.771 43.257 35.371 31.771

df 2 2 2 2 2 2 2 Asymptotic signifi- 0.000 0.000 0.000 0.000 0.000 0.000 0.000 cance a 0 cells (0.0%) have expected frequencies less than 5. The minimum expected cell frequency is 11.7

All of the p-values are less than 0.05, the level of Fig. 7 illustrates challenges of applying systems to significance. Hence, the scoring patterns for each measure and manage environmental performance. statement across the options were not similar.

40,00 57,14 Lack of resources 2,86

20,00 17,14 Lack of knowledge and understanding of computer 37,14 skills 25,71

11,43 42,86 Lack of professional help and advice 40,00 5,71

20,00 45,71 Lack of interest in improving environmental 34,29 performance

20,00 20,00 Difficulty in gathering data for environmental 37,14 indicators 22,86

8,57 60,00 Difficulties in motivating staff 31,43

0,00 10,00 20,00 30,00 40,00 50,00 60,00 Percent

Very challenging Challenging Neutral Somewhat important Not an important challenge at all Figure 7. Challenges of applying systems to measure and manage environmental performance (source: Doorasamy, 2014) 282 Mishelle Doorasamy

The data analysis was used to assess management’s a necessary measure by the organization. It was also perception on the most important challenges in ap- evident that the company only considers their waste plying a system to measure and manage environmen- disposal and water treatment costs as environmental tal performance. Results reveal that “lack of costs. Scavone (2006, pp.1276-1285) states that by resources” is the most important challenge with adopting an EMA system, a company can develop a response rate of 97.14%, followed by “difficulties proactive environmental programs which, in turn, in motivating staff”, at response rate of 68.57%. improve profitability and competitiveness, reduce Interestingly, “lack of interest in improving envi- business costs, increase worker productivity and ronmental performance” was also rated high with morale, enhance brand image, and improve relations 65.71% of respondents indicating this as a challenge. with regulators and local communities. She believes that companies that adopt proactive measures 9.5 Correlations to address environmental issues are in an excellent position to identify problems and opportunities Patterns reflected on the correlation sheet reveal that to introduce innovative solutions. It is essential there is a positive correlation between the company’s for companies to generate reliable past- and future- environmental performance and environmental activ- oriented information by using environmental ac- ities implemented to reduce environmental impact counting decision tools such as EMA, to enable ef- and pollution. Hence, it can be concluded that envi- fective and efficient management of environmental ronmental activities practiced by the company has consequences of the business operations. had a positive effect on the company’s environmen-  Their material losses are not evaluated and added tal performance. to NPO costs. All raw materials used are allocated to product cost irrespective of whether they actually Interestingly, the company’s investment in improv- form part of the final product. Energy and system ing environmental performance also has a high posi- costs, as identified by MFCA, are also not consid- tive correlation to environmental activities adopted. ered when costing wastes. Therefore, no decisions It can be inferred that as investments in pollution are made toward improving production processes prevention activities increases, environmental per- and moving toward CP technology. The cost of in- formance also increases. vesting in CP technology is not justified, because Further, a positive correlation of 0.828 has been not- of the inaccurate assessment of environmental costs ed for the relationship between “increased competi- resulting in it being underestimated. Environmental tiveness of the company” and “comparison of costs are also reflected under general overhead ac- environmental performance with that of competi- count and are not being traced back to the product tors.” This suggests that respondents agree that the or process. During the investigation using EMA, it level of environmental performance impacts on the had been discovered that the largest cost category competitiveness of an organization in comparison was the material purchase value of NPO. It had been to its competing industries. Hence, an organization concluded that EMA could be used to support strate- can achieve competitive advantage by improving its gic decision making in companies for more effective environmental performance. product mixes, strategies, and investments that improve environmental performance of a company 9.6 Semi-structured interviews and also highlight the potential for large cost sav- The study yielded the following results: ings.  The researcher, during the interview with the cost  Schmidt and Nakajima (2013, pp.358-369) found accountant of the company, discovered that the envi- some weaknesses in conventional cost accounting ronmental costs are perceived to be insignificant and (CCA) in that it cannot give all the required data. only accounted for annually using a traditional ac- Monetary value flows are traced and interpreted as counting system. Therefore, investment in CP tech- product cost in a CCA system. CCA focuses on cost nology to improve environmental performance and figures for each product in each process, whereas reducing environmental cost was not viewed as MFCA checks mass balances in each process. CCA Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 283 focuses on production costs of the whole company in decisions and to assess the benefits of adopting monetary terms, whereas MFCA focuses on accura- cleaner production techniques or technologies. cy of cost figures of each process taking into account CP adoption is also promoted by the new waste leg- material losses (NPO). Reporting under MFCA high- islation. Within the next 5–7 years, disposal to land- lights actual production costs by excluding the cost fill of certain wastes such as waste containing carbon of raw material purchased that becomes waste and will be strictly prohibited. This means that compa- does not form part of the final product. Generally, nies will have no choice but to change their produc- companies focus on the input materials and the quan- tion processes or technologies to reduce waste tity of products produced from these inputs, not on generated. Implementation of proactive environmen- the material losses generated from the specific pro- tal strategies and CP is imperative to ensure future cess. Hyrslova et al. (2011, p.8) concluded that sustainability of organizations by improving their MFCA is a very important method of environmental economic and environmental performance. CP op- and economic performance management. tions were provided in the literature review. Also a comparison of end-of-pipe technologies and CP 10 Conclusion technologies was presented in the literature review.

10.1 Conclusions drawn from literature review 10.2 Conclusions from empirical findings Recent paradigm shift of environmental management The aim of this research was not only to identify from pollution control to pollution prevention had environmental costs of the production process but led to the introduction of CP techniques and technol- also to highlight scope for potential savings. During ogies. The emphasis of CP is on reducing waste at its initial analysis, the focus was on what the company source. CP techniques include low-cost strategies, identified as environmental costs and also what other such as good housekeeping to investments involving costs are environmental but concealed in other ac- high capital cost, such as changes in technologies, counts. production processes, or input product substitution. The first objective of this study was to demonstrate Many case studies have been cited in the literature the role of EMA in sustainable development and to review highlighting the benefits of adopting CP identify the benefits of adopting CP technologies as measures. However, in South Africa, CP is still very compared to end-of-pipe technology based on prima- much in its infancy stage. Research shows that this is ry and secondary literature as well as empirical find- the only solution for companies that generate signifi- ings. cant waste and consumed large amount of resources. A comprehensive review of the literature clearly Waste is a sign of inefficiency, and inefficient pro- highlighted the role of EMA in sustainable develop- duction processes impact negatively on a company’s ment, and the benefits of adopting CP technologies profitability and environmental performance. In or- compared to end-of-pipe technologies were also der to identify which processes are inefficient, there presented. Various theories, approaches, and findings is a need to trace material and energy flows. on the relationship between EMA, CP, and the im- MFCA, an EMA tool, traces the flow of material pact on environmental and economic performance throughout the entire production process, highlight- of the organization were discussed in detail in the ing inefficiencies. The most significant portion of literature review. Therefore, the first objective of the environmental costs was NPO costs. Previous re- study has been achieved. search has shown that MFCA accurately traces the To conduct a CPA of the company’s current produc- monetary and physical amounts of NPO costs. tion process to identify operational inefficiencies It increases the transparency of environmental costs, and to assess the efficiency and environmental im- allowing managers to identify saving opportunities pact of current technologies being used in steam by adopting CP techniques or technologies. generation process. This enables them to make informed investment 284 Mishelle Doorasamy

To identify the environmental costs of the steam ny uses a CCA system, which is inadequate to calcu- generation process, a CPA was completed. late “actual environmental” cost; hence, environmen- The steam generation process revealed that large tal costs are significantly underestimated. All other amounts of boiler ash between 20 and 60 tons per environmental costs are hidden under overhead ac- day are generated from the boilers. An average counts. Similar shortcomings of conventional man- of 20% of this ash is made up of unburned coal. agement accounting practices in environmental cost Hence, this process is inefficient and results in finan- consideration during internal decision making were cial loss to the company as well as has negative im- reported by Ambe (2007, p.6). pact on the environment. The 20% loss of coal In order to assess the company’s current environ- becomes waste and needs to be evaluated and de- mental performance, various procedures and policies ducted from production cost. This was, however, not were investigated. being done. In the case study, the boilers used for the The empirical results were as follows: generation of steam is more than 40 years old  Environmental-related activities and are, therefore, considered obsolete, which could lead to inefficient steam production incurring high Environmental-related costs and estimation of con- environmental costs and poor economic perfor- tingent liabilities are considered by the company. mance. CP is not being adopted by the company, However, environmental costs are not systematically although this strategy could improve both the organ- traced back to production processes and products. izations’ environmental and economic performance. The following weaknesses in the company’s current As the coal-fired boiler gets older, the coal used to system in calculating the environmental costs were replace the original fuel is usually poorer in quality: identified. Costs of waste disposal were not consist- lower in heating value and higher in ash than ently gathered and evaluated, and the cost of han- the original design fuel (Sheldon, 2001, p.5). dling of waste within the organization was seldom taken into account. Including material purchase val- 10.3 Environmental and economic impact ue in waste was theoretically accepted but was never Frequent disruptions are experienced by the compa- actually calculated. Furthermore, the environmental ny, resulting in loss in production. Losses because and technical departments in addition to the financial of downtime amounted to approximately R439, and cost accounting calculation records carry out 101.80 according to company records. Frequent dis- recordings of data on amounts and costs of in- ruptions could be attributed to insufficient mainte- put/output materials, and so on. Technical controllers nance and poor housekeeping measures. use this data rather than data contained in accounting Furthermore, the company incurs high maintenance records. It is evident from the findings that there are cost for boilers. Managers are, however, unaware inconsistencies when compared to the accounting of the magnitude of maintenance cost. Schaltegger et figures. Hence, poor communication is evident. al. (2010) confirm that these are signs of inefficien- It had also been found that environmental and tech- cies that become evident during the CPA. nical managers have insufficient information about The company has no environmental costs allocated the magnitude of operational costs. Only accountants to the steam production process. The only cost in- were exposed to this kind of information. Further- curred according to financial records is the fixed and more, comprehensive cost statements for environ- variable costs according to production cost schedule. mental costs were not available. Hence, there is a Furthermore, NPO cost was not calculated for the need for increased awareness of the magnitude large amounts of unburned coal found in the boiler of environmental costs, more especially, the material ash. This generally forms a large proportion of envi- purchase value of NPO contained in waste needs ronmental costs and should have been allocated to be established. This information could be used to the steam production process. Instead, the entire to implement measures to improve material and pro- purchase value of the coal is indicated as production cess efficiency. costs (as per production cost schedule). The compa- Using Material Flow Cost Accounting (MFCA) to Identify Benefits of Eco-Efficiency and . . . 285

Therefore, it can be deduced that the environmental are also contributing factors to the lack of adoption costs reflected in the company records are incorrect, of CP technologies by companies in South Africa. as most of the costs that should be included in the Therefore, all the objectives of the study has been cost calculation are omitted. The reason for this achieved. is strongly attributed to the conventional accounting system being used by the company. 10.4 Theoretical contributions of CP  Perspectives of EMA The issue is that most companies are seeking Environmental information is reported to external to achieve short-term profitability instead of trying stakeholders. However, this is not being done regu- to find ways to ensure their long-term sustainability. larly and comprehensively as an EMA system would This study added to the body of knowledge on CP do. EMA will serve as a solid foundation for the and sustainable development. Managers would be effective implementation of an EMS (Mohr-Swart, able to evaluate and analyze how they can improve 2008). Lack of resources had been reported as most both their environmental and economic performance challenging in implementing the environmental in the future and attain their sustainability targets. management systems. Difficulty in motivating staff Barriers to the adoption of CP technologies by the has also been identified as a major challenge. Gil, company are high initial capital cost, which has been Andres, and Salinas (2007, p.89) argue that man- identified as the major barrier to adopting CP tech- agement commitment and awareness of environmen- nologies, followed by additional infrastructure re- tal responsibility significantly influence corporate quirement. Managers perceive that organizations strategy. Sinclair-Desgagne (2004, p.7) suggests that experience poor financial performance by investing all business units need to be involved in environmen- in CP technologies (Schaltegger et al., 2010). Re- tal goal setting and implementation in order to suc- laxed regulation and law enforcement are also con- cessfully achieve environmental objectives. tributing factors to the lack of adoption of CP technologies by companies in South Africa.  Communication between accounting department and environmental department 11 Reference The environmental manager is the only individual involved in handling environmental issues and, at times, environmental issues are outsourced to an [1] Academy of Science of South Africa (ASSAF), 2011. Technological innovations for a low car- environmental specialist. Poor interdepartmental bon society conference (online). Available: communication is evident. There is also no link be- http://www.assaf.co.za. tween systems for collecting financial and nonfinan- cial data. Recent developments in EMA emphasize [2] Acemoglu, D., Akcigit, U., Hanley, D., the greater need for accounting information when Kerr, W., 2012. Transition to Clean Technology. making decisions regarding environmental projects [3] Ambe, M. C., 2007. Environmental Management (Qian and Burritt, 2008, p.244). Accounting in South Africa. Status, challenges and implementation framework. D. Tech. Hence, the next objective of the study was achieved. Tshwane University of Technology.  To investigate barriers to CP implementation [4] Baas, L., 2007. Integrated Environmental and according to management Economic Performance Assessments for Strate- Barriers to the adoption of cleaner production tech- gic Planning and Policy Analysis in Paper Man- nologies by the company are high initial capital cost, ufacturing. Journal of Cleaner Production, which has been identified as the major barrier 15:1205-1216. to adopting CP technologies, followed by additional [5] Bartolomeo, M., Bennett, M., Bouma, J.J, Hey- infrastructure requirement. It is also clearly evident dkamp, P., James, P., Wolters, T., 2001. Envi- that managers perceive that organizations experience ronmental management accounting in Europe: poor financial performance by investing in CP tech- current practice and future potential. European nologies. Relaxed regulation and law enforcement Accounting Review, 9 (1):31-52. 286 Mishelle Doorasamy

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