Journal of Cleaner Production 36 (2012) 102e111

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Integrating information about the cost of carbon through activity-based costing

Wen-Hsien Tsai a, *, Yu-Shan Shen a, Pei-Ling Lee a, Hui-Chiao Chen a, Lopin Kuo b, Chi-Chou Huang b
a
b

National Central University, Jhongli, Taoyuan 32001, Taiwan

Tamkang University, Tamsui, Taipei 25137, Taiwan

a r t i c l e i n f o

a b s t r a c t

Article history:
Received 30 June 2011
Received in revised form
14 February 2012
Accepted 16 February 2012
Available online 16 March 2012

Environmental protection has been an issue of serious concern for many years. It is not a trend, but the
responsibility of corporations. This responsibility for environmental protection should be internalized
into business operations d prior to production d in order to reect the true cost of the nal product.
Due to the use of traditional cost accounting, many organizations have not estimated their environmental costs precisely. Therefore environmental accounting systems such as carbon management
accounting, environmental management accounting and greenhouse-gas accounting have attracted
worldwide attention. In this paper, we propose an integrated concept d the Activity-Based Costing
approach d to solve the problem of environmental and cost evaluation. We include a case study of an
existing pulp and paper company in Taiwan to show that the activity-based costing method estimates
emissions of waste and the environmental costs of a nal product more accurately than traditional
approaches do. The method can, therefore, provide information for use in existing environmental
accounting systems and help managers incorporate environmental costs into their decision-making
processes.

2012 Elsevier Ltd. All rights reserved.

Keywords:
Activity-Based Costing
Environmental cost
External costs of carbon emission

1. Introduction
Global warming is one of the major environmental problems of
the 21st century. Santers et al. (1996) studies provide hard
evidence that demonstrates how human activities have globalscale consequences. Scientists have contributed to the scientic
underpinning of this issue by reporting (in the conclusion to the
1995 Intergovernmental Panel on Climate Change (IPCC) report) a
discernible human inuence on the global climate (IPCC, 1995).
Human beings are harming the environment through polluting
groundwater, contaminating rivers that drain into the sea and
emitting carbon, etc.
Until the Kyoto Protocol came into effect in 2005, the application
of price mechanisms was the most important instrument for
carbon reduction and greenhouse-gas reduction. Many countries,
such as Denmark, the Netherlands, Sweden and Finland, etc., are
signatories of the Kyoto Protocol. Recognizing the necessity to
protect the environment through timely and effective intervention,
governments in most developed countries have responded to
public concerns by introducing regulations designed to restrict
environmentally harmful activities (Osborn and Datta, 2006). These

* Corresponding author. Tel.: 886 3 4267247; fax: 886 3 4222891.

E-mail address: whtsai@mgt.ncu.edu.tw (W.-H. Tsai).
0959-6526/$ e see front matter
2012 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jclepro.2012.02.024

regulations, which began in the 1970s and include anti-pollution

measures, carbon emission reductions, greenhouse-gas emission
credits, etc., continue to play a major role in forcing rms to change
their strategies and information paradigms about cost and managerial accounting processes (Ratnatunga and Balachandran, 2009);
they represent a top-down approach designed to lead to
improvements in the environment (Collins, 1998). Business entities
now need to consider such issues as trading in carbon allowances,
counting the costs of their carbon emissions and transmitting the
increased costs of carbon regulation to consumers through higher
prices with their product mix (Ratnatunga and Balachandran,
2009). Based on the polluter pays principle, a pollution tax may
be levied on industrial products. The effectiveness of this taxation
approach has been considered in many pieces of research. Paltsev
et al. (2009) analyzed the main proposals for cap-and-trade
systems, while Metcalf et al. (2008) and Paltsev et al. (2009) did
the same for CO2 taxes. Governments have adopted tax policies,
such as pollutant-based taxes, thus enabling rms to estimate the
marginal damages and marginal costs of different taxation levels in
calculating the optimal range of product prices. To better manage
waste and facilitate implementation of a pollution tax, the effective
calculation of environment-related costs becomes increasingly
important (Tsai et al., 2011a,b,c). In a conventional accounting
system, related costs are either hidden in overhead accounts or are
not recorded (Gale, 2006). Therefore a number of accounting

W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

methodologies, such as environmental management accounting

(EMA), carbon management accounting (CMA) and greenhouse-gas
accounting (GHG) etc., have been developed.
Taxes levied on the carbon content of fuels are being considered
in OECD countries as a policy instrument for reducing carbon/GHG
emissions in order to reduce the impacts of the accelerated
greenhouse effect (Hoeller and Wallin, 1991). Taxation, therefore,
can be seen as part of the trend in environmental protection to
transfer external costs to internal costs. In this paper we present
a case study of an existing pulp and paper company in Taiwan and
use the Activity-Based Costing (ABC) method to track the environmental costs of nal products and to estimate the environment
costs of different pollutants per unit. Due to the fact that, in
a conventional accounting system, environment-related costs are
either hidden in overhead accounts or are not recorded, we
demonstrate that the ABC method helps uncover those costs that
are hidden in overheads and therefore assists in estimating the
environmental costs of a nal product more accurately.
The rest of this paper is organized as follows: Sections 2 and 3
present in turn an overview of the global paper industry and the
impacts of externalizing costs. Section 4 provides background on
the case study. Section 5 describes types of cost accounting systems
and Section 6 describes the ABC and its application. Section 7
presents a worked example of the ABC method, and nally,
Section 8 concludes this paper.
2. The state of the global paper industry
Our research is based on the current legislative background of
the pulp and paper industry. This industry is the fth largest
industrial energy user, accounting for 10% of all industrial energy
consumption (IIED, 1995). The production and consumption of
paper leads to emissions of greenhouse gases (GHGs). World
consumption of paper has grown 400 percent in the last 40 years
and the world consumes about 300 million tons of paper each year
(Martin, 2011). The paper sector, as well as the stone, clay and glass
group, together consumed about 70% of energy consumption of all
industrial sector (Capehart et al., 2006). As can be seen, the paper
sector is one of the biggest sources of pollution.
The global pulp and paper industry has undergone substantial
changes since the late 1980s (Ince, 1999). The global economic
downturn in the late 1980s and early 1990s produced downward
pressure on the prices of paper products, and reduced the protability of rms (Ghosal and Nair-Reichert, 2009). The current global
overcapacity is due to low demand and a growth in environmental
consciousness. In order to remain competitive, rms in the paper
industry have to improve their production methods, enhance
production skills (Puurunen and Vasara, 2007), save energy (Farla
et al., 1997; Nilsson et al., 1995; Hekkert et al., 2002), and reduce
the costs of pollution. Most existing research about the pollution
generated by the pulp and paper industry has focused on either
improving production skills or making energy savings. In this
paper, we investigate the role of pollution charges, which have
received scant attention.
3. The external costs of carbon emissions
Many companies generate and discharge vast amounts of waste,
much of which pollutes the natural environment and imposes costs
on households and other enterprises. Economists call these
damages externalities because their costs typically do not fall on
the rms that discharge the wastes but fall instead on those that
bear the damage (Thomas et al., 2007). Most product cost estimation systems utilize as output a single cost corresponding to a single
process plan and thus they lack information about full cost

103

structure and production processes (i.e., process plans) (Hmida and

Vernadat, 2009). This indicates that traditional cost systems do not
trace costs to their sources or even quantify them systematically. In
2005, the United Nations Environment Program-Finance Initiative
(UNEP-FI) published a report which indicated that concern for the
environment is a signicant factor in achieving better nancial
performance in the real world. Under the Kyoto Protocol, a number
of countries with surplus credits are trading them to other countries with quantied emission restrictions. The existence of the
carbon trading market has the potential to inuence organizational
strategy, thus accountants and other business information
providers need to reconsider how they deal with carbon management accounting (Ratnatunga and Balachandran, 2009; Burritt
et al., 2011a,b). However, much of the former research has
ignored factors related to environmental costs, such as the cost of
carbon, etc. As mentioned previously, costs associated with the
environment are staring to be internalized. Therefore, we present
a method that companies can use for such cost-internalizing
purposes.
The ABC method has been successfully used by many enterprises
(Cooper and Kaplan, 2000). The method works in two ways: rst,
cost pools are dened as being activities rather than production cost
centers; secondly, the cost drivers used to assign activity costs are
structurally different from those used in traditional costing systems
(Rezaie et al., 2008). As the current study demonstrates, the
proposed ABC method can help managers to make better decisions
by enabling them to clearly identify the costs, by product, of environmental compliance and responsibility.
4. Background to the case study
In order to maintain national competitiveness and avoid the
consumption of high-priced energy, governments the world over
continue to make efforts toward conserving energy. In 2005,
Industrial Voluntary Agreement representatives from domestic
industrial elds convened in Taiwan to discuss the trend towards
GHG reductions. The top 6 energy intensive industries (steel,
petrochemicals, cement, papermaking, man-made ber and cottondyeing) were called upon to make voluntary carbon reductions by
the Ministry of Economic Affairs (MOEA). In 2007, the Environmental Protection Department (EPD) also targeted air pollution and
toxic waste management; since then it has implemented or
expanded on many new measures. The measures such as charges
(or nes) for air pollution have been implemented as part of the
EPDs prevention strategy.
The data used for this study were collected from the S Paper Co.,
Ltd., which belongs to one of the top 6 energy intensive sectors in
Taiwan, according to data reports from 2007 to 2010. S Paper Co.,
Ltd. was founded in 1918. Its share capital (NT dollars) is
$2,800,000,000, and it has 320 employees. S Paper Co., Ltd. is
a specialized manufacturing company engaging in industrial paper
production, trading and processing.
5. Types of cost accounting systems
Unlike in past years, sustainability concepts are now inuencing
the economic success of companies (Schaltegger, 2011). Managers
that seek to gain competitive advantage are beginning to realize the
necessity of promoting corporate sustainability initiatives
(Schaltegger and Burritt, 2005). Information about sustainability
should be considered in managerial decision-making. Sustainability accounting and reporting have therefore become crucial
tools which permit the collection and analysis of corporate
sustainability information (Schaltegger et al., 2006). Conventional
management accounting does not, in general, give explicit and

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W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

distinct recognition to company-related environmental impacts

(Schaltegger and Burritt, 2000). Burritt et al. (2002) indicated that
management accounting systems should be designed to reect the
fact that different managers may require different types of information. A number of accounting methodologies, such as environmental management accounting (EMA), carbon management
accounting (CMA) and greenhouse-gas accounting (GHG) have
therefore been developed. The rst, environmental management
accounting (EMA), is the most developed subset of sustainability
accounting and generates physical as well as monetary data
through the use of various accounting methods (Schaltegger et al.,
2006). The second, carbon management accounting (CMA), is one
part of sustainability accounting and has been evolving as a tool to
provide managers with carbon-related information (WRI, 2009;
Burritt et al., 2011a,b). The third method is greenhouse-gas (GHG)
accounting. Pulp and paper companies can use this method to
reduce their greenhouse effects. Finally, activity-based costing
(ABC) is one of the environmental management accounting tools
which tracks and incorporates the environmental costs of
processes, rather than hiding them in general overhead charges; it
is thus seen to be one way of estimating the environmental costs of
a product. The relevant schemes are discussed below.

be indirect upstream, direct operational or indirect downstream.

First, Merrild et al. (2009) states that indirect upstream GHG
emissions are derived from the provision of electricity and
combustion fuel oil in pulp and paper industry. Second, direct
operational emissions include combustion of fuels for heating of
facilities in pulp and paper industry. Third, downstream indirect
emissions identied include emissions saved from production of
substituted products produced from virgin bers in pulp and paper
industry. In connection with the case study example, the production of pulp and paper needs the use of power and steam and
requires the generation of heat and power (CHP), and causes
pollutants to be produced such as CO2 and coal ash. In addition,
paper production requires the use of virgin pulp and recycling pulp
and causes the emission of pollutants such as sludge, waste residues, etc.
5.3. Environmental management accounting

Carbon management accounting (CMA) has become a focus of

attention for three main reasons. Firstly, the type of information it
provides can improve carbon management (such as helping
companies to measure their carbon footprints (Wiedmann, 2009)).
Secondly, the process ensures that carbon emissions are subject to
standard quantitative measurement before appearing in corporate
external reports (WBCSD/WRI, 2004). Thirdly, carbon management
has been gaining attention in public discourse (BDI and McKinsey,
2007). Carbon management accounting (CMA) is one part of
sustainability accounting designed to provide managers with
information that can assist companies in making better decisions
about carbon emission-related issues (IPCC, 2007; Burritt et al.,
2011a,b). As Ratnatunga and Balachandran (2009) indicated,
during the product costing process, costs incurred subsequent to
the product being sold are usually not calculated and the expected
cost of after-sales service is incorporated into the cost. Carbon cost
management is a subset of the push towards environmental cost
accounting (Mathews, 1997; Adams, 2004; Burritt et al., 2011a,b)
that highlights cost impacts beyond those related to a specic cost
object, such as a product (Ratnatunga and Balachandran, 2009). If
carbon cost is allocated in a precise manner over product lifecycle,
it seems that the product costs may exceed the product prices.
Therefore, it is important to calculate the associated carbon cost,
identify the activities involved in production and provide the
needed monetary information to managers to enable them to make
better decisions.

Conventional management accounting systems often attribute

environmental costs to general overhead accounts with the
consequence that the production managers have no incentive to
reduce related environmental costs (de Beer and Friend, 2006).
Jasch (2003) indicated that conventional cost accounting may be
used to compare environmental and non-environmental costs in
overhead accounts, ending up with the environmental costs being
hidden. Environmental Management Accounting (EMA) can be
dened as being the generation, analysis and use of nancial and
non-nancial information in order to optimize corporate environmental and economic performance and to achieve sustainable
business (Bennett et al., 2003; Burritt et al., 2002, 2009). Burritt
et al. (2002) proposes that EMA should include both Monetary
Environmental Management Accounting (MEMA) and Physical
Environmental Management Accounting (PEMA). Monetary
Environmental Management Accounting deals with environmental aspects of corporate activities represented in monetary
units and generates information for internal management use
(Burritt et al., 2002). PEMA tools are designed to collect environmental impact information in physical units for internal use by
management (Schaltegger and Burritt, 2000; Burritt et al., 2002).
Physical Environmental Management Accounting also serves as
an information tool for internal management decisions (Burritt
et al., 2002). By identifying, assessing and allocating environmental costs, Environmental Management Accounting (EMA)
can provide opportunities to actually calculate cost savings or
assist in environmental cost allocation (Jasch, 2003). Environmental management accounting is part of a combined approach
to accounting infrastructure which provides third parties (such as
managers) with a variety of environment-related data (namely,
nancial accounting data, cost accounting data and material ow
balances). An EMA approach can therefore provide additional
information about products.

5.2. Greenhouse-gas accounting

5.4. The Activity-based costing method

Implementation of the articles of the Kyoto Protocol will require

rules for accounting against which reduction of greenhouse-gas
emissions, or enhancement of greenhouse-gas removals, are to be
measured (Gustavsson et al., 2000). Downie and Stubbs (in press)
indicated that corporations have a vital role to play in efforts to
mitigate global warming as the dominant producers of industrial
greenhouse-gas (GHG) emissions (direct or scope 1 emissions) and
due to the GHG emitted throughout their supply chain (indirect or
scope 2 and scope 3 emissions). Merrild et al. (2009) provided
research based on the Gentil et al. (2009) framework which can be
used in calculating GHG emissions. They specify that impacts may

Cost accounting literature has argued that traditional cost

accounting systems are obsolete in a new environment characterized by modern production technology; ABC has been offered as
a solution (Johnson and Kaplan, 1987; Cooper, 1988a,b; Malmi,
1999). ABC systems differ from traditional costing systems in how
they are able to model the use of all resources in all the activities
performed by these resources, and then link the cost of these
activities to products (Cooper and Kaplan, 1991a,b; Hundal, 1997;
Park and Simpson, 2008). In the ABC system, costs are traced by
activities across departments or cost centers (Lin et al., 2007; Cao
et al., 2006). ABC provides information about a products cost

5.1. Carbon management accounting

W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

based on the resources used in its production (Kee and Matherly,

2003). The causal relationship between products and customers
that consume resources is determined by tracing the cost of the
factor (cost driver) that is caused by (or correlates highly with)
a products or customers use of an activitys resources (Kee and
Schmidt, 2000). Traditional cost accounting methods do not accurately reect the contributions of indirect costs to individual activities. Instead, they pool all indirect costs and allocate them to various
products (services) in proportion to product (service) volume or
direct costs (Gujral et al., 2010). ABC solves this problem by estimating the cost of the activities that consume resources and by
linking these costs to the products (services) that are provided (Lin
et al., 2007; Cao et al., 2006). ABC products provides a better estimate of product cost as well as the cost of the individual activities
used in its production (Kee, 1995). Surveys and interviews with
managers who use ABC indicate that it is used to support a wide
range of economic activities, such as environmental management
(Tsai and Hung, 2009a,b; Tsai et al., 2011a, 2012), and other activities
in the environmental eld (da Silva and Amaral, 2009).
A detailed cost assignment view of ABC is shown in Fig. 1 (Tsai,
2010; Turney, 1992). ABC focuses on the accurate cost assignment of
overheads to products. In the cost assignment view, the assignment
of costs through the ABC method occurs in two stages: At the rst
stage, resource costs are assigned to various activities by creating
resource drivers. Each type of resource traced to an activity
becomes a cost element of an activity cost pool. An activity cost pool
therefore represents the total costs identied with an activity or
activity center, which is usually clustered by function or process. At
the second stage, the costs in each activity cost pool are allocated to
cost objects by an activity driver which is used to measure the
consumption of activities by the cost objects.
6. The ABC approach to environmental cost estimation
To apply ABC to environmental cost estimation, we utilized
a cost tracing graph, which is a directed acyclic graph that assigns
the environmental cost of each activity to the nal product. This
cost tracing graph can be generated from the business process of
a company or by consulting with experts. Fig. 2 is an example of
a cost tracing graph. There are many entities in Fig. 2. Each entity
belongs to one entity type. We use ei to denote the ith entity in
a cost tracing graph, while F, A and N are sets of entities whose
entity types are nal products, activities and pollutant products,
respectively. In Fig. 2, we use a square to present a nal product

105

Product 1
e1

Paper production
operations ( Machine 3 )
e2

Pulping operations
(virgin pulps)
e3

Power
generation
operation
e4
Coal Ash
e7
Gas
production
Operations
e5
CO2
e8

Fig. 2. Cost tracing graph.

entity, an ellipse to present an activity entity and a triangle to

present a pollutant product entity. In this example, F {e1}, A {e2,
e3, e4, e5}, and N {e6, e7, e8}.
There are arrows linking entities in Fig. 2. An arrow <ei, ej>
extends from ei to ej if ej is a cost component of ei. For example, the
environmental cost of e1 is derived from e2 and e3, while the
environmental cost of e5 is caused by e7 and e8. We use an array L, as
shown in Table 1, to record arrows in a graph. In this array, l(i, j) 1
if <ei, ej> exists; otherwise, l(i, j) 0.
Out (ei) is the set of entities which are cost components of ei. An
entity ej Outei if and only if l(i, j) 1. Conversely, an entity
ej Inei if and only if l(j, i) 1. For example, Out (e2) {e4, e5} and
In (e2) {e1}.
A path is a sequence of arrows. Another array P,
P
s
P lim m
s 1 L , is used to record the number of paths
m/N
between any two entities where p(i, j) is the number of different

Resources
Resource 1

Resource 2

Resource 3

Resource n
Resource
Drivers

First Stage
Activity Center

Activity
Activity Cost Pool
Activities
Cost Element

Second Stage

Activity
Drivers

CO1

CO2

CO3

Sludge
e6

CO4

COn

Fig. 1. Detailed cost assignment view of ABC. Source: Tsai (2010).

Cost objects

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W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

Table 1
An array of arrows for the example cost tracing graph.

e1
e2
e3
e4
e5
e6
e7
e8

Table 2
Costs by category.

e1

e2

e3

e4

e5

e6

e7

e8

0
0
0
0
0
0
0
0

1
0
0
0
0
0
0
0

1
0
0
0
0
0
0
0

0
1
1
0
0
0
0
0

0
1
0
1
0
0
0
0

0
0
1
0
0
0
0
0

0
0
0
0
1
0
0
0

0
0
0
0
1
0
0
0

Environmental cost ($)

Steam consumption
(ton)

Power consumption
(KW)

Air pollution
charge
Coal ash
Sludge
Waste residue

271,002

Machine 1

7162

Pulp

2,867,300

179,483
2,535,142
1,405,512

12,878
3638
12,781

Machine 1
Machine 2
Machine 3

855,700
1,658,500
755,800

Total

4,391,139

Machine 2
Machine 3
Power
generation
Total

36,459

Total

6,137,300

Pulp content (ton)

paths between ei and ej. For example, the value of p(1, 5) is 3, which
means that there are three paths between e1 and e5. The three paths
are: <e1, e2>, <e2, e5>, <e1, e2>, <e2, e4>, <e4, e5>, and <e1,
e3>, <e3, e4>, <e4, e5>.
We use d(ei, ej) to denote the amount of entity ej required by
each unit of entity ei. Some entities are required by others in an
indirect way. For example, the entity e5 is required not only directly
by e2, but also indirectly by e2 through e4. We use td(ei, ej) to denote
the total amount of entity ej required by each unit of entity ei in both
direct and indirect ways. The value of td(ei, ej) can be calculated
using Eq. (1):

8
0;
>
<


1;
td ei ; ej
P
>
:

cek Outei


 

d ei; ek td ek ; ej

pi; j 0
ei ej
pi; j>0^ei sej

(1)

cek Outei



d ei; ek TCek

Virgin pulp
Recycling pulp
Total

1439.085
10,516.601
11,955.686

Machine 1
Machine 2
Machine 3
Total

ei ;N^Outei f
ei N
ei ;N^Outei sf

Note: Sludge (virgin pulp:recycling pulp 1:5); Power consumption (virgin

pulp:recycling pulp 1.2:1) from S Paper Co., Ltd.

Table 3
Total outputs of machines.

Machine 1
Machine 2
Machine 3
Total

Product 1

Product 2

Product 3

Total

0
0
539.380
539.380

2403.456
6376.297
1323.866
10,103.619

243.270
0
0
243.270

2646.726
6376.297
1863.246
10,886.269

(2)

Furthermore, PC(ei, ej), the partial environmental cost of ei which

is caused by an individual pollutant ej, can be calculated by using
Eq. (3), while td(ei, ej) is the pollutant ej created as a result of
manufacturing each unit of ei:




  
PC ei ; ej td ei ; ej EC ej ; ej N

CO 2

Power

Virgin pulp
materials

Pulping
operations
(Virgin pulps)

Recycled pulp
raw materials

Pulping
operations

Steam

Coal ash

Gas production
operations

Coal ash
Heavy oil

Environmental
cost estimating

Steam
Power
Virgin pulps,
Recycling
pulps

(Recycling pulps)

Sludge Waste residue

(3)

For example, according to Fig. 2, we have TC(e3) d(e3, e4)

TC(e4) d(e3, e6)EC(e6) and PC(e1, e7) td(e1, e7)EC(e7).

ABC calculation method

Power
Generation
operations

2646.726
6376.297
1863.246
10,886.269

Note: 1 ton for the unit.

For example, td(e4, e1) 0, td(e3, e3) 1, and d(e1, e5) d(e1, e2)
td(e2, e5) d(e1, e3)td(e3, e5).
An activity may also produce some pollutants and therefore
entail an environmental cost. Assume ej is a pollutant and EC(ej) is
the environmental cost of ej. The total environmental cost of any
entity ei, TC(ei) can then be calculated using Eq. (2):

8
0;
>
<
ECeP
i ;
TCei
>
:

Total output (ton)

Paper
production
operations
(Machine 1)
Paper
production
operations
(Machine 2)
Paper
production
operations
(Machine 3)

Fig. 3. The production process in a pulp and paper company.

Product 1

Product 2

Product 3

W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

Table 4
Pulp usage.

Virgin pulp
Recycling pulp
Total

Product 1

Product 2

Product 3

Total

664.375
0
664.375

794.710
10,227.545
11,022.255

0
289.056
289.056

1439.085
10,516.601
11,955.686

Note: 1 ton for unit.

7. A worked example
In this section, we offer a worked example of estimating environmental costs with ABC using a pulp and paper company to
illustrate the process. Fig. 3 illustrates the production processes in
a pulp and paper company. Related information is shown in
Tables 2e4.
Fig. 3 presents the process boundaries. The production of
pulp and paper requires the use of power and steam. The steam
consumption ratio at paper mills enables the generation of heat
and power (CHP) to be efciently used in power generation and
paper production operations (Machines 1, 2 and 3). At the
beginning of the process, a coal-red power station produces
electricity by burning coal and heavy oil to generate steam that
generates power (i.e. provides the electricity that supports paper
production operations). Not all thermal energy is transformed
into mechanical power, since a large amount of carbon dioxide,
coal, sludge, etc. is produced as a side-effect. In addition, paper
production operations need virgin pulp and recycling pulp. The
output is a range of grades of paper products from three
machines (1, 2 and 3).
Cost tracing graphs were generated for each product using the
information above. Fig. 2 is the cost tracing graph for product 1.
To save space, the other cost tracing graphs are not included in
this paper. Notice that, since the environmental cost of product 2
varies according to the machine used in its manufacture, we treat
product 2 (which is manufactured by different machines) as
having a number of variants: product 2-1, product 2-2, and
product 2-3.
We rst calculate each activity driver, d(ei, ej), for each existing
<ei, ej>, where ei FWA and ej A. For example, according to
Table 2, since the steam consumption for power generation is

107

12,781 ton, and total power consumption is 6,137,300, the amount

of steam required by each unit of power generation d(power
generation operations, gas production operations) is 12,781/
6,137,300 z 0.00208. Other calculations and results are shown in
Table 5.
With the results of Table 5 and Eq. (1), we obtain the total
amount of each activity required by each nal product, as shown in
Table 6.
The unit value of the environmental cost of an activity can be
derived from the total environment charge and the total amount of
this activity. For example, since the total air pollution charge is NT$
271,002, and the total cost of gas production operations (which
include CO2 and leads to an air pollution charge) is NT$ 36,459, the
air pollution charge required for each unit of stream, d(gas
production operations, CO2)  EC(CO2), is 271,002/36,459 z NT$
7.433. Likewise, we can calculate all values of d(ei, ej)  EC(ej),
where ej N^ej Outei . The related calculations and results are
shown in Table 7.
Based on the results provided in Tables 6 and 7, we can obtain
the total environment cost TC(ei) for each activity and nal product
by using Eq. (2). The related calculations and results are shown in
Table 8.
To calculate the partial environmental costs, we rewrote Eq. (3)
as Eq. (4):



PC ei ; ej


  
dei ; ek d ek ; ej EC ej ;

ej N

(4)

cek Inej

With Table 8 and Eq. (4), we can calculate all the partial environmental costs for each nal product. The environmental cost
structures of the nal products are shown in Table 9.
From Table 9, we know that the total costs of products 1, 2 and 3
are: NT$98.954, NT$417.452 and NT$486.343, respectively. As
indicated in Table 9, the costs associated with the four factors (air
pollution, coal ash, sludge and waste residue) are variable for each
nal product. These data, which are usually bundled up as general
overheads by conventional cost accounting, is information which is
useful in existing environmental accounting systems and which
may help managers in decision-making about their production and
environment strategies.

Table 5
Activity drivers.
d(power generation operations, gas production operations) 12,781/6,137,300 0.00208
d(machine 1, gas production operations) 7162/2646.726 2.70
d(machine 2, gas production operations) 12,878/6376.297 2.019
d(machine 3, gas production operations) 3638/1863.246 1.95
d(virgin pulp operations, power generation operations) 2,867,300/(1.2  1439.085 10,516.601)  1.2 281.02
d(recycling pulp operations, power generation operations) 2,867,300/(1.2  1439.085 10,516.601) 234.18
d(machine 1, power generation operations) 855,700/2646.726 323.30
d(machine 2, power generation operations) 1,658,500/6376.297 260.10
d(machine 3, power generation operations) 755,800/1863.246 405.63
d(product 1, machine 3) 1
d(product 2-1, machine 1) 1
d(product 2-2, machine 2) 1
d(product 2-3, machine 3) 1
d(product 3, machine 1) 1
d(product 1, virgin pulp operations) 644.375/539.380 1.19
d(product 2-1, virgin pulp operations) 794.710/10,103.619 0.0786
d(product 2-2, virgin pulp operations) 794.710/10,103.619 0.0786
d(product 2-3, virgin pulp operations) 794.710/10,103.619 0.0786
d(product 2-1, recycling pulp operations) 10,227.545/10,103.619 1.012
d(product 2-2, recycling pulp operations) 10,227.545/10,103.619 1.012
d(product 2-3, recycling pulp operations) 10,227.545/10,103.619 1.012
d(product 3, recycling pulp operations) 289.056/243.270 1.188

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W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

Table 6
Activities required by each nal product.

Product
Product
Product
Product
Product

1
2-1
2-2
2-3
3

Gas production
operations

Power generation
operations

Virgin pulp
operations

Recycling pulp
operations

Machine 1

Machine 2

Machine 3

3.489
3.911
3.099
3.333
3.951

740.044
582.378
519.178
664.708
601.506

1.1900
0.0786
0.0786
0.0786
0

0
1.012
1.012
1.012
1.188

0
1
0
0
1

0
0
1
0
0

1
0
0
1
0

Note:
td(machine 1, gas production operations) 323.30  0.00208 + 2.70  1 0.6725 + 2.70 3.3725
td(machine 2, gas production operations) 260.10  0.00208 + 2.019  1 0.5410 + 2.019 2.56
td(machine 3, gas production operations) 405.63  0.00208 + 1.95  1 0.8437 + 1.95 2.7937
td(virgin pulp operations, gas production operations) 281.02  0.002080.5845
td(recycling pulp operations, gas production operations) 234.18  0.002080.4871
Gas production operations:
td(Product 1, gas production operations) 1  2.7937 + 1.19  0.5845 3.489
td(Product 2-1, gas production operations) 1  3.3725 + 0.0786  0.5845 + 1.012  0.4871 3.911
td(Product 2-2, gas production operations) 1  2.56 + 0.0786  0.5845 + 1.012  0.4871 3.099
td(Product 2-3, gas production operations) 1  2.7937 + 0.0786  0.5845 + 1.012  0.4871 3.333
td(Product 3, gas production operations) 1  3.3725 + 1.188  0.4871 3.951
Power generation operations:
td (Production 1, power generation operations) 1  405.63 + 1.19  281.02 740.044
td(Production 2-1, power generation operations) 1  323.30 + 0.0786  281.02 + 1.012  234.18 582.378
td(Production 2-2, power generation operations) 1  260.10 + 0.0786  281.02 + 1.012  234.18 519.178
td(Production 2-3, power generation operations) 1  405.63 + 0.0786  281.02 + 1.012  234.18 664.708
td(Production 3, power generation operations) 1  323.30 + 1.188  234.18 601.506
Virgin pulp operations and recycling pulp operations: please refer to Table 5

Table 7
Unit environment costs from different pollution products caused by different activities.
d(gas production operations, CO2)  EC(CO2)
dgas production operations; CO2  ECCO2 

total steam consumption

total steam consumption

total air pollution fee

total steam consumption
271,002/36,459 7.433
d(gas production operations, coal ash)  EC(coal ash)

dgas production operations; coal ash  ECcoal ash 

total steam consumption

total steam consumption

total coal ash fee

total steam consumption
179,483/36,459 4.922
d(virgin pulp operations, sludge)  EC(sludge)

dvirgin pulp operations; sludge  ECsludge 

total virgin pulp consumption

total virgin pulp consumption

total sludge fee caused by virgin pulp

total virgin pulp consumption
2; 535; 142=1; 439:085 10; 516:061  5
2,535,142/54,022.09 46.93
d(recycling pulp operations, sludge)  EC(sludge)

drecycling pulp operations; sludge  ECsludge 

total recycling pulp consumption

total recycling pulp consumption

total sludge fee caused by recycle pulp

total recycle pulp consumption
2; 535; 142=1; 439:085 10; 516:601  5  5
2,535,142/54,022.09  5 234.65
d(recycling pulp operations, waste residue)  EC(waste residue)

drecycling pulp operations; waste residue  ECwaste residue 

total waste residue fee
total recycling pulp consumption
1,405,512/10,516.601 133.64

total recycling pulp consumption

total recycling pulp consumption

W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

109

Table 8
Total environmental cost of activities.
TC(gas production operations) d(gas production operations, CO2)  EC(CO2) d(gas production operations, coal ash)  EC(coal ash) 7.433 4.922 12.355
TC(power generation operations) d(power generation operations, gas production operations)  TC(gas production operations) 0.00208  12.355 0.0257
TC(virgin pulp operations) d(virgin pulp operations, sludge)  EC(sludge) d(virgin pulp operations, power generation operations)  TC(power generation
operations) 46.93 281.02  0.0257 54.15
TC(recycling pulp operations) d(recycling pulp operations, sludge)  EC(sludge) d(recycling pulp operations, waste residue)  EC(waste residue) d(recycling pulp
operations, power generation operations)  TC(power generation operations) 234.65 133.64 234.18  0.0257 374.308
TC(machine 1) d(machine 1, gas production operations)  TC(gas production operations) d(machine 1, power generation operations)  TC(power generation
operations) 2.7  12.355 323.30  0.0257 41.6585
TC(machine 2) d(machine 2, gas production operations)  TC(gas production operations) d(machine 2, power generation operations)  TC(power generation
operations) 2.019  12.355 260.10  0.0257 31.624
TC(machine 3) d(machine 3, gas production operations)  TC(gas production operations) d(machine 3, power generation operations)  TC(power generation
operations) 1.95  12.355 405.63  0.0257 34.51
TC(product 1) d(product 1, virgin pulp operations)  TC(virgin pulp operations) d(product 1, machine 3)  TC(machine 3) 1.19  54.15 1  34.51 98.9485
TC(product 2-1) d(product 2-1, virgin pulp operations)  TC(virgin pulp operations) d(product 2-1, recycling pulp operations)  TC(recycling pulp operations)
d(product 2-1, machine 1)  TC(machine 1) 0.0786  54.15 1.012  374.308 1  41.6585 424.7135
TC(product 2-2) d(product 2-2, virgin pulp operations)  TC(virgin pulp operations) d(product 2-2, recycling pulp operations)  TC(recycling pulp operations)
d(product 2-2, machine 2)  TC(machine 2) 0.0786  54.15 1.012  374.308 1  31.624 414.679
TC(product 2-3) d(product 2-3, virgin pulp operations)  TC(virgin pulp operations) d(product 2-3, recycling pulp operations)  TC(recycling pulp operations)
d(product 2-3, machine 3)  TC(machine 3) 0.0786  54.15 1.012  374.308 1  34.51 417.565
TC(product 3) d(product 1, recycling pulp operations)  TC(recycling pulp operations) d(product 3, machine 1)  TC(machine 1) 1.188  374.308 1  41.6585
486.3364

Table 9
Environmental cost structures of nal products.

Product
Product
Product
Product
Product
Product

1
2-1
2-2
2-3
2 (avg)
3

Air pollution
charge

Coal ash

Sludge

Waste
residue

Total

25.934
29.070
23.035
24.774
24.698
29.368

17.173
19.250
15.253
16.405
16.355
19.447

55.847
241.155
241.155
241.155
241.155
278.764

0
135.244
135.244
135.244
135.244
158.764

98.954
424.719
414.687
417.578
417.452
486.343

Note. Unit: dollar/ton.

Air pollution charge:
PC(Production 1, CO2) 3.489  7.433 25.934
PC(Production 2-1, CO2) 3.911  7.433 29.070
PC(Production 2-2, CO2) 3.099  7.433 23.035
PC(Production 2-3, CO2) 3.333  7.433 24.774
PC(Production 2(avg), CO2) 29.070  2403.456/10,103.619 + 23.035  6376.297/
10,103.619 + 24.774  1323.866/10103.619 24.698
PC(Production 3, CO2) 3.951  7.433 29.368
Coal ash :
PC(Production 1, Coal ash) 3.489  4.922 17.173
PC(Production 2-1, Coal ash) 3.911  4.922 19.250
PC(Production 2-2, Coal ash) 3.099  4.922 15.253
PC(Production 2-3, Coal ash) 3.333  4.922 16.405
PC(Production 2(avg), Coal ash) 19.250  2403.456/10,103.619 + 15.253 
6376.297/10,103.619 +16.405  1323.866/10,103.619 16.355
PC(Production 3, Coal ash) 3.951  4.922 19.447
Sludge :
PC(Production 1, Sludge) 1.19  46.93 55.847
PC(Production 2-1, Sludge) PC(Production 2-2, Sludge) PC(Production 2-3,
Sludge) 0.0786  46.93 + 1.012  234.65 241.155
PC(Production 3, Sludge) 1.188  234.65 278.764
Waste residue :
PC(Production 2-1, Waste residue) PC(Production 2-2, Waste residue) PC(Production 2-3, Waste residue) 1.012  133.64 135.244
PC(Production 3, Waste residue) 1.188  133.64 158.764

8. Conclusions
In contrast to conventional accounting, which has been criticized for not including environmental impacts (Schaltegger and
Burritt, 2000), we propose an ABC approach, at a company level,
which is able to track pollutants created by each product and
calculate their cost. By tracing costs through activities, the ABC
approach not only produces more accurate estimations of the
environmental costs of nal products, but also represents a specic

environmental cost structure which can be used in policy making,

pricing and process improvement decisions. In our example, the
environmental cost of Product 1 is much less than those of the
others. According to the information shown in Table 9, two
elements of the total cost (namely sludge and waste residue)
account for this difference. To decrease the cost of products 2 and 3,
rms might enhance their pulp recycling operations or buy new
equipment. On the other hand, the high cost of sludge and waste
residue may force rms to decrease their use of recycling pulp or
increase the price of products made from recycled pulp. To offset
these possibilities, governments could create policies or offer
incentives to promote the use of recycled pulp. We also found that,
according to the air pollution charges, the difference between the
three nal products was not very signicant. Therefore, besides
nding an optimal product mix, the company in our case study
should evaluate other strategies (such as shutting down the inefcient equipment, closing the unused production equipment,
installing inverters to reduce electricity consumption and investing
in energy efcient equipment) in order to further reduce carbon
emissions and save on air pollution charges. These suggestions, at
the company level, may be used to reduce pollutions emissions.
In Taiwan, The Environmental Protection Agency (EPA) plans to
establish a permit trading program together with air pollution
charge regulation in the Kaohsiung and Pingtung counties to mitigate greenhouse-gas emissions (Liao, 2007). Taiwans government
is engaged in taking responsibility in order to control climate
change and environmental development. Following the requirements of governmental regulations, information about emissions,
waste and environmental costs have become increasingly important to both the government and companies. Companies should link
this information with their cost accounting and environmental
management procedures and develop an integrated management
information system, which involves environmental accounting
information, to help meet policy-making objectives. Many organizations do not estimate environmental costs, while others estimate
them using inadequate methods. Since many of the costs of environmental protection are now absorbed by businesses, business
operations need to accurately assess these costs before commencing
production. Accounting systems, therefore, should aim to promote
the internalization of environmental costs in order to better
approximate the true cost of each product. Our research can be used
to make suggestions about new approaches for allocating environmental costs at the company level.

110

W.-H. Tsai et al. / Journal of Cleaner Production 36 (2012) 102e111

In this paper, a Taiwanese pulp and paper rm was employed as

an example to demonstrate how to use the ABC method to estimate
the waste generated by and environmental costs of a nal product.
While conventional management accounting systems do not allocate environmental costs to specic production processes, ABC
allows identication of environmental costs with processes, rather
than hiding them in general overheads (Burritt, 2004).
A limitation of our study is that it applied this concept to only one
industry. Future research might extend the ABC method to an
analysis of other industries. Our study is also unique in that it
describes a case of an existing pulp and paper company in Taiwan in
order to show that the ABC method estimates the environmental
cost of a nal product more accurately than traditional approaches
do. The ndings of this study are thus of value to managers as they
can use the proposed techniques to incorporate environmental
costs into their decision-making. Managers need to assess potential
costs and benets and then decide whether a full costing approach
results in the making of products at a net economic prot
(Schaltegger and Burritt, 2000; Schaltegger and Figge, 2000;
Schaltegger and Synnestvedt, 2002). Managers, for example, may
use ABC to identify the cost of carbon in their products. This information can then be used to improve carbon management. Our
suggestion for environmental policy is that it should be re-designed
in a way that takes specic factors into account and allows for
revisions as and when necessary. The goals of cleaner production
(CP), which has become more popular (and the differing needs of
various CP strategies), might be partially met by the use of EMA
(Schaltegger et al., 2008).

Acknowledgements
The authors would like to thank the National Science Council of
Taiwan for nancial support for this research under Contract No:
NSC100-2410-H-008-007-MY3.

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