Introduction
Compliance with environmental regulations has significant effects on production costs in different industries. Some of the industries that are affected include paper, steel, and other services that are faced with tough environmental regulations. Environmental regulations affect the costs of firms in several ways. Accounting systems identify and separately capture, and accumulate visible costs associated with environmental compliance, like installation and maintenance of equipment for controlling pollution and costs incurred when treating end-of-pipe emissions (Krishnan 6).
Environmental regulations also have indirect effects on costs, through additional limitations on the technology used production of firms. For example, environmental compliance may require firms to replace inputs with less polluting ones or to make changes in the production process to prevent emissions. These aspects are covered in environmental accounting. This essay will look at the issue of environmental accounting and estimation of hidden costs in Dubai, especially in gas and oil firms.
The motivation of the Study
The total cost of environmental regulations is the total of visible costs, which are easily identified and dealt with by accounting systems. There are also hidden costs that are not directly identified by the accounting systems. Visible costs include costs of installing equipment and operations of treating released pollutants, costs that result from treatment of wastewater, and those of treating and disposing of harmful solid wastes. Most accounting systems accumulate visible costs into environmental costs which are usually separated from other overhead costs.
In addition to the visible costs of compliance with regulations, costs of firms are indirectly affected by environmental regulations when other limitations are included in the production processes, changes in the composition of raw materials, proportions of inputs, and use of energy. Since the accounting systems do not separately report changes in the costs of raw material as environmental costs, such costs which result from changes in regulations are hidden within the costs for materials.
For example, strict standards that regulate emissions from coke ovens reduce the consumption of coke by adding pulverized coal and natural gas into their blast furnaces. As a result, this leads to a reduction in the rate of average coke for firms while the use of other fuels is increased. In response to regulations of air quality, many mills are replaced with natural gas or electricity in their furnaces and boilers. The increases in costs due to such changes are hidden under costs of energy or factory overhead costs.
Firms incur additional indirect costs on labor during monitoring and reporting of emissions, and maintenance of equipment used in the control of pollution. Environmental regulations also lead to increases in general and administrative costs. For example, legal staff gets involved in regulatory activities like getting permits and licenses. However, such costs are not usually reported as environmental costs, but instead, they are included in administrative and general overhead costs. Such hidden environmental costs are difficult to relate to specific transactions. Hidden costs are estimated through other methods.
The hypothesis of the Study
Environmental regulation in Dubai affects the control of the hidden cost.
Research Problem
Accounting systems often do not identify separately the costs that accompany certain changes, but instead, include them in other related costs. The hidden costs are huge and end up changing the costs identified by the costing system of a firm. Environmental regulations also force the society to incur external costs, for which firms are not responsible, but which can turn into the material in the long run.
Most of the field studies indicate that costing systems do not discover the full impact of cost regulation. Most companies lack enough systems for managing and measuring environmental costs. They never follow up or accumulate environmental costs separately and a big percentage of the costs are hidden in different overhead accounts. As a result, most companies fail to understand environmental regulation costs.
Objectives of the study
The study aims at analyzing the issue of environmental accounting with an emphasis on hidden costs. There are visible costs of compliance with environmental regulation but other costs are hidden hence they end up being included in other overhead costs. The study will focus on the following specific objectives.
- To compare the estimated cost and the hidden cost during 2007-2011. During environmental protection interventions, the estimated cost is always different from other environmental protection costs hence the study will seek to make a comparison between the two.
- To propose appropriate measures of regulating the hidden cost to manage the environment in a better way. The hidden cost might increase to significant levels unless suitable mechanisms of regulating it are put in place hence this study will seek to propose the best measures of regulating the hidden cost.
Scope and Limitations of the Study
Apart from addressing hidden costs, the study will focus on several ways through which environmental accounting is conducted. The first method of conducting environmental accounting is an accounting of natural resources. This includes data on the stock of natural resources and the changes that affect them as a result of human activities. Such accounts cover forests, agricultural land, fisheries, water, and petroleum. Some countries also include monetary data on the value of the resources. Valuation attempts cause some limitations. The value of resources is determined easily in situations where the products find their way into the markets for sale.
Valuing the changes that occur in the stock is difficult because it might be as a result of changes in the market price or physical changes in the resources. Environmental products that are not taken to the markets make valuation difficult since changes in the flow of stock are not easily established. However, physical data can be connected to the economy to formulate policies. For instance, changes in income can at times be linked to changes in the resources or the effect of environmental disasters on the economy (An Introduction to Environmental Accounting 3).
The study will be faced with several limitations. For instance, the statistical models used by managers to estimate hidden regulatory costs and make quantitative judgments about the advantages of developing detailed costing systems will present challenges. The estimates only measure margin hidden costs. The average level of hidden cost which in most cases is lower than the marginal cost is not estimated. In addition, the estimated costs are based on statistical relationships between variations in total costs and visible environmental costs. If firms combine environmental expenditures with expenses that either lead to an increase or a decrease in the total cost, then the results of hidden cost estimates are not fair.
The other limitation which presents itself is that inclusion of the value of non-marketed environmental products always causes disagreements. Some individuals attempt to give the reasons why the values are included while others advance reasons why the inclusion is not important. In some sense, the value of the items is important when the accounts are used in assessing exchanges between economic and environmental goals. Otherwise, there might be evidence of costs incurred in environmental protection without proof of any benefits. There are differing views that argue that valuation goes beyond normal accounting hence it should be treated differently. There view is due to the concern that valuation methods are not easily standardized hence it might not be able to compare the resultant accounts across different countries or economic sectors in one country.
Another limitation of the study is that creating a GDP that addresses environmental issues is not easy. The majority of the individuals involved in creating environmental accounts try to show that it is less important. Since methods of environmental accounting are not standardized, the GDP can change into another meaning in projects that calculate it hence making it difficult to compare values across countries. However, this indicator is determined mathematically by accounting projects that are designed in terms of money.
Conclusion
Environmental accounting plays an important role in modern business. Many local, federal, and international regulations that cause significant costs on businesses have emerged. Identification of environmental regulation as an important cost driver, and formally including impacts of regulations in the accounting systems of firms are important for effective decision making. In addition, regulators need to understand the full costs of regulation to determine the best types of regulation that will make the identification of hidden costs possible.
Works Cited
An Introduction to Environmental Accounting n.d. Web.
Krishnan, Ranjani. Estimating the Hidden Costs of Environmental Regulation 2002. Web.