environmental costs

The costs of making sure that a company's activities do not damage the environment or that any such damage is put right. There are many types of environmental costs and these are often difficult to identify as they are hidden in overheads. Measuring environmental costs is now an important issue for many companies, as national regulations become more stringent and penalties or fines more severe. It is useful to classify environmental costs into four categories:

• environmental appraisal costs. These are the costs of activities performed to monitor environmental effects that a firm is responsible for. Examples include the costs arising from inspection of products and contamination testing.

• environmental prevention costs. These are the costs of activities performed to prevent the production of waste that could cause damage to the environment. Examples include the costs of recycling products, training staff, and carrying out environmental studies.

• environmental internal failure costs. These are the costs of activities that have to be performed when contaminants and waste have been produced by a company but not discharged into the environment. Examples include treating toxic waste and maintaining pollution equipment.

• environmental external failure costs. These are the costs incurred by a company if it discharges waste into the environment. Examples include the costs of cleaning up oil spills or cleaning a polluted river. A company may also incur fines or other penalties or lose sales if it acquires a poor environmental reputation.

See also: cost of quality