Environmental Cost Accounting and Corporate Environmental Performance Measurement

Abstract

This research introduces a novel, cross-disciplinary framework for environmental
cost accounting (ECA) that integrates principles from ecological economics, complex
systems theory, and information entropy to address the persistent shortcomings in
corporate environmental performance measurement. Traditional ECA methods have
largely failed to capture the full spectrum of environmental externalities, often relying on linear, reductionist models ill-suited to the non-linear, interconnected nature
of ecological impacts. Our methodology, termed the Entropic Environmental Cost
Accounting (EECA) framework, departs from conventional practice by conceptualizing corporate operations as thermodynamic systems interacting with ecological networks. We employ a hybrid technique combining life cycle assessment (LCA) data with
information-theoretic measures of ecological disruption, specifically applying KullbackLeibler divergence to quantify the ’informational distance’ between pre- and postindustrial ecosystem states. This allows for the monetization of entropy changes within
affected environmental systems, translating diffuse ecological degradation into quantifiable financial liabilities. A core innovation is the ’Ecological Carrying Capacity
Debt’ metric, a dynamic, time-dependent valuation of a corporation’s cumulative draw
on regenerative ecosystem services beyond sustainable thresholds. We test the EECA
framework through a longitudinal, multi-case study analysis of four corporations in the
extractive and manufacturing sectors, utilizing a proprietary dataset of operational and
environmental data from 1995 to 2004. Our results demonstrate that the EECA framework identifies and quantifies significant, previously uncosted environmental liabilities,
averaging 18-34