Carbon Management Accounting Considerations for Corporate Carbon Reduction: The Limitations and Future of Integrating Life Cycle Assessment and Material Flow Cost Accounting

CFP is also based on the LCA methodology and was developed with a focus on carbon emissions [19], the international standard for CFP, CFP is defined as "the sum of GHG emissions and GHG removals in a product system, expressed in carbon equivalents and based on a Life Cycle Assessment using the climate change single impact category" [18]. This approach is expected to play two roles: first, it will contribute to "visualizing" the carbon emissions of a product throughout its life cycle. In other words, it can identify areas of high GHG emissions throughout a product's life cycle and focus carbon reduction efforts there to achieve more effective carbon reduction [20]. The second role of CFP is to display calculated carbon emissions on products, which is expected to appeal to consumers' awareness of carbon reduction and encourage them to purchase products with low carbon emissions [20]. This change in consumer awareness is expected not only to have the recurring effect of encouraging manufacturers to develop products with low carbon emissions but also to make it possible to build a low-carbon society.

Le Breton and Aggeri [8] consider CFP as the main method that can provide physical information on carbon emissions at the product scale. Also, Cordova et al. [6] conducted a review of 31 previous studies on CMA and identified 11 of them as literature focusing on CFP. Therefore, CFP is positioned as a product physical CMA method in one area of CMA, quantifying the carbon emissions of a product throughout its life cycle, explaining whether a business is sustainable in the past and present, and contributing to ensuring transparency of the product itself in terms of carbon.

However, while CFP "visualizes" the physical information of carbon emissions over the entire life cycle of a product, its impact on corporate finance is not subject to evaluation [18]. For these reasons, it is pointed out that CFP remains merely a method to make carbon emissions transparent and is unlikely to lead to concrete carbon reduction actions by companies [21]. Brunelli et al. [22] point out the importance of monetary information as well as physical information on carbon emissions to support the implementation of carbon reductions and the improvement of corporate sustainability. Therefore, integrating LCA (CFP) with methods that can provide monetary information and simultaneously show carbon emissions and costs is expected to promote carbon reduction behavior.

2.2 Environmental management accounting based on monetary information

This section describes MFCA as a method that can provide monetary information on carbon emissions.

The EMA based on monetary information includes MFCA, environmental budget matrix, Life Cycle Costing, etc. but this paper focuses on MFCA for the following two reasons.

The first reason is that MFCA is encouraged as a method that can effectively promote the effective use of resources, including carbon, by making managers pay attention to the efficiency of resource use because it reveals economic losses caused by inefficient resource use more clearly than conventional cost accounting.

Next, Brunelli et al. [22] categorized CMA into two types of calculations: "non-sustainability calculations" and "sustainability calculations," noting that non-sustainability calculations can direct the carbon emission reduction (sustainability improvement) actions of companies. MFCA can evaluate the non-sustainability of resource use (material losses) in physical and monetary units at the same time and thus can not only direct but also encourage effective resource use, including carbon emissions. In other words, MFCA is expected to serve as an incentive to change a company from non-sustainability to sustainability.

The international standard for MFCA, MFCA is defined as "a method for quantifying the flow and stock of materials in a process or production line in physical and monetary units" [19]. This method was developed by B. Wagner in Germany and seeks to reduce both environmental impact and cost, built around the core idea of eco-efficiency (Appendix 5) (eco-efficiency).

MFCA has two roles [19, 23]. The first role is to understand the inefficiencies in the use of resources (materials and energy) of a company by identifying the flow of materials and energy in the manufacturing process in physical quantity and separating the "positive products" that become final products from the "negative products" that do not. The second role is that MFCA is considered to provide management with a basis for understanding material and energy flows in terms of quantity, evaluating each in financial terms, providing an opportunity to improve eco-efficiency by showing both quantity and cost simultaneously and providing an opportunity to improve both environmental and financial performance through a review of past production practices.

However, while MFCA can precisely calculate economic benefits (cost reduction), it only captures environmental impact reduction benefits in terms of physical quantity [24] and does not have a function to convert the physical quantity into carbon emissions. Therefore, MFCA is considered to be able to support carbon management by integrating it with methods that can determine the effect of environmental load reduction (e.g., [24]).

As a result of the above study, it is considered that integrating LCA (CFP) and MFCA can provide both physical and monetary information on carbon emissions and promote the carbon reduction behavior of companies. The following section discusses the significance and potential of integrating the two methods.

2.3 Significance and possibility of LCA (CFP) and MFCA integration

This section discusses the integration of MFCA and LCA (CFP) as a typical method to link quantity and monetary information.

The significance of integrating both methods is that MFCA provides cost information on materials and energy and LCA (CFP) provides carbon emissions at the same time, which may help corporate management recognize carbon reduction opportunities, provide incentives for carbon reduction behavior, and contribute to improving corporate sustainability [25].

The two methods can be integrated in the following respects [24].

•   Both methods also calculate material and energy.

•   Both methods seek to improve materials and energy.

Furthermore, due to the relevance of both methods in the calculation phase, there are three possible ways to integrate them.

•   The first is that both methods are computed separately at the computation stage, and the results of both calculations are related and provided only when making a decision. In this paper, we refer to this as the collaborative approach.

•   The second method is based on one of the methods and completely integrates it with the other method from the calculation stage. For example, the CFP-based method uses MFCA to measure costs along the product life cycle (which is the target of CPF calculation). In this paper, this is referred to as the fully integrated method.

•   The third method is an integration method other than the above, i.e., a partial integration of the two methods at the calculation stage. This is referred to as partial integration in this paper.

Given that both MFCA and LCA (CFP) methods are considered to be integrated because they share commonality in their objectives and measurement targets, and given that previous studies examining the integration of both methods have been accumulated, this paper reviews previous studies on the integration of both methods and examines the limitations and future ideal of existing integration models to promote carbon reduction.

4.1 Definition and structure of existing integrated models

As a result of the analysis, it was possible to identify 21 previous studies, among which there were three types of integration methods of MFCA and LCA (CFP). Specifically, the linkage type and the partial integration type were identified, and for the partial integration type, two types, product-based and process-based partial integration types, were identified depending on the target of measurement. Table 2 lists the references belonging to the three integration methods identified in this way. The definitions, structures, and roles of the three integration types are described below. Note that this table excludes the paper [24] that examines one or more integration methods of MFCA and LCA (CFP).

Table 2. Literature corresponding to each MFCA and LCA (CFP) integration type

(Source: Prepared by the authors)

(i) Cooperative type

As explained in Section 2, in the collaborative type, both methods, MFCA and LCA (CFP), are not integrated at the calculation stage, but are calculated separately, the obtained information is not linked, and finally, the calculation results of both methods are related and provided when making a decision. The coordinated method consists of MFCA and LCA (CFP). MFCA and LCA (CFP) are calculated separately, with MFCA calculating positive and negative product costs through production line measurements and LCA (CFP) calculating carbon emissions or LCA (CFP) calculates carbon emissions or social costs through the measurement of a product's life cycle. Finally, for example, after the introduction of a new environmentally friendly technology, the LCA (CFP) can be used to measure and clarify the eco-efficiency (change in carbon emissions) and the economic benefits (change in material loss costs) before and after the introduction with MFCA, using a coordinated model.

(ii) Partially integrated

In previous studies, two types of partial integration can be identified, which can be distinguished as product-based partial integration and process-based partial integration, depending on the difference in the computation target. The following sections describe each of the two types of partial integration.

a. Product-based partially integrated type

The product-based partial integration type is a method in which LCA (CFP) is integrated with a part of MFCA. This integrated type consists of LCA (CFP) and a part of MFCA. The LCA (CFP) is used to measure carbon emissions at each stage of the product life cycle (from raw material procurement to disposal), to which is added information on the ratio of positive to negative products based on MFCA, then the carbon emissions of the product are divided into positive and negative according to this ratio, and finally cost information on positive and negative products calculated by MFCA is added. This way, the carbon emissions and cost information of negative products can be shown at the same time, and carbon emission reduction behavior can be encouraged. Here, MFCA is positioned as a tool to promote specific improvement activities in CFP [24].

b. Process-based partially integrated type

The process-based partial integration type is a method that integrates a part of LCA (CFP) based on MFCA. This integration type consists of MFCA and LCA (CFP) CO₂ intensity or LIME integration factor. By integrating a part of MFCA and LCA (CFP), the environmental load information is not only weight but also carbon emissions or social cost, which has the advantage of highlighting the effect of MFCA on environmental conservation (e.g., for example, the effect of LCA (CFP) on the environmental cost of a product). This has the advantage that the environmental impact of MFCA can be understood not only in terms of weight but also in terms of carbon emissions or social costs (e.g., [24]). This is expected to promote the introduction of MFCA to companies and help them to reduce material losses and at the same time, reduce the carbon burden of material losses.

4.2 Analysis based on the CMA framework

Of the 21 studies collected, those that did not address specific integration models were excluded9, and the remaining 16 studies were categorized according to the CMA framework [10]. The results are shown in Table 3. The table shows that 14 studies focus on the provision of short-term, past-oriented information on carbon emissions, and only two studies consider the provision of short-term, future-oriented information. The two papers examining future-oriented information [28, 29] were able to go beyond past-oriented information and provide future-oriented information by linking a model that links parts of MFCA and LCA to a budget management system. As shown in Table 3, the provision of long-term information was not considered in the collected previous studies.

Table 3. Previous studies and CMA framework

4.3 Roles and limitations of the three identified integration models

Next, Table 4 shows the results of comparing the three integration types identified in previous studies against the CMA framework.

Table 4. Three integrated types and CMA frameworks

From the scope of application of the prior literature, the linkage type is characterized by its ability to provide information only for special purposes. Prior studies have shown that the federated type itself can support decision-making for special purposes, such as evaluating the economic and environmental effectiveness of new technology after its introduction (e.g., [30]) or product value chain selection (e.g., [29]. For example, it has been proposed that linking budget systems with MFCA can be expanded to provide regularly generated future-oriented information (e.g., [28, 29]). Thus, it has been pointed out that the linkage type can contribute to the pollution control activities of firms because it collects monetary and physical carbon information for special purposes [26]. However, it is difficult to incentivize carbon reduction in the linkage type because it does not show how the physical carbon emission information calculated by LCA (CFP) is related to the cost information by MFCA.

From the scope of application of the previous literature, it can be said that the product-based partial integration type is characterized mainly by its ability to provide information from a short-term perspective. In addition, prior studies have pointed out that providing the relationship between costs and carbon emissions obtained by this method is effective for long-term decision-making such as green procurement, capital investment, and environmentally conscious product design [24]. However, how to specifically support long-term decision-making using this method has not been examined. Since long-term decision-making requires information from a longer-term perspective, for example, capital budgets, corporate strategies, and consumer preferences, existing integrated models merely provide information from a short-term perspective of costs and carbon emissions, making it difficult to encourage managers to make long-term decisions that take carbon reduction into account. It is difficult to encourage managers to make long-term decisions that take carbon reduction into account. There is also a concern that adding MFCA thinking may focus only on the reduction of negative products and ignore the carbon carried by the material of positive products. In this way, it may impede decision-making, such as procurement of raw materials and product design that emit less carbon.

Based on the scope of application of the previous literature, the process-based partial integration type is the most studied method among the integrated models (12 out of 21 collected are process-based integrated, as shown in Table 2). The method is based on the short-term perspective of finding economic and environmental inefficiencies in the manufacturing process (e.g., [31, 32]) and improving the environmental performance of the entire supply chain (e.g., [33, 34]. In the case that regularly generated information (e.g., [31, 34] oriented toward the short-term perspective of improving environmental performance (e.g., [34, 35]) is needed, information for special purposes such as comparing economic and environmental improvement results before and after improvements in production methods [36, 37] is required (e.g., [38]).

In addition, as explained in Section 2.3, this integrated type can emphasize the environmental conservation effect of MFCA because it can evaluate the carbon reduction effect through the reduction of material losses by integrating it with LCA (CFP). In other words, the greatest advantage of this integrated model is that it can further reduce material losses in a company or supply chain by emphasizing the environmental conservation benefits of MFCA. Therefore, it is necessary to have the same quality of carbon-related quantity information as the management information that MFCA has to enable management decision-making [34]. However, it is pointed out that inventory data information in LCA (CFP) is calculated based on the average value of the input-output table and cannot reflect the individuality of each company, and that there are still many obstacles to overcome before it can be as high as cost information because the number of material item items handled is still small at present [34]. Another issue is how to share information by MFCA among supply chains to develop the integrated model from the manufacturing process to the supply chain [35].

Through the above discussion, the overall issues of the previous studies and each of the integrated types can be summarized as follows.

•   The common challenge of the three existing integrated models is that they can only provide short-term and past-oriented information and not long-term information, as shown in Table 3.

•   A common challenge of the collaborative model is that it does not provide information on the relationship between the quantity and cost of carbon emissions, which makes it difficult to provide incentives for carbon reduction.

•   A common challenge for product-based partial integration is that it is difficult to encourage management to make long-term decisions on green procurement, capital investment, and environmentally conscious product design.

•   Another common issue of product-based partial integration is that the use of MFCA tends to focus on the carbon carried by material losses rather than all carbon emissions carried by materials, which may inhibit product development and capital investment considering zero carbon and low carbon emissions. This may inhibit product development and capital investment in consideration of zero carbon and low carbon emissions.

•   In the process-based partially integrated model, the quality of information on LCA (CFP) to support internal corporate management decision-making is still lower than that of MFCA [34].

•   The process-based partially-integrated model has another issue of how to share the information from MFCA among the supply chain to extend it to the supply chain [35].

4.4 Why the full integration of MFCA and LCA (CFP) could not be identified

In Section 2.3, we categorized the methods of integrating MFCA and LCA (CFP) into three types, i.e., the linkage type, the partial integration type, and the fully integrated type. In the previous study, the linkage type and the partial integration type were identified, but the fully integrated type was not found. In this section, we clarify the reason why the fully integrated type cannot be identified.

As mentioned in Section 2.3, there are two types of fully integrated types: LCA (CFP) based and MFCA-based. The reasons why the LCA (CFP)-based fully integrated type and the MFCA-based integrated type cannot be formed are shown separately below.

The LCA (CFP)-based fully integrated type is said to be difficult to integrate for the following three reasons [39].

•   The scope of the application of MFCA is narrower than that of LCA. The scope of the application should be fully integrated into LCA (CFP). However, MFCA can theoretically be extended to the supply chain if information can be shared among the production process and the largest suppliers, but MFCA itself is difficult to extend to the life cycle because it cannot provide costs related to the downstream of the life cycle.

•   The MFCA information is used within organizations, so the information is highly individualized, making comparisons among organizations difficult.

•   The difference in the scope of data collection: MFCA only needs to know the weight and amount of purchased materials, while LCA (CFP) requires more detailed information than MFCA because it needs information on the composition of materials. To fully integrate MFCA into LCA (CFP), it is necessary to measure and collect a vast amount of data covering the entire company.

MFCA is valuable in that it divides products into "positive" and "negative," and clearly shows managers opportunities to reduce "negative products" by applying a value to "negative products." However, MFCA is not considered to have much significance in applying to all stages of the CFP life cycle because it is not considered necessary to divide costs into two stages, use and disposal, into positive and negative.

On the other hand, the MFCA-based fully integrated model is said to be difficult to integrate for the following two reasons [24].

•   The difference in the measurement targets: The labor costs of factories and depreciation costs of facilities, which are important measurement targets for MFCA, are not included in the scope of LCA (CFP).

•   MFCA is based on actual values such as measured values, which are useful information for management decision-making, while some data of LCA (CFP) are estimated values, which are difficult to use for management decision-making.

Therefore, due to the differences in the measurement ranges of the two methods, the technical difficulties of the measurement, and the low significance of integration, there is little need to fully integrate the two methods.

Appendix 1: The Paris Agreement is a new agreement to reduce carbon emissions concluded at the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC) held in 2015. The Agreement entered into force in November 2016, with a "2℃ target" to "keep the global average temperature increase well below 2℃ above pre-industrial levels and pursue efforts to limit it to 1.5℃," requiring countries to submit their reduction targets every five years to meet the 2℃ target (UNFCCC, 2015). To achieve the 2℃ targets, each country is now required to submit its reduction target every five years (UNFCCC, 2015).

Appendix 2: The Climate Group is an international business initiative operated by the Climate Group and CDP, an international environmental NGO, to promote the conversion of all electricity consumed by companies to renewable energy (RE100 website).

Appendix 3: SBTi is a joint initiative of the World Wide Fund for Nature (WWF), CDP, World Resources Institute (WRI), and the UN Global Compact. Based on the IPCC report, the Initiative calls on companies to set long-term GHG reduction targets consistent with scientific findings toward the goal of limiting the increase in global average temperature due to climate change to a maximum of less than 2℃ above pre-industrial levels (SBT website).

Appendix 4: Stranded assets: Defined as assets that suffer unexpected or premature write-downs, devaluations, or conversion to liabilities [5].

Appendix 5: Eco-efficiency is a kind of cross-efficiency that links environmental and economic issues and measures the environmental impact added per monetary unit earned. Specifically, eco-efficiency can be defined as minimizing negative outputs while maintaining or improving two economic successes, and outputs are determined based on the amount generated by a particular input level [6].