True Cost Accounting (TCA) is an accounting approach that measures and values the hidden impacts of economic activities on the environment, society and health. TCA is also referred to as full cost accounting (FCA) or "multiple capital accounting (MCA)". The approach moves beyond purely economic thinking with the aim of improving decision-making in commercial organizations and in public policy. It includes accounting for natural capital, human capital, social capital and produced capital. The True Cost Accounting approach can be applied to every sector of the economy. It aims to reveal the impacts of economic activities on society as a whole, in addition to the private costs directly incurred by producers and consumers. These can be environmental, health or social impacts that are not reflected in the market prices of products and services, i.e. not included in the operational profit and loss accounts, and so are regarded as hidden. True Cost Accounting is of particular relevance for agrifood systems (food and non-food agricultural products), where hidden costs can be substantial. Indeed, much of the development of TCA has historically been in the context of food.
History Although True Cost Accounting is a relatively recent term, it is not a new concept. It is closely linked to the concept of externalities, costs or benefits to an uninvolved third party that arise as an effect of another party's (or parties') activity. The root of the TCA concept can be attributed to the work of Pigou and Marshall in the 1920s. Over the last decades, monetary values have been assigned to externalities where businesses are penalized, or when insurance firms calculate costs in industrial accidents. TCA is also considered to be an expansion of cost-benefit analysis (CBA). In the 1980s and the 1990s, other terms were used to convey similar concepts to that of the TCA such as full cost accounting. What sets the true cost accounting approach apart from its predecessors is that systems thinking and holistic thinking – which acknowledge that economic systems are made up of many stakeholders (such as producers, consumers, distributors and policy makers) and that these systems rely on multiple capitals (natural capital, social capital, human capital and produced capital) – are integral parts of the approach. TCA acknowledges the complex nature of economic systems with all its interdependencies. An application of TCA tends to include a dozen or more indicators selected to measure and value positive and negative impacts across the environmental, health, social and economic domains.
The true cost accounting approach in food and agriculture Recent advancements in the true cost accounting approach have been related to food and agriculture. The Economics of Ecosystems and Biodiversity (TEEB) initiative currently hosted by the United Nations Environmental Programme, aims to mainstream the values of biodiversity and ecosystem services into decision-making. The programme has developed guidelines and several studies have been conducted on how to implement TCA and then use the results to guide policy reforms. In 2018, TEEB for Food and Agriculture (TEEBAgriFood) was launched, under Alexander Müller. The aim was to address the core theoretical issues and controversies underpinning the evaluation of the relationship between the agrifood sector, biodiversity and ecosystem services, and the impacts on human health on a global scale. In order to research the potential of true cost accounting to transform agrifood systems towards sustainability, various other organizations and research institutions have also initiated TCA studies and reports. Examples include the World Business Council for Sustainable Development, the Global Alliance for the Future of Food, and the Sustainable Food Trust. Additionally, the Global Nature Fund and the Capital Coalition, in collaboration with TEEBAgriFood, have developed a framework for integrating TCA into business accounting to make business impacts transparent.
Definitions The definition of True Cost Accounting is evolving, with many proposed definitions.
United Nations Environmental Programme The United Nations Environmental Programme defines it as "an evolving holistic and systemic approach to measure and value the positive and negative environmental, social, health and economic costs and benefits to facilitate policy, business, farmer, investor and consumer decisions."
True Cost Initiative The True Cost Initiative proposes a similar definition but uses the term "methodology" instead of "approach". However, TEEBAgrifood presents TCA as an approach under which various methodologies and analytical tools can be used. In addition, the definition proposed by the True Cost Initiative confines the use of TCA to externalities while FAO suggests that externalities constitute only part of the hidden costs, while other hidden costs might be driven by other market failures such as poor and asymmetric information. Some use the term "full cost accounting (FCA)" to refer to the same idea. This is the case of IFOAM (Organics International & Sustainable Organic Agriculture Action Network), which defines FCA in a similar way to the TCA definition of UNEP.
TEEBAgriFood Evaluation Framework In some publications, such as TEEBAgriFood Evaluation Framework, the term "multiple capital accounting (MCA)" is used to refer to TCA. For example, MCA is defined as "an approach to systems thinking, which includes natural, human, social and produced capitals" and "enables you to articulate and explore the visible and invisible connections that agrifood systems have with humans and the environment".
Food and Agriculture Organization In 2023, the Food and Agriculture Organization defined TCA as "a holistic and systemic approach to measuring and valuing the environmental, social, health and economic costs and benefits generated by agrifood systems in order to improve decisions by policymakers, businesses, farmers, investors and consumers." This definition is very similar to the one proposed by UNEP, the words "holistic and systemic" mean that TCA studies full systems, accounting for all types of capitals and stakeholders and their interconnectedness. In addition, this definition of TCA considers both "costs and benefits" and should value all impacts making them visible whether they are the environmental, social, health or economic.
Capitals
… excerpt ends here. Continue reading the full article.
