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Total cost assessment

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Total cost assessment (TCA) is a useful tool for integrating business and environmental objectives. It was developed in 1991 by the Tellus Institute in Boston, Massachusetts.

At an operational level, TCA is structured to capture costs and savings that are generally ignored by traditional approaches, and hence to allow environmental investments to compete more successfully for limited capital funds. In this way, TCA helps to 'level the playing field' for investments in environmental improvements and pollution prevention.

TCA involves four stages:

1. Defining the decision: understanding the options under consideration helps to identify the type of cost information that will be needed.

2. Identifying and understanding costs - it is necessary to identify direct costs (labour material and capital), indirect costs (often misallocated or lost in overhead categories), contingent costs (associated with potential liabilities) and less quantifiable costs (such as damage to employee morale or corporate image).

3. Analyzing financial performance - TCA uses discount cash flow - the fact that a dollar today is worth more than a dollar tomorrow - to recognize the time value of money.

4. Making the decision - through integrating all the factors that are relevant to profitability of an investment opportunity.

In essence, TCA goes beyond traditional accounting by examining changes in direct, indirect, contingent and less-quantifiable costs and savings over the longer term.

TCA is generally viewed as one tool within the broader field of environmental accounting. The latter ensures that the costs of the past, present and future environmental activities are incorporated, to some degree, in decisions made by an organization.

The diagram above illustrates the relationship between TCA and other approaches to environmental accounting. On the one hand, TCA differs from conventional approaches by considering a broader range of costs that are particularly applicable to pollution prevention. However, TCA has a more narrow focus than, for example, full cost assessment or life cycle analysis, because it may exclude external social costs for which a company is not legally accountable or financially liable.

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