True Cost Accounting

General

True Cost Accounting (TCA) is applied as a new way of bookkeeping that includes the so called ‘external costs’ that are not included in the financial costs of our society. In manufacturing it is financial costs plus eco-costs, as explained at the webpage on the concept of the eco-costs and the concept of the s-eco-costs.
For agriculture it is about the impacts on Natural and Social Capital. It is not LCA, but it is highly related with LCA and S-LCA (‘Social LCA’). The system of the eco-costs has been expanded to cope with the typical issues of TCA in the field of Natural and Social Capital.
The basic philosophy starts with the fact that food has external costs that are not covered by the economic market price (Hardin, 1968), and that our human welfare is largely supported by ecological systems (Constanza et al. 1997). From 2007 to 2012 the UNEP hosed a big project “The Economics of Ecosystems and Biodiversity” (Sukhdev, 2012) to define practical applications of TCA, which gained momentum in Agriculture and the Food industry. It deals with habitat and species losses, pollution of land and water , impacts on soil and biodiversity, as well as socio-economic impacts. It is a broad philosophy on the way we should take care for our Mother Earth. When it comes to practical accounting, the well developed methods of LCA and S-LCA seem to be indispensable, however, not

sufficient. This web-section describes some practical choices and the required extensions of the eco-costs system in the field of Natural Capital.

The main issues in TCA are:

Climate change
Water pollution and water scarcity
Biodiversity of land
Soil fertility
Social labor conditions
Animal wellbeing
Consumer health

It is obvious that the industrialized agriculture and food production affects the above 7 issues in a negative sense. It are ‘hidden costs’ that are generated by producers but carried by society as a whole. These so-called ‘external costs’ are not covered by the price of the products. To counteract the negative spiral of production and consumption, these external costs should be communicated to the consumers, and should become part of the consumer price (e.g. by taxes, governmental regulations, implementation of best practices).

Content

A transition from the industrialized bio-industry to organic farming will reduce the eco-costs of food considerably in E-LCA (E-LCA is the classical environmental LCA, coping with issue 1, 2, and 3). Furthermore, drastic improvement of the social labor conditions in the developing world is required for a sustainable world, as expressed in the s-eco-costs of S-LCA (issue 5). The issue of Soil fertility is new in E-LCA, so data are lacking in standard LCI databases.
Animal wellbeing (issue 6) is obviously an issue in chicken farms and pig farms.
Issue 7 (Consumer health) is about unhealthy components in food like pesticides. It are the so-called ‘internalities’ of products, which differ from the ‘externalities’ in E-LCA. Externalities of products is damage to third parties; internalities is unintended damage to people who buy the products.

Calculation structure of TCA

The calculation structure in TCA is similar to the calculation structure in LCA, see Fig. 6.1a. There is a foreground system (the farm under study), and there are the background processes in the supply chain (supply of diesel, electricity, fertilizers, pesticides, cattle food, etcetera). For most of the supplies, there are ‘market mix’ LCIs available, and when the supplier with a certificate is known, that specific LCA data should be applied. The ‘market mix’ is always the best guess of the real situation when the supplier is not known and/or does not have a certificate with LCA data.
In some cases of processed food, the chain of farmers + processing is known as the foreground system.
Note that the eco-costs system applies the ‘cut-off ‘ (at the stockpile) system, which means that the farmer who buys manure and compost benefits from the avoidance of chemical fertilizer. In the case of organic farming, the manure and compost stays within the boundary of the system, so should not be counted (neither as input nor as output).

There is a remarkable difference between E-LCA and TCA. In E-LCA all eco-burden is counted as something

that is negative: most activities of mankind are ruining mother nature. The positive thing about organic farming in “E-LCA benchmarking” is that is scores less eco-costs than conventional farming. This is an issue of the ‘Reference Point’: in LCA, the reference point is ‘untouched nature’, or ‘no-effect-level’ (also called negligible-effect-level).
Only land-use change can have a positive effect on biodiversity in E-LCA, when land is given back to nature.

In TCA, however, a positive contribution to the steady state (i.e. when there is no change in the system) might be regarded as positive . The reference point is here a conventional farm (needed anyway to feed mankind): when a farmer produces food, and takes care for mother nature by keeping biodiversity and soil organic matter at a high level, it is as such a positive contribution to nature. This positive extra effort of the farmer is counted within TCA, which is further explained at Natural Capital.
In S-LCA there is a debate on positive impacts in LCA. An example is the case when a company is paying more salary than the Performance Reference Point of the ‘fair

Figure 6.1a. The TCA calculation system with foreground and background processes

wage’ in a specific country. The question is then whether or not the company can claim is such a case a positive impact. In TCA it seems logical that such a positive claim is allowed in a developing country, but not when such a salary is payed in Western Europe. Fact is that LCA Practitioners see that companies often use positive impacts for greenwashing purposes. Extra attention is given to this issue in the design of the impact factors, as described in the webpage Social Capital.

Calculating a production chain in TCA, and data that are required from farmers

The foreground system

The following foreground issues related to Natural Capital need to be addressed in TCA:

Carbon footprint emissions: CO2 emissions caused by operations,
Carbon footprint emissions are dealt with in E-LCA. To calculate the kg CO2/kg crops, the amount of diesel/kg crops must be known.
Note that some LCI databases (e.g. the EF database) provides data for agricultural processes like harvesting, however, these are generic data. It is better to ask for the specific use of fuels (kg fuel/kg crops; plus the type of fuel), and disregard of the secondary data to build the machines (as is done in LCA practice). The reason is that the ecoburden of the machine is in most cases not more than 15%, whereas the inaccuracy of the amount of fuel can be more than a factor 2 when generic data are used (in contrast to specific data).
Carbon footprint emissions: N2O emissions caused by crop production
The N2O emissions from land, caused by fertilizers, are the main source of global warming.
The required data and the calculation of the emissions are described in the Datasheet Fertilizers
Note. Note: For milk and meat the calculation is a bit more complex, see Vonk J et al. 2016, “Methodology for estimating emissions from agriculture”, WUR
Water scarcity caused by irrigation.
The issue is the use of ‘green’ water and especially ‘blue’ water. ‘Green’ thus means ‘originating from rainwater’ and ‘blue’ means ‘originating from groundwater or surface water’. When the amount of blue water to the farm (irrigation water) is known, the calculation is simple. However, when the amount of irrigation water is not known, there is no simple default value: the default value is a rather complex and laborious calculation. See Datasheet Water
Biodiversity and Soil fertility both strongly depend on the farm management.
These are important issues that are complex, see eco-costs of land-use.
Required data are for biodiversity: (a) geographical location of the farm, (b) number of vascular species per km2, (c) meters of hedges and meters of scrubland around farmland fields (per ha farmland).
Required for soil fertility: (d) kg of harvested product per ha (e) % SOM in the top 15, 30 and 60 cm (if available) (f) how often cover crops (or crop rotation) is applied?
The calculations are rather complex, see Datasheet Soil and Biodiversity

The following foreground issues related to Social Capital and Animal Wellbeing need to be addressed in TCA:

Minimal Acceptable Living Wage.
It is based on local standards on a wage that is sufficient for the living of a family, the so-called ‘decent living wage’ of the Anker and Anker method. In many cases Anker and Anker data are not available. An approximation is calculated then, see Datasheet Living Wage
Extreme Poverty (Slavery) and Child Labour.
When the living wage becomes under the level of enough nutrition for the family (so far below the Minimal Acceptable Living Wage), i.e. below the so called “1 $/day World Bank level”, another issue becomes at the surface: people get ill because of malnutrition, children are forced to work, and people are caught by their bosses that supply just enough food to stay alive (slavery). It becomes impossible for the families to escape from this life.
The eco-costs of the Minimum Acceptable Living Wage is in such cases insufficient to describe the real situation. In such a case of extreme poverty (causing physical and mental health by food shortages) the eco-costs are calculated in terms of the DALY (Disability Adjusted Life Year). See Datasheet Extreme Poverty (Slavery) and Child Labour
Excessive Working Hours.
These working hours are a separate issue for adults, mainly in Chinese manufacturing plants (according to the norms of the International Labour Organization). In agriculture it is only an issue for children when they are deprived from school. See Datasheet Extreme Poverty (Slavery) and Child Labour, and see at s-eco-costs
Occupational Safety and Health (OSH).
OSH is about work related accidents that caused injuries or were fatal. In can be measured in big agricultural companies, not in small family farms. See Datasheet OSH.
Animal Wellbeing.
The unacceptable living conditions for animals in the modern bio-industry is an important aspect in TCA. In the eco-costs system, 4 categories of food are distinguished: (a) milk of cows (b) bovine, i.e. calves and cows (c) porcine, i.e. pigs (d) poultry, i.e. chicken. For details see Well-being for Animals (Fig 6.5).

The following foreground issue related to health of Consumer food (‘internalities’) need to be addressed in TCA:

Pesticides
Since the fraction that resides in the harvested product is not known within a reasonable accuracy, and since the pesticides in the product decay, the only way to determine this internality is to measure the amount of pesticide in the products at the retailer, and multiply that to the eco-costs that are given in a table.
When measured data are not available, the default value is the Maximum Residue Limit (MRL).
See Datasheet Pesticides

The background system

Note that all materials that are supplied to the farm (“scope 3”) are calculated with E-LCA (the production of diesel, fertilisers, pesticides, etcetera)

Figure 6.1b. The structure of the eco-costs system for True Cost Accounting (preliminary version)

The main structure of a TCA calculation project

(see Fig. 6.1c)

The first step in a TCA project is the definition of the ‘Goal and Scope’. First it is important to determine what has to be achieved, since that determines what has to be done in the project. Goals are: awareness of the general public, improvement of the system, annual corporate sustainability report, awareness of the employees, product branding in marketing, communication in sales.
The scope is important as well: Which processes do we include and what do we exclude? What are the system boundaries and the system description (see Fig.1a), and what are the intended accuracies?

The second step is the ‘Inventory Analysis’, comprising two activities: (1) gathering of operational data (input quantities) of farmers by questionnaires (2) gathering default data when specific quantities from the farmers are not available. Be aware that the default values in TCA must be as detailed and as local as possible

(e.g. local salaries from internet databases, required water for irrigation from detailed calculations on evapotranspiration and precipitation). Specific pollution flows are added to the list as well.
The delivery of this second step is the so-called Inventory List of the required input (per unit of output, the productof the farm)

The third step is the ‘Impact Assessment’. In this step the impact end scores are calculated by multiplying the quantities of the Inventory Lists by impact data of the Indicator System. For TCA we take the indicator system of the eco-costs: (1) per unit of input from Idemat 2022, (2) per unit of pollution from the Ecocosts 2022 midpoint tables.xlsx , and (3) per unit of use of Natural and Social Capital see webpages Natural Capital , Social Capital (with S-eco-costs)and customer health.

From the calculations of the third step, one should draw conclusions with regard to improvement of the system (the ‘Interpretation’), since it is clear now which ‘hot

spots’ (i.e. issues with a high eco-costs score) should be tackled.

Step 4 is to develop the right communication to the consumers, employees, shareholders and other stakeholders. In this last step, product branding must be developed as well, since it is important to sell the positive attributes of the product with regard to the Natural and Social Capital.