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“Messy” marginal costs: Internal pricing of environmental aspects on the firm level

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  • Letmathe, Peter
  • Wagner, Sandra

Abstract

Internal pricing of environmental aspects is usually not embedded in management accounting systems. Therefore, we first show that pricing from a corporative perspective is possible and applicable. Contrary to common belief, we also show that marginal costs curves of environmental aspects are often not monotonic and price changes are highly context-specific. We introduce a model that addresses different environmental aspects that translate into constraints or change direct cost factors in the objective function. Environmental constraints originate from different types of limit values concerning emissions and production processes as well as restraining the potential environmental damage as the outcome of ecological valuation methods. Direct cost factors include the taxation of emissions and costs stemming from being involved in the emissions trading market. Our model allows for calculating the marginal (indirect) costs of these environmental aspects as the constraints might enforce factor and product substitutions. We show that the marginal costs differ substantially from the direct costs and do not follow a predictable pattern. Sensitivity analysis and parametric programming are applied to set up an internal pricing and cost allocation scheme for environmental aspects, specifically focusing on the pricing of emissions, resources and processes, of production and recycling. The model's implications on corporate decision making are illustrated by a numerical example that draws on the opportunity of process substitution, e.g. producing a product on different machines. Even though we cannot use original data for proprietary reasons, such settings are highly relevant in industry and the energy sector.

Suggested Citation

  • Letmathe, Peter & Wagner, Sandra, 2018. "“Messy” marginal costs: Internal pricing of environmental aspects on the firm level," International Journal of Production Economics, Elsevier, vol. 201(C), pages 41-52.
  • Handle: RePEc:eee:proeco:v:201:y:2018:i:c:p:41-52
    DOI: 10.1016/j.ijpe.2018.04.016
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