Accounting for Cost Avoidance Often, the avoidance of costs associated with transportation, carbon, water, storm water, sewer, electricity, gas, heat and other attributes of green buildings are undervalued in the market and not considered by current appraisal and accounting practices. Why is this so? Modern accounting principles are based primarily on measuring a firm or entity’s ability to meet liabilities and obligations. Through the lens of ecological economics, once an ecosystem service is lost, for instance water supply, a liability is created and a problem can be detected using modern accounting methods. Alternatively, once the ability to avoid paying the cost of that service is lost, then accounting can detect the problem. This issue of cost avoidance is not easily detected by modern accounting or economics. If a building or natural system is providing benefits beyond its site boundary, such as watershed protection or groundwater recharging, these attributes do not directly contribute to reducing liabilities or meeting financial obligations. The following example from Seattle Public Utilities provides some clarity as to how estimation of avoided cost burdens can lead to recommended changes to current accounting rules, eventually “changing the investment playing field” by allowing avoided costs to be included in legal accounting requirements for natural systems and real estate.
Case Study: Seattle Public Utilities
Seattle’s population quadrupled between 1880 and 1889. The city had no water or sewer systems. Four unregulated private water companies drew water from local lakes, into which sewage also flowed. Cholera and typhoid epidemics earned Seattle a reputation as one of the unhealthiest cities in the United States.9 Citizens perished from contaminated water every year. Yet what sparked change was the water-related loss of the city’s built capital. A
catastrophic fire in 1889 burned down 65 acres of Seattle’s downtown for lack of water to put it out. Citizens had had enough and they made the decision to invest in re-building the infrastructure required to secure a safe, healthy and abundant supply of clean water.
Photograph taken after the 1889 fire in Seattle
That year Seattle’s citizens voted (93% “yes”) to establish Seattle Public Utilities (SPU) as the agency responsible for providing water to the city. SPU took the initial and wise step of purchasing a majority of the upper Cedar River Watershed in 1899 to secure a safe water supply on a scale dwarfing the city’s needs. Had the Seattle City Council required a quick return on the investment, the purchase would likely have been rejected. However, the goal was not to maximize “net present value,” but to provide a safe, reliable and sufficient drinking water supply for the people of Seattle in perpetuity. By 1901, clean water was flowing. Cholera and typhoid were banished.10 Citizens were healthier and more productive. Kids missed less school. Reconstruction of the downtown proceeded at a break-neck pace. By 1909, Seattle was considered one of the healthiest cities in the United States.