Increasing concerns about the environmental impact and unreasonable consumption of natural resources for energy production and conversion processes have led to analyze thoroughly the current state of energy systems development. Hence, what is required is not only producing with the maximum cost effectiveness, but also minimizing the emission of pollutants and waste disposals, too. Unavoidably, in any productive process, the achievement of functional products is inseparable from the generation of residues and waste disposals. Thermoeconomic cost accounting methods have placed emphasis on the production process traditionally, without bearing in mind the cost of residues. To allocate the cost of products from poly-generation systems appropriately, it is required to know where the residues have been generated as well as their abatement costs. Therefore, in the same way as there is a process of cost formation of the functional products, there also exists a cost formation process of the residues. In this paper, the mathematical basis for the cost assessment and the formation process of residues are presented. (C) 2007 Elsevier Ltd. All rights reserved.