An analysis of carbon emissions schemes

Category: Accounting

Carbon emissions trading basically refers to the buying and selling of carbon 'credits' which is an amount of Emissions Allowance for a certain company at domestic and international levels. The idea is that those who can reduce the emissions below the emissions allowance, they can be rewarded by selling it and those who need to emit more than the limit must be charged (purchase price).This will limit the greenhouses gases emissions, preventing Global warming. This "trade" provision is intended as a financial incentive to clean up. (Springston, R 2009)

To monitor and manage the amounts and allowances between each other there was an agreement signed known as Kyoto Protocol. Kyoto Protocol created 3 mechanisms to deal with greenhouse emissions, Joint Implementation, Clean development and the emissions trading. However, Carbon emissions trading has had the biggest effect and has been preferred since 2005 on other mechanisms. (Gardner, Prugh 2008)

There are two types of carbon emissions schemes which are Cap & trade and Baseline & credit. The cap and trade system has been efficiently followed since 2005, where a fixed number of credits or emission allowance units (EU'S) are allotted to each company or state. In the situation where the state has some EU's units left after finishing production they have this as a surplus and can trade to other states who have utilised all their EU'S units.(Stewart Smith 2007). If emitters wish to expand their production and make emissions beyond that limit, then they must either invest in pollution control equipment or purchase more emission permits from the country that is under their target. The low emitters may sell their surplus permits to more polluting countries or use them to offset excess emissions in other parts of the plant (Stewart, Smith 2007).

The financial management of this trading activity becomes quite complex when it comes to reporting for entities. An application of a core accounting standard for emissions trade is necessary at the current stage. Current Participants in Carbon emissions trading schemes have no accounting guidance on emissions trading which raises numerous financial issues.

Issues such as the ways of recognizing sales of emission allowance, revaluation of EAs considering it an asset, the effect of emissions on income statement, reporting of liabilities (what amount and when), recognition of government grants, valuation and classification of EUs when recorded as an asset or a liability, effect on cash flow statements from these events.etc. The regulating authority must ensure that allowance accounting is undertaken with the appropriate scrutiny and security to avoid errors and fraud. Computerized accounting systems for emissions and allowances can facilitate the management of these responsibilities. (Tools of the Trade, Environmental protection agency United States 2003)

The international financial reporting interpretations committee (IFRIC) of the International accounting standards board (IASB) has laid out the structure of how to account for emissions rights. An allowance is considered as an intangible asset and accounted for according to IAS 38.Allowances which are allocated for less than fair value, shall be measured initially at their fair value. If allowances are considered less than their fair value, then the difference is considered as a government grant, which is recognized as a deferred income. As emissions are made, a liability is recognized for the obligation to deliver allowances equal to emissions that have been made. (Antes, Hansjurgens & Letmathe 2003)

In December 2007 the IASB project on emission rights was placed back on the agenda. But no technical guidance has been issued to date (Dr, Lorne 2009). Currently IASB and the financial accounting Standards Board (FASB) are conducting a joint project to develop comprehensive guidance on the accounting for emissions trading schemes which is anticipated in 2010. (Fornaro et al. 2009).

The application of new accounting standards will have implications for reporting entities and accounting profession which will make the system a lot easier in many ways. The main advantage is that the carbon accounting will be done via a standard financial reporting framework, which includes provisions for certification, and shall be transparent, relevant, consistent and comparable. Greenhouse Gas Protocol: Corporate Accounting and Reporting Standard (revised edition). (Pankaj, B, Janet R 2004).

The standard accounting treatment if based on the current standards of accounting, audit and review, it will provide assurance on emissions and energy disclosures. This standardised framework will apply the single national reporting system such as National Greenhouse and Energy Reporting Act 2007. (Common wealth of Australia law2007).It will make the reports consistent with other corporate disclosure regimes. This will give an access to the information about the abatement actions and the energy production and consumption. Furthermore, companies will be able to recognize and reorganise the reporting information consistent with the standard domestic as well as international proposals.

The disclosure of standardized climate risk which consists of total past, present and anticipated GHG emissions, analysis of climate risk, emissions management, energy production and consumption will help the investors to think on several issues before investing in the company. Greenhouse Gas Protocol: Corporate Accounting and Reporting Standard (revised edition). (Pankaj, B, Janet R 2004).

The prevention of inconsistency between the treatments of dealing with carbon emissions as an asset, liability, expense or income can be achieved by the new guidelines as they would be comprehensive, consisting of new control devices and on top covering all the participants in carbon emission trade scheme.

With the introduction of these standards on the carbon emissions trading for reporting entities, the system will be stabilized but still there will be number of issues left out and unconsidered. The valuation and recognition of the EAs (carbon credits) will vary from state to state and country to country as they are not issued by one international emissions trading authority. It's true that they all use the same basis of calculating the carbon credits but there will always be a difference in the valuation which will result in accounting diversity. (Janek, R 2007).

Carbon emissions trading with the cap and trade scheme when dealt with accounting standards may result in the implication of carbon tax on the companies.Large percentage of a country's operating revenues come from resource development. If carbon is taxed and coal falls out of favor, that would cost jobs and reduce the county's ability to provide services. (Linda Halstead-Acharya. 2009)

The main aim to limit the carbon emission is to prevent global warming. The accounting standards need to be set in a way that along with the reporting requirements there must be a similar commitment to reduce pollution as shown by various legislative arrangements and international treaties. The lack of guidance and explanation on the standards for the use of emission permits results in inconsistency and transparency.

Accounting information only deals with the monetary measures related to the accounting equation without taking care of the non-monetary measures such as carbon dioxide sources and sinks. That means that the existing system dealing with the carbon emission trading is not well-equipped to provide that level of information in order to meet the challenge of global warming. (Janek, R, 2007)

However, the introduction of a new accounting standard will facilitate the environmental conditions overall. It is just that the legislation and the accounting bodies have to put a lot of effort to create the perfect standards.