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Carbon Accounting

This document discusses accounting issues related to carbon emissions transactions in the absence of authoritative guidance. It outlines key accounting questions around the timing of recognizing assets and liabilities, measurement approaches, and tax implications. It also provides an overview of different categories of organizations involved in carbon markets, such as emitters regulated by the EU ETS and CRC, creators who generate offsets, and traders, along with their accounting considerations.

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Rama Krishnan
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85 views4 pages

Carbon Accounting

This document discusses accounting issues related to carbon emissions transactions in the absence of authoritative guidance. It outlines key accounting questions around the timing of recognizing assets and liabilities, measurement approaches, and tax implications. It also provides an overview of different categories of organizations involved in carbon markets, such as emitters regulated by the EU ETS and CRC, creators who generate offsets, and traders, along with their accounting considerations.

Uploaded by

Rama Krishnan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The recognition of climate change as a significant business issue continues to

grow. However, a diverse range of accounting treatments and methods has evolved
in the absence of authoritative accounting guidance. This in turn has led to a lack
of consistency in financial reporting that could undermine investor confidence in a
company's strategy and approach to carbon transactions.
The possible accounting methods could lead to volatility and material and/or
counter-intuitive effects on financial statements. This white paper outlines the
accounting and reporting questions that businesses involved in the rapidly
expanding market for carbon emissions allowances and credits will need to address
to implement their carbon strategy effectively.
This paper, offers a guide to some of the key accounting issues to consider when
transacting in the carbon market. It is essential that carbon emissions accounting
methods are considered early to avoid any surprises in the financial statements.
The possible accounting approaches could lead to volatility and material and/or
counter-intuitive effects on your financial statements in matters
such as:

Timing of recognition of assets, liabilities, profits and losses

Measurement of balance sheet items at nominal value, cost or fair value

Current and deferred tax and VAT implications

Presentation and disclosure

Emitters (under the EU Emissions Trading Scheme) Certain companies


are allocated emission allowances they must either reduce emissions to remain
within their allowance or buy additional allowances to cover total measured
emissions.
Emitters (under the Carbon Reduction Commitment (CRC)) Organisations
spending 0.5m or more on electricity in the UK annually are likely to be included
in the scheme and will need to buy emission allowances.

Creators (under the Clean Development Mechanism) Companies can invest in


or develop emissions-reducing projects overseas within production processes or
produce green energy products. Reductions must be certified to receive Certified
Emission Reductions (CERs) which can then be sold or used to fulfil the
organisations own emission obligations.
Traders/brokers/aggregators
Dealers may buy and sell CERsand allowances or derivativesbased on the
underlying asset.

Investors/Consultants Consultants who assist others to reduce emissions and/or


claim CERs may receive their fee in CERs or options to buy CERs.
Investors may invest specifically in carbon related activities in return for CERs.
These categories are not mutually exclusive. Some emitters also have in-house
traders buying and selling for the companys own use or for profit. Some also act
as creators of emission reductions and/or consultants. There are also examples of
companies running their own exchanges. We consider some of the accounting
implications for each category in the following pages.

The IASB issued IFRIC 3 on Emission Rights but it was withdrawn in


June 2005. Based on other IFRSs in issue at the time, IFRIC 3 concluded that:
Rights (allowances) are intangible assets (IAS 38 Intangible assets)
Where allowances are issued by governments for less than fair value, the
difference between fair value and the amount paid, if any, is a government grant
Provisions for emissions-related liabilities should be recorded (IAS 37
Provisions, contingent liabilities and contingent assets)

The main reason for withdrawal was the potential volatility arising from
recognising changes in the value of revalued allowances (intangible assets) in
equity but movements on the provision for emissions in the income statement

UK Carbon Reduction Commitment


In addition to the EU scheme the UK government has introduced the Carbon
Reduction Commitment (CRC), a mandatory cap and trade scheme targeted
at large companies. Phase I is April 2010 to March 2013, with companies
qualifying in 2008, depending on their usage.
The CRC is similar to the EU Emissions Trading Scheme but it will apply to
large, non-energy intensive organisations. Allowances will be sold to
participants in a sealed bid uniform price auction.
Those included in the scheme will need to buy allowances to cover expected
total CO2 emissions for each year. The minimum cost of allowances, before
any potential penalty, for companies just falling within the emission levels of
the scheme, is estimated at 38,000.
Additional or excess allowances can be bought and sold through a secondary
market but the market price will be uncertain. At the end of the year
allowances for all emissions must be submitted
Organisations included in the scheme can trade allowances with others not
in the scheme, allowing third parties to join the market. The EU ETS provides
a market for trading and valuation purposes the market price of December
2012 EUA settlement was around 19 per tonne of CO2 at 19 November
2008, CER around 15 per tonne (source: europeanclimateexchange.com
or www.pointcarbon.com)
1. Emitters

Certain industries are included in the EU Emissions Trading Scheme, which is


currently in Phase II (2008-2012), many other UK organisations are already
included in the CRC.
2. Creators/green energy
Companies can gain credits by implementing certain green projects, for example
to reduce emissions or to produce products that are considered carbon efficient.

3. Traders/Aggregators
Traders and brokers may trade emissions allowances in both current and future
contracts.
Trading has two main aims:
duce emissions or to produce products that are considered carbon efficient.
4. Investors/Consultants An investor may provide cash or other assets in
return for a right to receive a potentially variable number of CERs.

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