Download Accounting Issues on Emissions Trading

Accounting Issues
on
Emissions Trading
I am a member of the CPA (Australia), and I will
spend the following 15 minutes to talk about the
accounting issues relate to emissions trading.
The 3 areas I would like to concentrate on are:
1) Why - Emissions of carbon dioxide (CO2)
2) How to reduce CO2 emissions
3) The accounting issues
Global Warming
Industrial activities  Greenhouse gasses
Results & Solutions
•
From 1993 to 2003 (10 years), a near doubling in the rate of sea level
rise.
•
The United Nations Framework Convention on Climate Change
(UNFCCC) – first international treaty to set limit on greenhouse gas
emissions (1992).
– nonbinding - not impose legal obligations on any nations.
•
(1997), UNFCCC took place in Kyoto - Kyoto Protocol.
– Goal: Developed countries ↓ emissions of greenhouse gases by
at least 5% of 1990 levels. The year to complete this target is
2012.
– Legal obligation? Yes. For example, by ratifying the Kyoto
Protocol, all member nations of the European Union became
obligated to reduce their GHG emissions.
How?
Reforestation
• How? to remove CO2 from
the atmosphere is to grow
more forests.
• How? to purchase & use low
CO2 emission technologies.
How?
Straight tax option
• Advantage: a straight tax on CO2
emissions is immediately enforceable
and transparent.
• Disadvantage: some businesses may
have the market ability to pass the tax
to consumers, and not to cut emissions.
Cap-and-trade option
• Cap-and-trade scheme. Companies are told
how much CO2 they can emit (the cap) for
a period.
• If the companies produce less than the cap,
they have surplus credits for sale.
• If they emit more than their cap, then they
can buy credits from other businesses that
come in under their cap (the trade).
Kyoto Protocol
&
Emissions Trading
• The Kyoto Protocol endorsed an international
emissions trading mechanism
– a member nation can emit more CO2 than its
assigned amount (which, is defined as being 8%
above its emissions in 1990) only if the member
country can simultaneously create the equivalent
amount in CO2 reduction activities such as
reforestation.
International Emission Trading –
Cap & trade option
• Now, in the international carbon credit
market, countries can sell their unused
emission allowances to other countries
with reduction commitments.
• Credits can be bought and sold in
international carbon credits trading
markets at the prevailing market price,
such as the Chicago Climate Exchange
and the European Climate Exchange.
One can shop for the best price
• These 'carbon credits' are similar to 'taxi licenses'
issued by a local authority that can be traded for
money.
• However, even though the underlying basis of
calculating a carbon credit is international, just like
taxi licenses, the pricing of carbon credits varies from
country to country and state to state.
• In other words, significant arbitrage opportunities
exist, and 'CO2 emitters' in high cost countries can
buy credits from trading exchanges in low-cost
countries.
Advantage
• Carbon trading refers to the buying and selling of
the right to emit CO2. The basic unit is one metric
tonne of CO2 per year.
• Carbon credits trading system gives a monetary
value to the cost of polluting the air. This means
that carbon becomes a cost of doing business
and is seen like other inputs such as raw
materials.
• Now, the factories can compare the costs buying
the carbon permits to the costs of purchasing the
low CO2 emission technologies.
Implications
• For underdeveloped agricultural countries, trees
may no longer be seen as hinder to farming.
• Planting trees for conservation purposes will
provide more long-term benefit to the global carbon
cycle than will plantings for commercial harvesting,
such as trees for logging and pulping.
• In theory - a stronger incentive to prevent forest fire.
In practice – no. (The law - how many new trees
planted after 1990, and pre-1990 trees still existing
are not considered carbon credit purposes).
Accounting issues
Is the 'allowance' an asset?
•
No. The company gets it free from the government.
•
Yes. It can trade in the market (it has money value).
•
If yes, should it be treated as an intangible asset
– US: Since emissions rights lack physical substance,
they cannot meet the definition of a financial asset
under SFAS 140.
•
if it is treated as an intangible asset, should it be
measured at cost when the business acquired the
carbon allowance through a third party transaction (It
will meet the reliability test). How about the allowance
get from government?
We can’t find the answer
• If we look to the GHG Protocol Corporate
Accounting and Reporting Standard
(World Business Council for Sustainable
Development 2004), a guide for companies
to report their GHG emissions.
• However, the entire standard does not
suggest any accounting treatment for
carbon allowance.
In or not in the balance sheet
Off-balance sheet approach
•
The business only accounts for actual emissions by
indicating the amount of insufficient allowances carbon credits purchase from the market. The
accountant should debit expenses, and credit cash at
market price.
In-balance sheet approach
•
If an entity recognizes the allocated allowances as an
asset, then the accountant may use the amortising
model (debit: asset, credit equity reserves) at cost
price. Subsequently, the entity amortizes the
allowances as it pollutes (debit expense, credit asset).
Asset & liabilities, offsetting?
Is offsetting of assets and liabilities be
permitted?
• Should an accountant treat carbon
allowances (assets) independently to
the obligations (liabilities)? If carbon
allowance is an independent asset, then
the accountant cannot offset of the asset
amount with the liabilities.
Right to emit CO2
The hottest trading item
• Due to the possibility of trading, carbon
credits become the world's hottest trading
item.
• The carbon trading market internationally was
about US$100 million total value about 10
years ago.
• Now it is about US$18 billion. It becomes the
fastest growing commodity markets in the
world.
Shipping
• CO2 emissions from shipping have a serious
impact on global warming.
– For example, BP owns 50 tankers, and
researchers at the Institute for Physics and
Atmosphere in Wessling, Germany reveal that
annual CO2 emissions from shipping range
between 600 and 800m tonnes. (This constitutes
about 5% of the global total). This is nearly
double Britain's total emissions and more than all
African countries combined.
Shipping
• CO2 emissions from ships do not come under the
current Kyoto agreement.
• CO2 emissions from ships would be a likely target
in the next commitment period of the Kyoto Protocol.
• For example, the Norwegian government opined
that there are no technical obstacles to bringing
international shipping under a post-Kyoto Protocol.
• Therefore, it would be beneficial for ship owners to
get themselves familiar with the emissions trading
scheme under the Kyoto Protocol.