Accounting for Emissions: Emerging Issues and the Need for Global Accounting Standards

Abstract

EXECUTIVE SUMMARY * Concerns over the environmental, economic and health risks posed by greenhouse gas emissions have become a frequent topic of discussion. Recent events and initiatives suggest that climate change ranks high on the U.S. political agenda. * Cap-and-trade programs have emerged globally as the most prevalent market mechanism used by countries to limit greenhouse gas emissions. In such programs, a government sets a targeted level of emissions for companies for a specified time period and uses to assign a monetary value to pollution. Companies that emit less than their target may have excess allowances, whereas those that exceed their targets can acquire additional allowances. Companies generally can sell or purchase allowances directly with other companies, through a broker, or on an exchange. * Users of financial statements require expanded and transparent disclosure of the financial results related to pollution emissions. However, attempts by FASB and the IASB to provide definitive accounting guidance have been unsuccessful, leading to diversity in global accounting practices. * FASB and the IASB are working jointly to examine the accounting issues related to cap-and-trade programs and other market-based mechanisms designed to limit emissions. A final standard is anticipated in 2010. ********** [ILLUSTRATION OMITTED] For several decades, the environmental, economic and health effects from greenhouse gases (GHG) have been closely studied and debated by the scientific community, regulatory authorities and other diverse groups. GHGs are emitted into the atmosphere mainly as a by-product of waste disposal and the burning of fossil fuels by individuals, households and businesses. Of the six principal types of GHGs, the Environmental Protection Agency (EPA) estimates that carbon dioxide (C[O.sub.2]) makes up 85% of these emissions in the U.S. Because GHGs can trap the sun's heat in the Earth's atmosphere, many scientists have targeted them as a leading cause of global warming. This article introduces practitioners to the fundamental accounting issues concerning emissions of GHGs. The key elements of and trade programs are discussed since they are the predominant market mechanism employed globally to limit GHG emissions. Finally, we examine attempts by standard setters to fill the void in the authoritative accounting guidance in this area and the consequences of the diverse accounting practices that have emerged globally. CONTROLLING GHG EMISSIONS: CAP AND TRADE PROGRAMS Currently, countnes are pursuing alternative strategies in their quest to curb the level of GHG emissions and meet national targets. While President Obama and congressional Democratic leaders have said controlling GHGs is a priority, the probability of limitations being adopted in the U.S. in the near term remained unclear at the time of this writing. But globally, cap-and-trade programs have emerged as the most prevalent market mechanism. Such programs present a variety of complex accounting issues. A cap-and-trade program is a market-based approach in which or credits are used to provide incentives to companies to reduce emissions by assigning a monetary value to pollution. In the European Union (EU), each carbon allowance permits the holder to emit one metric ton of C[O.sub.2]. The cap phase of the program begins when a government or regulatory body establishes an economywide target for the maximum level of specific emissions permitted by companies in a specified time frame. Then, a specific number of emissions allowances equal to the national target are allocated (or auctioned) to participating companies based on a formula that generally includes past emissions levels. Companies report their actual emissions at the end of the compliance period and deliver an equivalent number of allowances to satisfy actual levels. …