This paper aims to contribute to the discussion regarding accounting for emission trading schemes, introduced on a global scale as a result of the Kyoto Protocol of 1997, which sets binding greenhouse gases emissions targets for 37 industrialized countries and the European Union. The EU Directive 87/2003/EC establishes a scheme for greenhouse gases allowance trading, in order to promote reduction of greenhouse gases in an efficient and cost-effective manner. The European Union has adopted a “cap and trade” scheme (Starbatty, 2010), which establishes a cap on the total amount of greenhouse gases than can be released over a specified period of time. The European Emission Trading Scheme (the EU ETS) started in January 2005 and it is the largest company-level, multi-sector cap and trade emissions trading scheme in the world. Allowances are instruments issued by the administrator (e.g., a government) of the trading scheme and assigned to the participants of the trading scheme. They are transferrable instruments which can be traded, either in an official market or over the counter. Any emission of greenhouse gases must be offset by returning an appropriate number of allowances to the administrator of the scheme.
The International Accounting Standards Board (IASB), after withdrawing IFRIC 3, is working, jointly with the US Financial Accounting and Standards Board (FASB), to produce a new standard on emission trading schemes. Thus, at the time of writing, no accounting standard yet exists on how to report emission trading schemes in financial statements.
In this paper we discuss the problem of the appropriate accounting for emission trading allowances, considering the relevant literature in this field and the various positions taken by authors and regulatory bodies over the years.
Provided that financial reporting should always reflect the economic substance of the phenomena which it aims to portray, we emphasize the difference between emission permits and emission allowances, noting how the latter represent a means of payment for every unit of greenhouse gases emitted. We therefore argue against reporting emission allowances as intangible assets, offering instead an alternative view of these instruments as non-monetary means of payment. We also consider to which extent the current reporting model for financial instrument devised by IAS 32 is applicable to emission allowances. Finally, we comment on the measurement issues that arise at each reporting date for the emission allowances held by the scheme participant.
