Accounting For Carbon Emission Rights

Since the industrial revolution, large-scale utilization of fossil fuels leads to a dramatic increase in the atmospheric concentrations of greenhouse gas, and further causes global climate change, which is a serious threat to human economy, society and ecology. In order to jointly cope with global climate change, the 1992 Rio Earth Summit passed the United Nations Framework Convention on Climate Change, which resulted in the Kyoto protocol being negotiated in December 1997. Many countries and regions, including European Union(EU), launched emissions trading schemes based on the "cap and trade" principle in the effort to meet their emission reduction commitments under the Kyoto protocol. In December 2004, the International Accounting Standards Board(IASB) issued IFRIC 3 as the mandatory guidance for the financial reporting of Emission Rights in EU. The interpretation met fierce criticism for the accounting mismatches it caused and was withdrawn six months later.In order to solve the problems caused by IFRIC 3, in the exploration to establish carbon accounting system, accounting entity is divided into three categories: pure suppliers of CCER, financial intermediaries and emission entities.For pure suppliers of CCER, CCER should be recognized as the inventory. Other business income should be recognized at sale. while consulting CCER methodologies, I found that the cost boundary in developing CCER is difficult to determine. Because it involved in profit and income tax, I think this issue deserves further research.For financial intermediaries, carbon emissions rights should be recognized as tradable financial assets, with gains and losses reported in profit or loss.For emission entities, purchased carbon emissions allowances, CCER and unused free allowances should be recognized as tradable financial assets, with gains and losses reported in profit or loss. Free allowances should not be recognized on receipt, but should be specified in the notes to financial statements. Carbon emission rights should be re-measured to fair value at each reporting date, with gains and losses reported in profit or loss. Emissions liability should not be recognized as long as the cumulative emissions is not more than free allowances hold. When the cumulative emissions is more than free allowances hold, emissions liability then should be recognized for the part of the excess emissions at fair value. And emissions liability should be re-measured at fair value at each reporting date. At the end of the year, relevant asset and liability, income and expense should be offset. At the end of the year, unused free allowances should be recognized as government grant at fair value and be re-measured at fair value at each reporting date ever after. Because the amount of report annual emission, free allowances may be adjusted in next year, and the price of allowances will fluctuate before the delivery, some adjustments need to be done accordingly. Emission entities can deliver CCER and allowances of previous year as well, the value of these emission rights may well be different to the same amount of allowance of current year, so some adjustments is also necessary at delivery.