Accounting for Emissions Trading: How Allowances Appear on Financial Statements Could Influence the Effectiveness of Programs to Curb Pollution

Abstract

Cap-and-trade programs to curb carbon emissions frequently rely on the use of tradable emissions credits known as “allowances.” To date, companies' presentations of their usage of these allowances on their financial statements has not been uniform. Cap-and-trade programs will be most effective when presentation of allowances on financial statements is standardized, since all companies will be forced to be transparent about their methods of compliance with carbon emissions trading systems. Therefore, the Financial Accounting Standards Board and the International Accounting Standards Board should implement standards for the presentation of allowances on companies’ financial statements.