Carbon Trading Accounting

Carbon Trading Accounting – Options and Difficulties

Global climate change is an issue that involves all sectors of society and will drive a level of social change as the public in general becomes more and more engaged. Organizations from government down to sole traderships must be held responsible for action as we move forward, as it is estimated that significant if not irreversible damage could be caused to our planet and its species in a very short period of time.

Carbon trading accounting will require that initiatives be strictly adhered to and that benchmarks be met, even as such benchmarks remain the product of active discussion at governmental and academic level. Carbon trading accounting should take into account three separate layers of analysis including financial accounting, risk accounting and uncertainty accounting, as put forward by a white paper released by the European Accounting Association in late 2008.

In terms of financial carbon trading accounting, short-term implications affect corporate balance sheets as they prepare for the allocation and purchase of allowances. As “cap and trade” schemes are rolled out, emission allowances will be curtailed and companies must achieve internal efficiencies, both to meet the guidelines and to potentially achieve a financial benefit through over-performance.

Within the European Union scheme, there are additional implications and penalties for companies who are unable to cover any excess emissions that they may make. In addition to these penalties, they will still need to purchase allowances to cover the uncovered emissions and thus face a double penalty nightmare. It seems that there is still a way to go before powerful market forces, government intentions and an overall wish to address global climate change concur.

Risk-Assessed Carbon Trading Accounting Approach

Another school of thought proposes that carbon trading accounting be elevated to the point that it rises above pure economics and addresses the question of pollution and accountability in itself. This requires that nonfinancial information be incorporated within reporting strategies and procedures, detailing the risks associated with the failure to address global climate change. In this scenario, it would be necessary to report what is being classified as a “true and fair view” of corporate performance and to specify how an organization is adapting to demands that it modifies its overall footprint.

Within risk–assessed carbon trading accounting, environmentalist Stern suggested in 2006 that an approach “must be global, deal with long term horizons, have the economics of risk and uncertainty as its core and examine the possibility of major, non-marginal change.” In this analysis, a distinction is made between risk and uncertainty and is based on the probability distribution of potential losses and gains.

As the effect of competitive market forces in a global economy may affect carbon trading accounting, stakeholders will need comprehensive information to enable them to assess an organization's carbon footprint and estimate any risks associated with regulatory and competitive environments in future. Disclosure projects underway may form a basis where standards are set and benchmarks established for corporate performance.

Financially-based Carbon Trading Accounting

Most straightforward, financially-based carbon trading accounting and risk based approaches are insufficient and do not take into account the uncertainty that surrounds the levels of global climate change caused, in itself by the very increase in warming. Further, the entire planet is affected regardless of the location of greenhouse gas emission and while we are aware that carbon dioxide may exist in the atmosphere for 100 years, we are unsure of the exponential effects over time.

UNESCO proposed in 2005 that when human activities lead to “morally unacceptable harm” as they defined it, that is “scientifically plausible but uncertain,” then action should be taken to avoid or diminish harm. In short, this platform suggests that a precautionary approach integrates technical knowledge and facts with social issues and dimensions to achieve an open, comprehensive and engaged process.

As it has been traditionally very difficult to merge accounting practices with social causes, hurdles remain before it will be possible to establish any uncertainty–based approach to carbon trading accounting.

About Verisae

Verisae helps measure, manage and reduce equipment and energy costs including the related business and environmental impacts of carbon emissions. The Sustainability Resource Planning (“SRP”) software platform improves operational efficiency, protects brand integrity and helps ensure regulatory compliance for distributed enterprises across many industries. Verisae delivers a broad range of sustainability solutions to dozens of clients globally with thousands of daily users including an extended network of third-party suppliers. Verisae’s integrated sustainability platform actively tracks millions of assets across thousands of sites worldwide.

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