Emissions Trading Schemes

Date recorded:

The FASB staff joined the meeting by video link for this session.


Background and objective

The purpose of this session was to clarify the scope of the joint project with the FASB on emissions trading schemes. The Board activated the work on this project in December 2007 and this was the first time it was discussed at the Board since then.

The staff highlighted the following:

  • Presently, there is no authoritative accounting literature in either IFRSs or US GAAP that addresses these issues. In June 2005, the IASB withdrew IFRIC 3 Emissions Rights, which addressed the accounting for the rights and obligations arising from participation in the European Union's Emissions Trading Scheme (EU ETS).
  • Clarification of the scope of the project is a key issue because it will have the following implications:
    • The accounting questions that will need to be answered (and therefore the staff's direction of research) depend on the scope of the project.
    • Neither Board has clearly defined the scope (in light of the variety of schemes that exist) when it added the project to its agenda.
    • An opportunity exists to align each Board's respective scope.
  • There is a wide range of emissions trading schemes. In common, they are all aimed at reducing the damage to the environment. The theory behind emissions trading relies on the creation of value through the allocation of a right to emit. This target is normally below actual physical levels of emissions currently being made by entities. Hence, an artificial scarcity is created, which in turn creates a value for the holders of such rights. Emissions trading schemes are believed to reduce emissions in a manner that is cost effective and efficient.
In general, an emissions target is set and distributed (either through an auction or through allocation) among those that qualify. The emissions target creates a 'cap' or a 'baseline' target of total emissions allowed during a particular period.


Scope alternatives and Board decisions

Based on the staff's research, three possible scopes for the project have been identified:

  • Alternative A: Government mandated cap and trade schemes only (narrow scope).
  • Alternative B: All emissions trading schemes and tradable rights (broad scope).
  • Alternative C: A scope between the narrow scope and broad scope

The Board supported Alternative B mainly for the following reasons:

  • Constituents, particularly financial statement preparers, are asking for guidance is this area.
  • There is currently no authoritative literature in IFRSs or US GAAP that addresses the subject; consequently, preparers are uncertain about the proper accounting and diversity has developed in practice.
  • The lack of authoritative guidance might produce diversity between different schemes and/or tradable rights.
  • A consequence of a limited-scope project might be that preparers and auditors bombard the Board with questions about how to account for schemes or tradable rights that were excluded from the scope of the project.
  • The number and types of emissions trading schemes continue to increase over time as more and more citizens, entities, and governments all around the world grow increasingly concerned about the environment.

The Board then discussed the definition of emissions trading scheme. The staff proposed the following definition:

'An emissions trading scheme is an arrangement designed to improve the environment, in which participating entities may be required to remit to an administrator a quantity of tradable rights that is linked to their direct or indirect effects on the environment.'

Broadly speaking the Board agreed with the proposed definition. However, Board members proposed to change the wording slightly to clarify that such a scheme does not improve but rather reduces the impact on the environment. Further editorial comments will be provided offline.

Finally, the Board agreed with the staff's recommendation not to constrain itself to existing authoritative literature when developing possible accounting models, but only to ensure that the accounting model developed will comply with the Framework.

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