Emission Trading

Date recorded:

At this session, the Boards began considering the main accounting issues associated with the inception of 'cap and trade' and 'baseline and credit' schemes. The staff used this session to educate the Boards and did not ask the Boards to make any decisions. The staff stated that they believed the inception accounting issues to be the most contentious accounting issues. The staff began the discussion by providing background on each of the two schemes.

  • Cap and trade (most prominent in the European Union). This scheme includes a 'scheme administrator' (usually a governing body) which sets an overall cap on the amount of emissions that are allowed to be released during a specified period (the compliance period). Under this scheme, the allowances are allocated before or during the compliance period and must be remitted to the scheme administrator after the compliance period has passed. This allows participants in the scheme to freely trade the allowances for an extended period of time.
  • Baseline and credit. These schemes are similar to cap and trade in that they have a scheme administrator and allowance or credit certificates. However, they differ in one important respect. Instead of issuing allowances before or during the compliance period, the scheme administrator assigns a baseline to each participant which establishes a limit for the compliance period. After the compliance period has passed, each participant's output is measured and compared to the baseline. After such measurement, the participant either receives allowances or has to seek allowances in the open market (equal to the difference between the baseline and actual output). The receipt of allowances usually occurs a few months before those allowances must be remitted to the scheme administrator. This allows the receiving participants to freely trade those allowances to participants that have exceeded their baseline.

The first set of questions the staff asked the Boards to consider was whether credits and emission allowances are assets that should be recognised. The Board members' views varied, and no decisions were made.

The second set of questions the Board considered was whether a baseline is an asset that should be recognised. The staff separated the discussion into two views. The first view was that baseline meets the definition of an asset. The second view was that recognition of an asset depended on the type of baseline scheme (that is, does the baseline preclude use or limit the use of economic resource/emitting by other?). Supporters of this view believe that in an open scheme (access is not precluded) no asset is recognised while in a closed scheme (access is precluded) an asset is recognised. The staff explained that the open scheme was more prevalent in the EU while the closed scheme was seen in the US (for example, acid rain program). The Board members' views varied on this question as well, and no formal decisions were reached. The staff also asked whether under a baseline scheme an entity should recognise a separate asset or include the value of the baseline in the value of the emitting source (for example, include in the value of a power plant).

The third set of questions the Boards considered was whether an entity incurs an obligation in the schemes and if so, how the entity should recognise the baseline or emission allowance obligation. The staff suggested different views on recognition of the obligation. The views on the baseline scheme were premised by the assumption that an asset is not recognised. Board members' views varied, and no decisions were made. Some Board members also suggested alternative views including following the IAS 20 government grant model or an IAS 37 approach (provisions approach).

Lastly, the staff posed a question to the Boards asking whether the schemes required consistent accounting approaches. Some Board members stated that different schemes should only have consistent accounting approaches if they require participants to have the same rights and obligations. If schemes do not have similar rights and obligations, the accounting approaches do not necessarily have to be same.

At the end of the session, one of the Board members suggested that the staff not focus on particular schemes, but rather it should focus on the broader concept of whether an emission allowance is an asset and when a liability is incurred. This Board member believed that the objective of the project is to develop an accounting model that could be applied broadly as opposed to only selected schemes. The staff said it was currently working on broadening the application of the views and was only using this session to educate the Boards on the more contentious accounting issues related to emission allowances.

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