In 2004, the IASB attempted to address the accounting for emissions credits and allowances in International Financial Reporting Interpretations Committee (IFRIC) and issued IFRIC 3, Emissions Rights (IFRIC 3). IFRIC 3 required GHG emissions and credits to be classified as intangible assets and recorded at fair value regardless of whether the credit or allowance was purchased or issued. However, IFRIC 3 was met with significant resistance from the accounting community who cited that it resulted in a mismatch between assets and liabilities. The mismatch occurred because the credits received would be recognized when obtained and the liabilities would be recognized as it is incurred. The standard was later withdrawn by the IASB in 2005. Currently under IFRS, companies generally develop an accounting policy based on International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors (E&Y, 2010). In addition, there remains a number of existing standards that provide authorative guidance on relevant accounting on which companies can draw to form their policies for GHG related transactions such as IAS 2, 20, 37, 38, and 39 (KPMG, 2008).
The U.S. Cap and Trade Schemes: Acid Rain Program and NOx Budget Trading Program
In the United States, the EPA is currently monitoring sulphur dioxide (SO2), nitrogen oxide (NOx) and carbon dioxide (CO2) emissions. The Clean Air Act helped to establish a cap-and-trade system for electric power producers to trade SO2 and NOx. The two of the more successful cap and trade programs in the United States are the nationwide Acid Rain Program and the regional NOx Budget Trading Program in the Northeast.
The Acid Rain Program is a departure from the traditional command and control regulatory methods that establish specific, inflexible emissions limitations with which all affected sources must comply. “Instead, the Acid Rain Program introduces an allowance trading system that harnesses the incentives of the free market to reduce pollution” (EPA, 2011). Under the system, each source must continuously measure and record its emissions of SO2, NOx, and CO2, as well as heat input, volumetric flow, and opacity using in most cases a continuous emission monitoring (CEM) system and report hourly emissions data to the EPA on a quarterly basis. Similar to the EU-ETS, any source that exceeds emissions over the allowances held will be fined and violating utilities must offset the excess emissions with allowances in an amount equivalent to the excess.
The NOx Budget Trading Program (NBP) was a market-based cap and trade program created to reduce the emissions of nitrogen oxides from power plants in the eastern U.S during the warm summer months, when ozone concentrations are highest. While the EPA administers the trading program, states share responsibility with the EPA by allocating allowances, inspecting and auditing sources, and enforcing the program (EPA, 2009).
While these programs...