Low Carbon Economy, 2013, 4, 25-35
http://dx.doi.org/10.4236/lce.2013.41003 Published Online March 2013 (http://www.scirp.org/journal/lce) 25
Climate Change Challenges to Accounting
Constancio Zamora Ramírez, José María González González
Department of Accounting and Finance, University of Seville, Seville, Spain.
Email: constancio@us.es
Received December 2nd, 2012; revised January 10th, 2013; accepted February 5th, 2013
Low carbon economy is causing the implementation and development of carbon markets that affect an increasing or-
ganizations number. These markets entail new challenges to accounting practitioners. The aim of this paper is, on the
one hand, to know how the financial statements are being affected by the obligations of companies to control and com-
pensate their carbon emissions, by analyzing the different positions adopted by both regulatory organizations and com-
panies in the practice; and, on the other hand, to analyze the content and specific problematic of accounting statements
that report on emissions in physical terms. This paper considers the accounting treatment of new carbon assets and li-
abilities which external information is not sufficiently regulated . Also, the paper analyzes the new contractua l relation-
ships that are being developed such as complex derivative structures, purchasing carbon units through ERPAs (Emis-
sions Reduction Purchase Agreements), carbon monetization, carbon collateralization and carbon funds. Finally, new
report requirements to companies that are arising, like Carbon Accounting or risks and strategies regard to climate
change (Carbon Reporting), are also analyzed.
Keywords: Climate Change; Carbon Assets; Carbon Markets; Carbon Finance; Weather Derivatives; Catastrophe
Bonds; Carbon Acco unting; Carbon Reporting
1. Introduction
In the past years we have been able to appreciate a con-
tinuous increase in the organizations’ overall interest to
measure their Greenhouse Gasses emissions (hereinafter,
GHG), with the goal of reducing or compensating them.
The for-profit companies that are also interested in mea-
suring their GHG emissions are not limited solely to
those that have a productive model that is highly linked
to the consumption of fossil fuels, sin ce they include ser-
vices companies and even financial institutions. In this
sense, we can say that the control and r eduction of emis-
sions of the organizations fighting against climate change
are raising important challenges to Accoun ting [1-4].
The organizations are getting involved in the emissions
control and reduction processes, either because they are
submitted to a regulatory framework or because they de-
cided to do so willingly. Organization s can also decide to
submit voluntarily to th e obligation of co ntrolling and re-
ducing their emissions and reporting them, for different
reasons which may include: their own corporate respon-
sibility policy, a better assessment of the company, their
products or services by their clients; better access to fi-
nancial resources or the search of influence on the regu-
lations that could be implemented in the future [5]. In
these cases, carbon assets can fulfill different functions,
including the compensation of emissions of all or part of
the activities of the company or offering the market CO2
neutral products, in which case, clients might be willing
to pay an additional charge for this “added value”.
Similarly, the carbon units can be used in a great range
of operations between companies [6]. On the one hand,
these operations can rise from the company’s manage-
ment of the different risks that are related to these assets,
normally related to the evolution of different market com-
ponents, among others: their prices, energy prices and the
relation between the main fuels, as well as the relation-
ship between volumes and prices of the different types of
carbon emission assets. On the other hand, the carbon
units can be a source of resources that the companies can
access in different ways.
Carbon units fundamentally form the mechanisms for
mitigation in the fight against climate change. However,
with this same goal, we will find specific financial instru-
ments through which companies can manage the risks
deriving from climate and natural disasters, which result
in the rise of the so called adaptation mechanisms.
We can suppose that the economic effects of the emis-
sions, as well as the different assets and operations de-
veloped for their management, may affect the accounting
balances in many different ways. There are instruments
and operations that are p erfectly framed within the Inter-
national Accounting Reporting Standards (IFRSs), and
the International Accounting Standards (IASs), both is-
Copyright © 2013 SciRes. LCE
Climate Change Challenges to Accounting
sued by the International Accounting Standard Board
(IASB). However, the lack of agreement on the true na-
ture of carbon assets has hindered the necessary consen-
sus so that the practice accepts IASB’s efforts to regulate
the accounting of emission rights.
On the other hand, the supply of information r egarding
emissions no longer constitutes one sole problem which
may have a greater or smaller impact on traditional fi-
nancial statements. The social and political awareness of
the environmental impact of the entrepreneurial activity
has resulted in the inclusion of sustainability reports in
their financial information. In these reports we can find
real financial statements of emissions, in which the eco-
nomical fluxes of monetary units have been replaced by
flows of tones of CO2 emissions, including notes in whi ch,
instead of commenting on the accounting principles and
policies used for the preparation of this information, we
find the specifications of the measurement standards of
these emissions.
Consequently, the carbon economy implies a large
range of legal, economical, and financial problems, as
well as in terms of the information prov ided by the com-
pany which we will analyze in this paper from the point
of view of their impact on the information revealed by
organizations. Likewise, we will consider if these new
problems can be solved or not by the current accounting
regulations, thus contributing to identify those specific
aspects in which Accounting research can offer answers
and, in general, all the aspects related to the revelation of
information by the companies in regards to a low-carbon
To comply with this goal, in the following sections of
this paper, we have considered the accounting treatment
of the new carbon assets and the economical obligations
linked to the low-carbon economy, whose reporting in
the financial statements still have not been regulated de-
finitively. Furthermore, we will analyze the accounting
implications of these new contractual relationships that
have been developed on carbon units, under derivative
structures, as forms of future acquisitions of these assets
by means of Emissions Reduction Purchase Agreements
(ERPAs), carbon monetization, carbon collateralization
and carbon funds. Moreover, we will show the account-
ing implications of the operations in the adaptation mar-
kets. Lastly, we will analyze the information standards
that are arising for organizations, both to elaborate and
report on carbon inventories (Carbon Accounting) as well
as showing the references to risks and strategies related
to climate change (Carbon Reporting).
2. Reference Regulations and Practices
for the Financial Accounting of Carbon
Although the European market has been working for over
half a decade, the debate on the nature of the assets de-
riving from them still hasn’t been closed, which not only
affects their accounting treatment, but also their tax con-
siderations and other legal issues. The difficulty to adapt
their nature to the legal effects is determined by the vari-
ety of their origin, functio n and implications for th e com-
The diversity of carbon units that arise from these
The different purposes for which they can be used in
an institution an d their different sources: for the com-
pliance with the legal oblig ations for the emissions of
their facilities, for the compliance of voluntarily ac-
quired commitments and even, with mere speculative
purposes regarding their prices.
The acquisition of carbon units that, for example, can
take place through the reception of de rivative rights in
an assignment plan, direct purchases from third par-
ties or through a platform the compliance of forward
or option contracts or the participation in a carbon
Participation in these markets implies for the co mpan y
the recognition of liabilities in their balance sheets of
the obligations resulting from issuing the emissions
subject to this regime.
As the first international reference regulation we can
mention the Uniform System of Accounts de la Federal
Energy Regulatory Commission (FERC) of 1993 in the
United States of America, for energy companies and util-
ities. Emission rights, in this case, were for the emissions
of sulphur dioxide-acid rain-established in the amend-
ments of the 1990 Clean Air Act. Despite the time ela-
psed since this act and its diversion from the rest of the
regulations, as we will see below, there are practices in
many companies that comply with the same.
Both the Financial Accounting Standard Board (FASB)
as the IASB have had failed experiences in terms of the
issuance of statements in this regard. FASB eliminated
from their agenda th e EITF 03-14 Participants’ Account-
ing for Emissions Allowances under a “Cap-and-trade”
Program, based on a regulation issued by FERC. The rea-
sons to eliminate this EITF is mainly based on the di-
mension of the problematic that this document should
address (beyond a cap-and-trade program), as well as the
inconsistencies of the document (based on FERC regula-
tion) with the rest of the FASB standards [7].
IASB wanted to prepare a statement of the Interna-
tional Financial Reporting Interpretation s Committee (IF-
RIC) before the implementation of the emissions rights
European market. Thus, in December 2004 they issued
the IFRIC Interpretation 3, Emissions Rights, with the
purpose of seeking a greater consistency with the regula-
tory corpus of this body. However, it didn’t have the
support of the European Financial Reporting Advisory
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Climate Change Challenges to Accounting 27
Group (EFRAG), which resulted in its elimination by
IASB. Currently, this project has been stopped. The main
characteristics of this regulation were:
A consideration of the European emission rights as
intangible assets subject to the Intern ational Account-
ing Standard (I AS) 38.
The valuation of these assets in their recognition would
be at their fair value, therefore the listing as assets
acquired from the government at a price that is null or
lower than market value should appear on the balance
sheet as a government grant (subject to IAS 20), wh ic h
would imply the recognition of deferred revenue. This
revenue would appear as a liability on the balance
sheet, outside equity, and would be allocated to the re -
sult of the year on the basis of a systematic base dur-
ing the compliance period, regardless of if these as-
sets (carbon units) were maintained or transferred.
Once these assets had been recognized, they would
maintain their initial va lue, except for corrections due
to deterioration. However, the re-evaluation model
foreseen for intangible elements in IAS 38 could be
The emissions developed would give way to the rec-
ognition of a liability subject to IAS 37 (Provisions,
Contingent Liabilities and Conting ent Assets). There-
fore, the debt should be recognized for the amount
necessary to compensate these emissions in the pre-
sent, in other words, at the fair value of the amount
equivalent to those emission rights.
Although the carbon markets and the climate change
economy are in constant expansion, the accounting stan-
dards still do not have a necessary consensus. This has
resulted in a remarkable divergence in the development
of practices by corporations in relation to the reflection
of all the equity effects that could derive from the impli-
cation in low-carbon markets and projects. Therefore,
when studying how these aspects affect the financial
statements, we should also consider how these practices
are being developed. The entrepreneurial practices have
developed actions that are not fully consistent with the
IFRSs. In 2007, PricewaterhouseCoopers (PwC) con-
ducted a study [8] regarding these practices, not only fo-
cusing on the accounting of EUAs and the emissions ob-
ligations of the companies, but also on CERs.
We must bear in mind that the aforementioned docu-
ments refer to very specific assets, more specificall y Eu r o-
pean emission rights, but the problem is extensive to
other carbon assets, as well as the obligations and op era-
tions resulting from the company’s participation in other
carbon markets, within the Kyoto Protocol or not. How-
ever, the joint project with FASB, Emissions Trading
Schemes, has suggested a more extensive scope for cap-
and-trade regimes of mandatory compliance, so that it
may include any r e gulation for volun tary regimes1.
The analysis below regarding the accounting implica-
tions of the participation in a carbon market will be done
by using as a reference all the documents mentioned in
this section.
3. Balance Elements Generated by the
Carbon Markets: Presentation and
3.1. Balance Sheet Presentation
Basically, we can identify three elements that could ap-
pear in a balance when a company takes part in a carbon
market: assets for carbon units, liabilities for the obliga-
tions resulting from the correct regime that the company
is ascribed to, deferred in come (or equity, in its case) for
the emission rights received for free or for a price below
their fair value. The operations on these assets as those
developed in the adaptation markets will be addressed in
Sections 4 and 5.
For the carbon assets, with their maximum exponent in
the EUA, in general, the conceptual Accounting frame-
work can point us towards an independent presentation in
the balance. In fact, the control that the company exer-
cises on these assets is independent of its obligations; the
organization can transfer them once these rights have
been assigned, having the obligation of rendering an
amount of rights equaling the tonnes of CO2 emitted in
the past.
The register of the accounting implications of an emis-
sions regime can be done showing a net amount in the
balance [9] between the allowances maintained by the in-
stitution and their amount which should be provided for
the actual emissions (including an amount for the same,
lessening the asset). If there were not enough permits,
this net amount would imply including a liability in the
balance. Thus, the described register was included by
FERC in their regulation Uniform System of Accounts,
in which the emissions permits were considered as stock
inventories, to be valued at a historical cost by using the
weighte d average cost , so that thos e delivered by the go-
vernment freely would have an accounting value equal to
zero. The value of this asset would be reduced, collecting
the corresponding cost as the emissions of sulphur diox-
ide would take place.
The accounting nature of the batch for carbon assets,
in addition to being considered in certain environments
as an inventory, has been proposed as a financial instru-
ment and an intangible asset, the latter is what seems to
obtain a larger consensus among regulators for their pre-
1We will later refer to this project in different sections of this paper. It
can be read in the following links: http://www.ifrs.org/Current+Project
hemes.htm and http:/
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Climate Change Challenges to Accounting
sentation in the balan ce.
The carbon assets could hardly be treated as financial
instruments, given that, although they could be consid-
ered as a means of payment to cancel the liabilities as-
sumed by the company’s emissions, they lack a contrac-
tual nature, or the bilaterality of the definition o f a finan-
cial instrument, since it gives way to “a financial asset of
one entity and a financial liability o r equity instru ment of
another entity” (IAS 32, Section 11). In itself, it does not
comply with the financial asset definition, since they are
not cash, net instruments, cash receivables financial as-
sets, or contracts to exchange financial instruments. The
PwC (2007) survey does not include a practice that treats
these assets as financial instruments.
As regards to the treatment of these assets as stocks,
on the one hand, they are considered in the Uniform Sys-
tem of Accounts, which affects all of the power utilities
of that country. On the other hand, the PwC study (2007)
showed that 15% of the surveyed companies, when deal-
ing with EUAs, and 38% of the surveyed companies,
when related to CERs, treated these carbon assets as in-
ventories. Inventories are those assets (IAS 2, Para. 6): 1)
held for sale in the ordinary course of business; 2) assets
in the production process for sale in the ordinary course
of business; or 3) materials and supplies that are con-
sumed in production, or the rendering of services. Sec-
tion 1) is fulfilled if part of the activity were to purchase
or sale these rights in the ordinary course of business.
Section 2) is not fulfilled, since they are not undergoing a
production process. As regards to Section 3), these assets
could not be easily framed. Although they could be con-
sidered as another supply, necessary for the production
process, of with the special connotatio ns that constitute a
right to develop an action (emissions of gasses), which
do not imply the reception of a material or a service. We
must bear in mind that the amounts of the assets required
by an entity would depend more or less directly on the
production that is developed in this period.
However, it seems that the consensus ended up con-
sidering them as intangible assets, given the greater ac-
commodation of these emissions rights and credits fol-
lowing the definition of IAS 38, Para. 8: an identifiable
non-monetary asset without physical substance. The af ore-
mentioned survey reported it in the following way: of the
surveyed companies, 65%, in the case of EUAs and 38%,
in the case of CERs, considered them as intangible assets.
Although the last joint meetings between IASB and FA S B
reaffirm the nature of the assets of these rights and the in-
dependent record of the obligations that they imply, their
nature still has not been treated .
Another matter that has been discussed in the IASB-
FASB joint project is the possibility of recognizing as
assets all the carbon units that the company will receive
during the years that form a compliance period during
which the company has decided to be a part of the vol-
untary market, regardless of if these have not been deliv-
3.2. Assets Recognition per Carbon Units
3.2.1. Initial Recognition and Value
If the assets have been acquired in the market at a price
equivalent to their fair value, this price will be their ini-
tial value. However, the main problem lies in how to
value the assets received for free or for a price lower than
their fair value. This happens to many companies when
they receive emissions rights through a national designa-
tion plan, normally at zero cost. In some cases, they co uld
have supported a certain cost, but different from their fair
value, because they have been acquired through an auc-
tion system or because the company is developing a pro-
ject with which it would obtain CERs, for instance.
In regards to the freely received assets, in general, the
statements or regulatory projects opt for the recognition
of these assets at market value, as recommended in the
revoked IFRIC 3 and IAS 38. However, there are other
positions in favour of the initial null valuation which
would imply a distancing from the conceptual framework,
as we can find in some statements, as the one included in
the US FERC, and the practices of certain companies
(76% of the companies surveyed by PwC, 2007). This
initial null valuation or at cost (if it exists) is backed up
by the practice precisely because it eliminates volatility
problems in the results that other more conceptually co n-
sistent alternatives would entail.
The case that the carbon assets are generated by the
company itself in the development of some project for
the reduction of emissions have not been contemplated in
any project of the regulation. Given that the generated
carbon units (CERs, although others could also be used,
as ERUs or VERs) are obtained in compliance with the
main production of the project, it is probable that th e cal-
culation of the production costs would be less reliable
than recording these assets in the balance at their fair
value, recognizing th e correspond ing exp loitation in come.
The fair value will be the most consistent alternative if
these assets are considered as intangible assets, which is
the treatment given by 13% of the companies surveyed
by PwC. 29% of them recognizes their production costs
as inventories; while 29% does no t recognize it until th ey
are sold or compensated.
In the IASB-FASB joint project, they also reinforced
the position of the initial valuation at fair value, given
that it provides more transparent and relevant informa-
tion for decisio n making.
3.2.2. Measurement after Recognition
Regarding the subsequent valuation, the possibilities of-
fered by the statements are also very different. The FER C
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Climate Change Challenges to Accounting 29
regulation proposes a valuation at a cost that, in case of
being units rec ei ved f or free , wo ul d conti n u e at zero cost.
Under IAS 38, we could adapt the revaluation model.
This model consists of valuing at fair value after the rec-
ognizing the carbon assets. In this case, the increases
should be included in the net assets like “other compre-
hensive income”, directly allo cating the lessening of val-
ue to losses and earnings. However, the increases recog-
nized in the equity will become part of the distributable
funds when these assets are eliminated, and what the case
would be if these were used to compensate emissions.
This model could not be applied under PGC, since it does
not consider the treatment of immobilized assets.
In the aforementioned IASB-FASB joint project, fur-
ther valuation to fair value is supported by most of the
members of the committee (meeting of September 2010
and subsequent meetings), both for those allocated for
free as those acquired from third parties. Its impact in the
results would be compensated by the liabilities assumed
by the commitments of emissions deriving from the mar-
ket regime under which the company is ascribed. How-
ever, the recognition of an income could be derived if it
is expected that part of the carbon units received exceed
the foreseen emissions, although this matter is in an ini-
tial development ph ase.
In regards to the impairment, not only would it be done
under the cost model, as well as under the revaluation
model, since the IAS 38, the lessening of values, once the
former increases in the net assets can be recognized, it
would imply the recognition of the development against
equity (for the loss of revaluations that have already been
registered in the equity) or to the result, if the recoverable
amounts were below the cost.
3.2.3. Reception of Free Assets or for Amounts below
Their Fair Value
According to the aforementioned PwC survey, the free
reception of rights is recognized at a null value by most
companies. However, when these carbon units are ac-
quired for free, they receive an initial valuation, normally
obeying their fair value and it should correspond to a
counterpart that would be recognized as a subsidy or do-
nation. In IASB, the free reception of carbon units as de-
ferred income (IAS 20), is shown as the liabilities of the
balance. In some accounting systems, like the Spanish
one, subsidies and donations are included as an amount
in other comprehensive income.
The imputation of this subs idy to the result of the year
will be done systematically, as shown in paragraph 12
(IAS 20), which will obey the emissions of gases that
will be compensated with the received units. In the sur-
vey developed by PwC, this was also the second criteria
followed by most of the surveyed companies (50%). A
similar treatment is applied when the assets are not re-
ceived for free, but for an amount lower than fair value.
Another possibility, further from the concep tual frame-
work, but put into practice according to the aforemen-
tioned survey (altho ugh in a lower percentage), is the re-
cognition as income directly in the result of the year for
the carbon assets received freely (total or partially).
3.3. Liabilities That Arise from the Carbon
The emissions of a company subject to a market, imply
the recognition of a liability at the year end, by means of
the recognition of a provision, for the compensation ob-
ligations through the delivery of the carbon-units equiv-
alents, normally EUAs or CE Rs.
Under a cost model, the provision would be registered
against profit and losses, for those emissions developed
during the period, in an amount equivalent to the ac-
counting value of the carbon assets which should be de-
livered for their compensation. In the event that there
were not enough units, the assets that should have been
acquired to annul such emissions would be increased by
the market value at the year end. In the FERC regulations
we should consider the units acquired by means of allo-
cation plans, they will not have an assigned value, which
would reduce the amount of the provision, since it would
be calculated by an aver age weighted price of the carbon
units in the portfolio. This model, in which the liab ilities
assumed by the subsidies are valu ed in terms of the allo-
cated value to the rights previously received, were also
followed by most of the surveyed companies (47%) in
the PwC survey. It is interesting to observe that th is same
item in the survey also considered the prices hired under
forward purchase options subscribed by the company
Under the international regulations, these liabilities
should be initially valued at the market value of the car-
bon units required to cancel the obligations of the emis-
sions during that period. This is due to the fact that the
amount of a provision should be the higher estimate, at
the date of the balance, and the necessary payment for
the cancellation of the present obligation (IAS 37, Para.
The broader focus adopted by the IASB-FASB project,
covering other markets such as the voluntary markets,
has been to consider if the reception of carbon units co uld
imply the immediate appearance of an obligation, since
the company has assumed a certain level of efficiency in
their emissions under the regime, and therefore would
result in a liability. If these units were received for free
from a state, under the IASB regulations, this liability ap-
pears due to its free reception2. In a meeting held in Oc-
tober 2012, most of the members of the committee chose
an initial and subsequent valuation of these liabilities at
2In IAS 20, the subsidies can be considered as deferred income (liabili-
ties), and not income directly attributable to the net equity contem-
lated in the PGC.
Copyright © 2013 SciRes. LCE
Climate Change Challenges to Accounting
their fair value. However, they considered the alternative
of the valuation being subject to a “business model” such
as the one used for financial instruments. In October and
November 2010, they debated if an excess of emissions
foreseen regarding the allotted carbon units, should give
way to a liability prior to the dev elopment of the efficient
excess of emissions, which were still without solving the
form of recognition and valuation of this liability.
In this last meeting, the presentation of the carbon as-
sets and the liabilities for emissions have also been con-
sidered, it is currently under debate if the assets and li-
abilities should be presented independently or in a net
form, under a “linked-presentation”, as long as the com-
pany has the intention of compensation.
4. Accounting of Operations with Carbon
Most of the operations that use carbon units as the un-
derlying adopt the structure of financial derivatives (fu-
tures, options, etc.) and, accordingly, are within the scope
of IAS 393.
Although the underlying does not create a financial in-
strument, its changes of value determine the change in
the value of the contract to acquire or sell carbon assets.
This treatment implies that the changes of value of these
contracts (or clauses) within the scope of IAS 39 should
be attributed to the losses and earnings of the period.
In addition to the negotiation of these contracts in p lat-
forms, the companies can enter in to agreements that have
the same structure or that have clauses that adopt the
form of a derivative agreement and, therefore, are also
within the scope of IAS 39. A special reference should be
made of ERPAs, private contracts through which inves-
tors and promoters negotiate the transmission of credits
that a project will generate in the future. When these clos e
or condition the price at which these credits will b e tran s-
mitted, the agreement adopts the structure of a forward or
an option.
However, the treatment as a derivative of these con-
tracts in the financial statements of a company can be
considered as outside the scope of the regulation, thanks
to the exclusion established in paragraph 5, which pre-
scribed that IAS 39 shall be applied to those contracts to
buy or sell a non-financial item that can be settled net in
cash or another financial instrument, or by exchanging
financial instruments, as if the contracts were financial
instruments, with the exception of contracts that were en-
tered into and continue to be held for the purpose of the
receipt or delivery of a non-financial item in accordance
with the entity’s expected purchase, sale or usage re-
Therefore, a body that negotiates with these carbon as-
sets to purchase or sell them through these contracts,
because it is part of its activity, is not required to treat
these transactions as financial derivatives from an ac-
counting point of view. This can be the case of a com-
pany that owns facilities affected by EU ETS or the pro-
moter of a project that generates credits for the reduction
of emissions. It is important to highlight that to claim this
exclusion, the volume of the contract should be done in
relation to the body’s exp ected purchases, sales or needs.
The entrepreneurial practice in fact uses this possibility,
given that the PwC survey [8] states that 46% and 31%
of surveyed companies claim this exception for contracts
on EUAs and CERs, respectively.
We should also highlight that if these contracts are net
settled, it would not be possible to claim this exception,
as previously stated in Para. 5 and specified in Para. 64.
This way, for example, if the company adopts the prac-
tice of acquiring EUAs throu gh a forward and sells them
immediately, it cannot leave similar forwards outside of
the balance. It could happen that the contracts include
purchase-sale clauses of carbon units. Depending on how
these are articulated, they could proceed to the separation
of the implicit derivative, or not. Normally, the main ele-
ment of analysis for a separate presentation of the deriva-
tive is if it shares the nature and risk of the main con tract.
This is precisely the condition established by IAS 39
(Para. 11):
In the case of cap and floor options on a variable es-
tablished price (cap, floors, collars), these should be
outside of the money and not levered at the beginning
4Paragraph 6 of IAS 39 establishes different ways by which a contract
for the purchase or sale of non-financial items can be liquidated at their
net amount, in cash or by means of another financial instrument, or
through the exchange of financial instruments. These include:
when the terms of the contract permit either party to settle it net in
cash or another financial instrument or by exchanging financial in-
when the ability to settle net in cash or another financial instru-
ment, or by exchanging financial instruments, is not explicit in the
terms of the contract, but the entity has a practice of settling simi-
lar contracts net in cash or another financial instrument or by ex-
changing financial instruments (whether with the counterpart, by
entering into offsetting contracts or by selling the contract
its exercise or lapse);
when, for similar contracts, the entity has a practice of taking
delivery of the underlying and selling it within a short period after
delivery for the purpose of generating a profit from short-term
fluctuations in price or dealer’s margin; and
when the non-financial item that is the subject of the contract is
convertible to cash.
3As we can observe in paragraph 9: “A derivative is a financial instru-
ment or other contract within the scope of this Standard with all three
of the following characteristics 1) its value changes in response to the
change in a specified interest rate, financial instrument price, commod-
ity price, foreign exchange rate, index of prices or rates, credit rating or
credit index, or other variable, provided in the case of a non-financial
variable that the variable is not specific to a party to the contract
(sometimes called the ‘underlying’); 2) it requires no initial net in-
vestment or an initial net investment that is smaller than would be
required for other types of contracts that would be expected to have a
similar response to changes in market factors; and 3) it is settled at a
ure date.”
Copyright © 2013 SciRes. LCE
Climate Change Challenges to Accounting 31
of the contract, as specified in the Application Guide
of IAS 39 (Para. AG 33 b), since otherwise, the clause
would imply the separate recognition of an implicit
The price of the contract can be indexed with differ-
ent references. Obviously, if it refers to an index or a
listed price of carbon assets, it would share the risks
and the nature of the main contract and their separa-
tion would be unnecessary. But there is no longer a
specific guide for those cases in which it is not a price
of the same asset. We understand that if this asset is
very similar to the one negotiated in the contract, it
would be unnecessary to separate it; for example,
CERs or VERs are purchased and their price is refer-
red to a EUA listing. Another very common case is to
list the contract at the price of a commodity, which
normally maintains a close relation with the value of
carbon units. In this case they would require a more
detailed analysis, but it is true that the prices of raw
materials or supplies such as carbon, oil, electricity,
etc., are closely related with the quoting of EUAs and
CERs, which could lead to the conclusion that this
separation is not necessary5.
Another alternative accounting treatment for these con-
tracts on carbon assets is the application of hedge ac-
counting, normally by means of cash flow hedge accou nt-
ing, since these are usually used to hedge the transactions
foreseen in these activities. This would imply that their
changes in value are included , completely or partially, as
income and expenses in other comprehensive income.
However, the practice included in the aforementioned
survey is not to use this accounting mechanism, since
barely 7% of the surveyed companies use it in the case of
EUAs. For the specific case that the hedged item is an
operation foreseen as highly probable6, the accounting
hedging that would correspond would be cash flow, im-
puting the changes of value of the derivative to the net
equity in the part that has not been determined as an ef-
fective hedging.
On the other hand, in operations such as monetization
and collateralization, their accounting treatment is equal
to a loan, in which the funds that will be received from
an ERPA will be destined fully or partially to the pay-
ment of the same. Therefore, they should be registered as
such loans. However, in the case of a monetizati on it could
be an anticipated purchase-sale of carbon assets, but for
this it would be necessary that the seller of the carbon
assets does not have to complete future deliveries of
CERs with additional provisions in the case that the val-
ue of these assets did not achieve the amount of the re-
ceived funds.
Another interesting matter is the treatment that should
be given to the participation in carbon funds. We must
consider that these funds are not constituted under the
regulation of a normal investment fund, but they are le-
gally considered as joint property7. On the other hand,
the performance obtained by the investors does not cor-
respond with the delivery of financial instruments, but
with carbon assets (EUAs or CERs, normally). This re-
sults in the fact that the accounting treatment of these
participations does not coincide with those of a normal
investment fund, in which performance is obtained nor-
mally in cash and, therefor e, is outside of the regulations
regarding financial instruments. In our opinion, these
participations should be treated in a similar way as to
how the company treats credits for directly managed pro-
jects, in other words, as intangible assets or inventories,
considering the regulations relating to a joint account.
5. Accounting of Operations in Adaptation
Markets: Weather Derivatives Y
Catastrophe Bonds
Climate change has meant that many companies develop
new financial instruments in order to “accommodate”
their income statements to the effects of climate change.
Along this line, climate derivatives and disaster bonds
have risen as adaptation financial mechanisms.
In regards to climate derivatives, their treatment will
be similar to those of any other derivative when these are
negotiated in an organized market8. The accounting treat-
ment of these instruments was the purpose of the debate,
given the function of the same as insurances. In fact, the
original wording of IAS 39, revised in 2003, excluded
these contracts from their focus (Para. 2h). However, in a
subsequent revision of this regulation in 2004, NIIF 4
eliminated this exception and only considered the exclu-
sion of those contracts that really acted as insurance, that
is, within the scope of NIIF 4 ( IAS 39, GA 1).
For a contract to have th e condition of an insurance in
the accounts under NIIF 4, the insurer accepts a signifi-
cant insurance risk from the other party (the holder of the
insurance policy), agreeing to compensate the holder if a
future uncertain event (the insured event), adversely af-
fects the holder of the insurance. Under thi s p remise, most
of the climate derivatives will not comply with the con-
ditions of the insurance, since the covered underlying
5Paragraph 33f of the AG of IAS 39 contemplates the indexing of a
lease of an inflation index of the economical environment of the entity
as a derivative that shares the nature and the risks inherent to the host
roject, as long as at the ti
e of the agreement they are outside of the
money and are not leveraged. Therefore, we consider that we could
believe that the indexation of the contracts on carbon assets are com-
modities with a close relationship between their price which will not
result in the separation of the same as an implicit derivative, with the
exception that the conditions of non-leverage and contracting “outside
of money” are respected.
6We consider that this could be the most frequent situation.
7It can be read in the FC2e Website (http://www.fc2e.com), which re-
commends this treatment to their participants.
8The largest negotiation p l a t f o r m is CME.
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Climate Change Challenges to Accounting
condition cannot affect the hiring party adversely, in other
words, it simply speculates on the evolution of the vari-
able. On the other hand, it does not establish mechanisms
that evaluate this party in this case. Simply, in the event
of an evolution of a given climatic, geological or any
other physical variable, one of the parties of the deriva-
tive contract must pay the other party, depending on the
notional and calculation formulas specified in the con-
tract. In conclusion, climatic derivatives should be ac-
counted for as derivatives, in other words, recording the
assets and liabilities th at correspond to the assumed r igh ts
and obligations, and valuing them at their fair value in
profit or loss. To allow for them to be registered as insur-
ance, these contracts should only produce settlements if
the holder suffered losses as a resu lt of the covered event.
As for catastrophe bonds, they are a hybrid instrument
case, which is subject to the scope of IAS 39. The host
contract would be a debt instrument and the embedded
derivative a climate derivative, in the form of a swap, in
which the issuer would pay a premium to the investor
(excess interest rate paid on the returns that correspond to
a normal bond with the same risk and maturity); while
the issuer, in the case that the covered event occurred,
would receive a compensation equal to the nominal value
or interests that they would not have to pay.
In order to propose the accounting treatment that the
issuer and bondholder should apply, we must remem-
ber the conditions relating to the accounting obliga-
tions of separating embedded derivatives (IAS 39, Para.
The economic characteristics and risks of the embed-
ded derivative are not closely related to the economic
characteristics and risks of the host contract; in this
case, a bond, its risks are linked to the issuer’s ability
to pay and the interest rates, wh ich are not sh ared w ith
the risks inherent to weather derivatives, whose un-
derlying variables would be measures of rain, wind,
earthquakes… Thus, both the issuer and the holder
must recognize and val ue b oth components separately.
A separate instrument with the same terms as the em-
bedded derivative would meet the definition of a de-
rivative; obviously it has a variable that is not related
to one side (climatic-physical phenomenon), lever-
aged (the interest paid on these instruments is well
below the amount that would cease to be paid in case
of occurrence of the event-nominal or bond interest),
and have a maturity date (that of the bond).
The hybrid (combined) instrument is not measured at
fair value with changes in fair value recognized in
profit or loss, this is, a derivative that is embedded in
a financial asset or liability measured at its fair value
with changes in the profit or loss for the period would
not be separate d.
From the point of view of the issuer, unless the liabil-
ity was measured at fair value, the bond would be valued
at amortized cost. Its initial value would result from the
difference between the initial fair value of the entire in-
strument and the value related to the embedded deriva-
tive. The effective rate to be applied to calculate the am-
ortized cost should eq ual the initial valu e thus calcu lating
the flows that correspond to a bond, considering for the
compensation an interest rate equivalent to a debt emis-
sion during the same period and by an issuer of a similar
The investor in these products may encounter more
diverse problems. If they were valued in their entirety at
fair value through profit or loss, it would not be required
to separate the incorporated climatic derivative. If this
were not the case, separation would be required, so that
the initial value of the bond (the host contract) is calcu-
lated by the difference between the initial fair value of
the entire instrument and the corresponding embedded
derivative. The main contract, as of this moment, would
be valued depending on the category of financial assets
in which they have been included. In any case, it will be
necessary to calculate their amortized cost, in a similar
way as we have specified in the preceding paragraph.
Lastly, if the investor applies IFRS 9, this type of finan-
cial assets would be valued at fair value through profit or
loss, since they are hybrids; their main contracts are
treated at the same time as the financial instruments.
6. Carbon Accounting
For the development of a low-carbon economy it is nec-
essary to have procedures for calculating the amount of
CO2e emitted by different sources, or stored, in the case
of a sump. These procedures are known as Emissions
Accounting, Carbon Capture and Storage (Carbon Ac-
Carbon Accounting r equires a pro tocol or ap proach for
the development of inventories and carbon footprints,
built under a series of principles that provide these mea-
sures with sufficient reliability. To do this, it is necessary
to follow a set of principles, similar to tho se under which
financial information is drafted: relevance, integrity, con-
sistency, transparency and accuracy [10]9. Any standard
for carbon accounting should be con sistent with the prin-
ciples of the Intergovernmental Panel on Climate Change
(IPCC), since otherwise, the generation of carbon credits
would not be possible, even if the development of the
standards considered the requirements of the regulations
of all the carbon markets [9].
The most extended protocol today is the GHG Proto-
col [10], which was promoted by the World Resources
9The Greenhouse Gas Protocol Initiative was created in the United
States, since this country has not ratified the Kyoto Protocol, although
it has had a broad dissemination even among several signatory compa-
Copyright © 2013 SciRes. LCE
Climate Change Challenges to Accounting 33
Institute and the World Business Coun cil for Sustainable
Development [11]. This protocol is applied to over 63%
of the companies included in US Fortune 500. Another
regulation pursuing this same purpose is standard ISO
Emission inventories not only have the purpose of es-
timating the emissions of a body, but they should serve
as a tool for the development of emissions reduction stra-
tegies, the establish ment of goals and th e support to ma ke
investment decisions.
The inventory should be defined in terms of two vari-
Area of Responsibility: is the definition of th e limit to
which a body will assume the posting of the emis-
sions of their subsidiaries. There are two mechanisms:
the first, under which they would assume emissions in
the proportion of their share; and the second, which
would assume the integr ity of the emissions of all the
participated companies with a domain of 51%. How-
ever, although both are simple and objective criteria,
it is clear that situations requiring a greater complex-
ity of these methods can be easily found.
Scope Level: Refers to those sources or origins of
emissions that will be controlled in the inventory.
Normally, a higher scope level involves higher com-
plexity in the calculations, as well as the assumption
of a hypothesis. The GHG Protocol establishes three
scope levels, the first two are of required control un-
der this standard: Scope 1) based on those sources
that are owned or directly controlled by the entity,
such as combustion boilers for the production of elec-
tricity or heat. This is the case also for the company’s
own vehicles. Scope 2) emissions related to the elec-
tricity that is acquired from third parties, therefore it
would be important that the utility company would
provide as accurate a measure as possible of the emis-
sions of the electricity consumed by its clients. Scope
3) under which the rest of t he com pany ’s indirect emis-
sions are incorporated, such as those generated by the
movement of employees in public transportation, the
freight developed by third parties, those generated for
the development of consumption required for produc-
tion, etc. This is the most complex level measured
precisely due to the lack of information and the com-
plexity of the required methodology. Therefore, its
application is often not absolute, but many co mpanies
specify this level with a limited scope.
In some cases, under a level of Scope 1) they control a
very high percentage of the volume of emissions (e.g. a
carrier), while in others, most of the emissions are con-
centrated in the indirect character developed by third par-
ties to supply goods and services to companies (e.g. con-
In capital markets there is a process to audit the infor-
mation that entities provide to investors. Similarly, it is
necessary in the field of carbon markets for two reasons.
On the one hand, to verify that inventories provided its
investors has been developed according to a certain stan-
dard. And on the other hand, carbon assets should gener-
ate enough confidence in their potential investors, for
which is necessary that such units are generated accord-
ing to the requirements of the regulatory regime under
which they are traded. This is especially important for
CER credits or other units generated under the umbrella
of the voluntary markets, such as the Gold Standard or
the Voluntary Carbon Standard.
As a proof of the importance that the information audit
related to the carbon inventories is reaching, the Interna-
tional Auditing and Assurance Standard Board (IAASB),
dependent organism of the International Federation of
Accountants (IFAC), has approved a final draft of the
ISAE 3410 (2011) regulation, Assurance Engagements
on Greenhouse Gas Statements, which is consistent with
ISAE 3000, Assurance Engagements Other than Audits
or Reviews of Historical Financial Information.
ISAE 3410 recognize that, in many cases, the audit of
emissions would require a report with a limited scop e. In
any case, the standard does not prescribe specific proce-
dures, as in the case of financial reporting, but the par-
ticularity of the object of the analysis implies that the
auditor should select the most appropriate ones for the
circumstances of the regime under which these emissions
are measured, based on the valuation of errors risks in
these emissions reports. In the report, both the limited
scope and a reasonable insurance should include a sum-
mary of the procedures.
7. Carbon Reporting
The investors’ demands for information on sustainability
are growing. Within these demands, the one related to the
emissions of bodies is becoming stronger, having several
reasons for this interest, including:
Institutional investors, such as investment funds, that
are demanding this information to develop investment
strategies between companies with a certain sustain-
ability profile.
Certain international indexes such as the Dow Jones
Sustainability Indexes, Global 100, Best in Class,
among others, that specifically require such informa-
Some governments that require certain bodies to pub-
lish their emissions reports, as in the case of the state
of California, New South Wales or the UK [9].
Information on emissions can be issued in several
ways, among which we must highlight three. First, the
standards of the Global Reporting Initiative (GRI), under
which most sustainability reports are drafted. Under the
GRI, companies must report their emissions, although
they do not require a very thorough detail (GRI, 2006).
Copyright © 2013 SciRes. LCE
Climate Change Challenges to Accounting
A second mechanism in which major global corpora-
tions collaborate is the Carbon Disclosure Project (CDP),
promoted in the year 2000 by 35 institutional investors
that were aware of the risks that were not covered by
investments in sectors of higher environmental impact, as
well as the impact of new regulations, which could affect
profitability adversely. Th e number of members has con-
tinued to increase, reaching—in the last survey in 2012—
534 investors, with a total volume of assets of 64 trillion
The CDP questionnaire is completed by over 3000
companies worldwide. This questionnaire comprises 5
areas: risks and opportunities of climate change, account-
ing of GHG emissions, additional issues on GHG account-
ing, performance and corporate governance. Based on
these responses, the CDP has created the Carbon Disclo-
sure Leadership Index (CDLI).
There is now a third effort to improve and expand in-
formation on climate change provided by the companies
conducted by the Climate Disclosure Standards Board
(CDSB) [12], whose promoters include the CDP. Its aim
is to standardize information on climate change in com-
pany reports. Specifically, the proposal is to include this
information in the management report, based on the prin-
ciples issued by the accounting regulators (IASB) or re-
lated to sustainability (World Resources Institute, WRI,
World Business Council for Sustainable Development,
WBCSB, and International Organization for Standardiza-
tion, ISO). Their proposal of a conceptual framework is
still in a draft phase, but in its contents we can differenti-
1) Management commentary, including: a) strategies
developed by the company to reduce the impact of cli-
mate change on the company itself; b) main risks and op-
portunities for the business related to climate change; c)
corporate governance, understanding the decision-mak-
ing level within the organization and controlling the ac-
tions related to climate change; d) yield: presentation of
charts and graphs of all relevant indicators to judge the
impact on costs and benefits for the company of the set
of actions and their effects on climate change; e) regula-
tory regimes affecting the company.
2) Statement of Greenhouse Gas Emissions, which col-
lect emissions for different scope levels. For comparative
purposes, not only should it include the statement for the
year, but it should also the figures of the previous year
and the baseline data. To complement this, carbon inten-
sity indicators should be included (e.g. tone/€ of revenue),
for the year, the year prior and the baseline. These inven-
tories could be sup pl e mented wit h sect or a ve rages.
3) The Notes to the Greenhouse Gas Emissions State-
ment would provide an explanation to properly interpret
the inventory: a) information p olicy related to the invent-
tory: GHGs included, businesses/activities/geographical
area of the group, or tho se that are being measured or ex-
cluded, levels of scope and/or their limits, their conver-
sion factors and sources or standards, explanation of the
baseline, verification of the compensation and their sour-
ces; b) emission Inventory according to different sources
for each of the levels of the scope.
4) Independent Assurance Report: which expresses its
scope, that is, what inventory information has been veri-
fied, the purpose for which the audit report was prepared,
the standards that have been followed for the measure-
ment of the inventory, the audit process, limitations, and,
lastly, the auditor’s opinion on whether the inventory in-
formation fairly reflects the reality of the company’s
emissions. To do this, the standards that IAASB will is-
sue in the future should be considered.
8. Conclusions
Throughout this paper we have shown how the climate
change economy affects the external information pro-
vided by the company. For operations with carbon units
and the adaptation market, international law provides a
clear framework for accounting purposes, as we have dis-
cussed above. However, the most important matter of a
low-carbon economy remains pending, that is, the nature
and the accounting reflection of the carbon assets from
mitigation markets.
The IASB and the FASB should complete the project
related to the emissions markets. This regulation should
cover not only the classic carbon assets (EUAs and CER s) ,
but it should have a certain degree of abstraction that is
sufficient to consider the derived assets from any market,
both of a regulated and voluntary character. In any case,
the accounting treatment of emissions rights should be
based on th e entity’s business model and intended use of
the rights.
The academic world has an important role, supporting
the development of these standardization processes. Gi-
ven the variety of existing practices, it would be useful to
shed light, through research projects, on the most con-
venient practices for the decision-making processes of
the users. However, research in this area should not only
cover the standardization of financial information. As we
have seen above, the information on carbon inventories,
as well as the information regarding the risks and strate-
gies related to climate change, will be incorpo rated to the
information supplied by the bodies. Accounting profess-
sionals should also be partly responsible for what char-
acteristics this information should have, as well as to
where and how it is provided.
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