Carbon Credit and Accounting Policy
Abstract ::
In 1996 the Kyoto Protocol established a global policy in 1996 with aim of reducing Green House Gas (GHG) emissions. As a result slow and steady steps are being taken to implement carbon emission limits. Markets are established to exchange carbon allowances among various companies. Turning the environment, a public good, into private property presents many economic challenges. This paper examines the implications of the policy direction established in the Kyoto accord. Several needed changes to corporate accounting policy are recommended. The expected benefit is that socially responsible professionals will prepare their institutions cost and financial accounting systems to encourage success as carbon emissions become more regulated. Therefore, it can be advocated for three categories of response by professional accountants: (i). Inclusion of carbon gas emission markets in the capital budgeting process (ii).Reporting environmental impacts in financial reports (iii).Advocating for the most efficient regulatory approach for each sector of the economy. Accountants that respond in these ways will contribute to the competitive advantage of their firms and society. The first step is to consider future costs in capital budgeting models. A carbon credit market based on output permits is costly to implement.
INTRODUCTION ::
Financial reporting is an important social activity. The existing form of accounting reports and the standards used to prepare them reflect business results. Over time accounting reports and what they contain have changed and will continue to change. Concern for the environment protection has reached the point of real proposals for action in the political arena. Environmental awareness within the management community is reflected in frequent coverage of sustainability and environmental responsibility in management oriented publications. These social developments create a need for financial information. If the trend towards increased corporate responsibility for environmental impacts continues then accounting practice will ultimately reflect this.
The efforts have been made in this paper to examine the impact of global warming on accounting policy. For this, it is useful to understand the environment in economic terms. It is difficult to turn a public resource into a private resource. Market driven solutions have proved that economic theories are difficult to implement. In recent times, politically motivated regulation regarding the environment is increasing. As environmental impacts are privatized a whole new class of assets and liabilities will emerge. The main aim of this paper is to examine how these items fit into the present financial reporting practices. Accounting policy that reflects the impact of environment will ensure the relevance of accounting for evaluating corporate performance.
Opportunity for success is created by changes. Companies which adopt the new regulations of environmental impacts will become relatively more competitive. Implementing a green strategy too early is foolish from a stockholder perspective. It is equally foolish to do nothing and plan to invest in a green strategy once regulation comes enforce. Until quarterly financial reports reflect environmental assets and liabilities a portion of the investment community will continue to treat the environment as a public relations issue. This paper suggests ways that accountants and accounting systems can be modified to contribute to corporate preparedness. It is useful to review, why the people collectively tolerate environmental degradation? There is a rational explanation for the declining situation. Public property and services benefit all members of society and a private price cannot be determined for such things. Decisions about public properties are therefore political since there is no private market mechanism to regulate them.
The best way to respond to environmental degradation is market solution. Those that have a deep faith in private markets have to be especially careful. The present environmental situation provides a rationale for ongoing economic education. The environment is a political problem as the number of carbon emissions is not a private property. Controversy and conflict over how to proceed are an integral part of the political process. Human activity creates a stress on the environment. An individual may not be aware of, or even able to compute, the costs of his decision to the whole community. It is hard and expensive to get that kind of information. The environment may be thought of as a global commons.
In present times, the increasing number of countries and individuals becoming sensitive to the costs associated with global warning. This would be the equivalent of some shepherds noticing that the quality of the pasture is declining. Some may seek to redress the situation before the commons collapses and there is much less for everyone.
That will only cause frustration because individual incentives do not support their diligence. In this context carbon credits are a rational way to turn a public property into a private property. Everyone does not have to understand global warming for the mechanism to work. The external costs of individual actions are incorporated into individual decisions regardless of political affiliation or private beliefs. Unless there is some other unforeseen development that diminishes the desire to produce more carbon than the planet can absorb, the carbon market has a high probability of developing into an important economic reality.
There is an international dimension to this problem since air and water move freely around the planet. Purely domestic actions can be ineffective because some sectors will face overriding international mechanisms. Consider the case of the International Civil Aviation Organization has significant power in terms of regulating international flights. In conjunction with this, the European Parliament will impose an emissions trading scheme on all carriers in the near future. In addition, they will apply pan-national regulation on aircraft entering Europe that require set emission standards per passenger to be reached and heavy taxes to drive out unacceptable equipment. These developments will cause airlines to dump functional but polluting aircraft into unregulated domestic markets.
Accountants have the benefit of economic education as well as practical experience concerning the operation of market and other regulatory mechanisms. Accounting professionals may find discussions about public goods difficult. They believe in private markets. Most economic activity fits into this category. The environment, national defence, and public infrastructure do not. There is no way, except through government and taxation, to ensure this good is provided to a level that maximizes societies benefit.
The government is the correct place for this discourse. Accounting professionals can reduce the business angst by making statements about the environment within the paradigm of public goods. The societal risk is too high to simply wait for the environmental equivalent of a stock market crash to address the need for regulation. Forward thinking professionals cannot allow free riding citizens, companies, or countries to drag into a crisis. Public action can cause the environmental costs of carbon emissions to be internalized by everyone. The free rider advantage has to be taken away. Accountants can help business leaders make a contribution to policy formulation by turning their energy into creating effective markets and practical disclosure requirements.
MARKET SOLUTIONS ::
Many business leaders believe that market mechanisms will address environmental issues. Comments about the kind of market forces which will be effective would provide meaningful leadership. There are four different market models under consideration. All four could create a better environment. Almost none of us operate in a perfectly competitive market and so it is foolish to pretend that we do when commenting on market mechanisms. Accountants can contribute to the discussion by ensuring the business community is informed about how each model will be reflected in business systems and financial reports. Until these considerations are made businesses cannot determine where their opportunities lie. Each alternative utilizes a different economic mechanism.
The first model involves use of fees on polluting inputs. This is done by laving fees on low efficiency SUVs and taxes added to the price of automotive gasoline. By making the input more expensive, efforts are made to shift demand to the available substitutes. In presents times, availability of CNG Cars substituting Petrol cars. In this model, carbon generating activities continue for by those most willing to pay the price or where no substitutes are readily available.
The second model involves a system of quotas. This approach is used in many industries to provide limited protection for competition. In the energy, especially for Coke and Natural Gas a form of quota in place due to shortage of supply. This causes prices to climb and consumers to seek substitutes as prices climb. Quotas could form the basis of a carbon credit market. Based on current uses, consumers and companies are awarded a quota. Those that want more capacity would then have to bid credits away from others. Those with the easiest opportunities for carbon emission reduction would benefit in this case. They can sell their savings to companies with less opportunity. Companies with the easiest opportunities to reduce carbon emissions would profit by responding to the opportunity to sell the carbon savings they create.
A third market model focuses on output efficiencies instead of monitoring inputs. This model establishes a baseline of carbon use per unit of production. Permits for a quantity of CO2 emissions are granted for a period of time that reflects a specific carbon allowance in relation to actual output. These permits are typically granted for periods of 3-5 years. Once the permit period has elapsed, fresh standards would be imposed for the new permit. This model facilitates growth and allows an enlightened regulator to motivate improvements in the context of new technology or market conditions. Progressive reduction of the carbon allowance for electric production would accelerate the demise of high polluting plants and therefore create incentives for new plant construction.
A fourth model is the market for carbon offsets. It is socially popular to state that you made a trip “carbon neutral” by planting the number of trees needed to absorb that carbon caused by a trip. At a corporate level a company would be required to invest in projects that reduce their carbon “footprint.” This model will require careful regulation to ensure legitimate and verifiable measurement of carbon use and carbon offsets. Agricultural projects can reduce the amount of carbon in the atmosphere. Investment in those projects could create new carbon credits for firms. Obviously a market mechanism to sell the created carbon offset allowance will be an incentive to launch such projects. There is a real risk that such an allowance will eliminate the need for real change as market players find ways to bring existing (as opposed to new) activities into the market as offsets.
It is a common misunderstanding that the quota system is what public leaders mean when they talk about establishing carbon limits through markets. This perception is wrong. The current approach favours a baseline-and-credit method for establishing a Green House Gas (GHG) emissions trading market over a cap-and-trade method in several ways. The most important significance of this for business is that a total emissions ceiling is not under consideration. Allowable levels of carbon emission refer to emissions per unit of production. The Kyoto Protocol therefore supports a growth model that assumes total emissions will go down because efficiency gains will outpace the carbon inputs associated with new production.
The implications of this approach must be understood and cry out for industry comment. Consider the application to a firm producing power at a coal-fired facility. The permit would establish the amount of carbon dioxide emitted per megawatt produced for a coal-fired generating facility. The firm may buy or sell credits in order to achieve the baseline figure. The regulating agency would then periodically adjust the rate of emissions to suit economic circumstances and force implementation of new technology generating a lower emissions state. This approach to allocating emission credits requires a huge number of baseline values that are applied to the multitude of industrial sectors. This approach will give governments a great deal of control over regional and country-wide emission profiles. One can easily speculate that this, the favoured approach, will necessitate many legions of regulators and windfall profits to those individuals and management firms with scientific skills.
Some industrial resistance is understandable in context of the work involved. This is only adding to public angst that is evident in outbreaks of market activism. The setting up a Cement Factory in Bhavnagar by Nirma Company is being opposed by local people and farmers under the leadership of Dr. Kanubhai Kalsariya, sitting MLA. Because of this there is delay in starting business by this unit. The lesson of this case points to the need for accountants to be aware of the environment and to be taking steps to avoid disruptive business events.
An additional consideration is carbon shifting. If in our country raises its costs by reducing carbon emissions it could hurt the economy by shifting jobs to countries that do not. So discussion about the carbon market has created an international macro-economic discussion about green accounting. Green accounting is about governmental economic accounts and not the financial books of companies and government entities. Green accounting means national accounts would include environmental costs in public accounts. In this system, countries like the U.S. would suddenly show huge trade deficits associated with their high carbon outputs. Governments have been actively discussing green accounting in the Doha round of trade talks. It is foreseeable that the United Nations could create an international carbon market that would see the United States paying huge sums to other nations in order to maintain its disproportionate use of global emissions capacity.
In conclusion it is important to specify what market mechanism is under consideration. It is best for everyone if dramatic change can be averted. The easiest and therefore most predictable approach to creating a market mechanism to reduce carbon emissions is to look at what we already have in place. Staying abreast of the regional approaches to carbon trading is therefore a way to gain insight as to what is likely to happen as the situation becomes more urgent.
WHAT ARE WE PREPARING FOR?
Political agenda of countries around the world reflect the broad base of concern regarding global environmental degradation. The Kyoto Protocol of 1996 was a huge step towards worldwide regulation of the environment. Many countries have ratified the protocol and are now taking limited steps to achieve their commitments. The resulting patchwork of political, industrial, and individual efforts to become more environmentally neutral is nonetheless very significant. This leaves management in an awkward position. Companies know that environmental degradation is not going to end on its own. It is difficult for managers to understand what strategies can be effective when the public policy responses are not known. Without clear direction the incentives will appear to favour those that do not adopt costly green strategies.
The headline change in response to environmental degradation is emissions reduction. The leading idea with regard to reducing emissions is to create a limit on carbon gas production. By making CO2 inputs more expensive, innovation will be encouraged and the market will shift to other alternatives. This concept was imbedded in the Kyoto protocol. The development of a serious carbon trading business in Europe can give US businesses insight into how they should prepare.
The number of political proposals for carbon regulation indicates that a critical mass of support for substantial change is approaching. Congress is working at the committee level on the Lieberman-Warner Climate Security Act which has passed the first of several congressional committee votes. According to Sawa, Japan is heeding the call to maintain leadership with its legislative agenda. Europe is refining its systems to allow for a specific push towards environmental efficiency around 2011. Business leaders’ and accountants should realize that significant regulation is near. Exportation does not address the global problem that will require global regulation.
There is also evidence that the appetite for radical change is growing at the grass roots level. In India, all vehicles are required to have PUC certificate compulsory which is moving toward a tight standard for CO2 emissions. Wal-Mart responds by establishing a “live better” index. This index communicates to customers the greenness of their choices. There has been a 20% adoption rate amongst Wal-Mart customers according to Campbell (2007). While some consumers will always resist, on principle or by necessity, a higher cost environmentally responsible option, these developments become evidence of consumer support for radical change.
The accounting profession was also thinking about the environment in the time leading up to the Kyoto Protocol. Epstein (1996) wrote a book on the associated issues of environmental reporting. Another example of professional attention at the time was Milne (1996) who highlighted the impact, amongst other factors, of accounting practices that do not include an enlightened understanding of sustainability costs in the management accounting practices used in decision making processes. Accounting is a social practice and it reflects the values of the financial community unless pushed to a broader perspective. Unless there is a legal obligation to record the cost of environmental degradation caused by a firms operations they are unlikely to be recorded. Until there is enough social pressure to change, corporate accounting financial reports will understate a serious long term liability related to preserving the environment. The externality is not reported. There is a significant risk of ugly impacts on net income and balance sheets of companies that ignore environmental liabilities they do not currently need to report.
Regulatory proposals to manage CO2 emissions are more than social or political indulgences. Some will under estimate the issue by adopting that mindset. The Central-State government is already imposing controls in the form of permission from Environmental Ministry. As a result, businesses that have adopted environmental protection policy already understand the competitive opportunity environmental regulation brings.
A whole world of opportunity can be identified if accepted that capping CO2 emissions by governments is necessary and inevitable. This position leads to effective preparation rather than denial. Understanding the basic intent and workings of the Kyoto Protocol is essential. This is the context within which nations are designing cap-and-trade markets. There is also much to be learned by studying the experiences of industries in countries that are further along the road to Kyoto compliance. This is a time for forward thinking. Accountants work with managerial decision-making processes that impact investments everyday so they can offer ideas about how to most effectively get firms and industries to internalize the costs of carbon emissions. As a result accountants that become informed are in a unique position to comment on the implementation issues associated with each of the models under consideration.
The US government decided to excuse itself from signing the Kyoto Accord. White House officials have since said that they would like to see a market-based solution for GHG emissions reduction. The absence of a formal commitment to reduce GHG emissions has not been a barrier to the establishment of a trading market. The market in the US is developing some unique features.
The Calgary-based power generation and wholesale marketing company has been actively reducing GHG emissions since the early 1990’s. At various points they have found themselves assuming the role of either credit buyer or seller. The concern is evident in the sustainability section of their annual reports for 1999-2006. A large GHG emitter like Transalta is typically a buyer of carbon credits. Transalta was involved in the first exchange-based trade of GHG emissions reductions in 1999, but in most cases their purchases have come through the financial support of an emissions offset project. Transalta stopped detailing individual transactions in 2002 for reasons of confidentiality. This apparently recognizes that the costs associated with this activity outweigh the public relations benefit derived from their diligence. Now of the credits as assets or liabilities were visible on their balance sheets. Even though they have been trading credits since 1990 they have yet to show the related assets and liabilities on their financial statements. So on top of the difficulties of creating a market for a public property it can be seen that the accounting profession is not addressing these new instruments when they do exist. It is therefore important to consider the absence of financial accounting disclosure when formulating opportunities for profit.
CORPORATE ACCOUNTING AND THE ENVIRONMENT ::
Accounting plays a crucial role in determining what matters. Until it is measured and reported on in financial statements an economic development will rarely receive much attention. Accountants take a great deal of pride in the principles that form the basis of a profession that is best understood as a social science. The profession has a well developed sense of social responsibility. A responsible profession does not need a disaster to generate change. Why then, is the accounting process complicit in the decision to not record important environmental costs? The answer lies in basic accounting principles and points to an opportunity for a fresh interpretation of them. Accounting evaluates processes by a hierarchy of principles that set out highly valued, qualitative characteristics of accounting information. These characteristics require fresh attention in light of the environmental issues society is facing. It is useful to widen the definition of useful information so that the accounting process internalizes more environmental cost information.
The overriding qualitative characteristic of accounting information is decision usefulness. Accounting practice can contribute to the development of environmental markets. The impact of environmental degradation on economic activity needs a higher priority in the accounting profession. Environmental costs that are foreseeable if current trends continue need consideration if financial reports are to have decision usefulness; Application of the components will change as more accountants understand the situation.
Reliability is one of the primary characteristics of useful information. Accountants view reliability in terms of specific components. One such component is that information must be verifiable. This places a great strain on the market mechanism for carbon credits. If our governments proceed with the output-licensing model, there will be huge difficulties with verification of carbon credit reductions. The implementation of the proposed market, in light of this component, merits deep consideration.
There are two necessary steps for carbon emissions and reductions to be certified. Certification is needed so that the resulting credits are recognized and may be legitimately traded. One has to know what a legitimate credit is and there has to be a method for accreditation by an independent party. Certification is necessary since a carbon credit is not a deliverable commodity. The value of this intangible asset exists because of trust that buyers place in the system. The success and survival of the system is thus predicated on the credit-worthiness of emissions reductions. At the present time, the profession has gone a long way towards denying the existence of intangible assets and will have a great deal of trouble recognizing companies that are creating them.
Carbon credits are created when GHG emissions are reduced below some business-as-usual baseline. This baseline allowance is set by governing bodies. The basic requirements are that emission reductions are measurable and last at least five years. The potential agency problem is addressed through the mandatory use of independent third parties to verify that emission reductions are real. This will create a large demand for professionals that can provide this attestation service. These transaction costs are not emphasized in discussion about which regulatory model to adopt.
The verifiability problem has not been ignored by the environmental activists. An independent third party carries out the function of verifying, monitoring, and certifying emissions reductions. The oversight body will only recognize emissions reductions certified by one of its accredited auditors. The qualifications to become a certified emissions auditor are not onerous. The auditing party must demonstrate technical expertise of certification criteria, possess strong internal systems and controls, and have the financial resources and liability insurance in place to carry out its duties. Periodic spot checks of the auditors are routinely carried out by the accreditation body in order to ensure ongoing compliance with existing standards. The possibility of errors and malfeasance are obvious. Market shocks due to verification failures will occur. The verification of carbon credits is therefore a difficult issue. It is likely the profession will not allow companies to record the value of carbon credits they have created until they are sold. Another likely response will be to exclude the liability associated with the need to purchase carbon credits or invest improvements to meet standards each time the output measure changes. In both cases, the professions response results in understating reality and therefore dimming corporate response and market awareness. Continuing to uphold the current strict interpretation of a verifiability standard will hinder the professions support of environmental activism.
Objectivity is another component that is used to evaluate the reliability of information. The most evident outcome of this value is the historic cost principle. One application of this principle has been the elimination of asset write-ups. Under no circumstances may professional judgment be exercised and an unrealized gain on long term assets be realized. Unrealized gains on long term liabilities do not get recorded until they are realized. Managerial efforts that create carbon savings or reduce future environmental costs are not recorded until they are realized. Firms that are proactive about generating carbon assets will find that their associated assets and liabilities, as shown in their financial statement, will understate their real situation. The effect is to dim our attention to environmental action and perhaps reward inaction in the short term. Items that are in the management report have less impact when they do not tie into specific entries on the income statement.
The context of output productivity is critical with reference to a discussion of objectivity. Companies that invest in research and technologies to increase their output efficiency will be creating significant reductions in their need to buy carbon credits. They may also be creating a significant asset consisting of surplus credits that can be sold. A carbon market will create an objective current value for these positive steps. Since the objective of creating the market is to make companies more responsive the financial impact needs to be stressed. Without a change in accounting practice, the profession will again dull the disclosure and responsiveness of financial markets to companies that are taking action. Accountants will help their firms by supporting initiatives that will transform the reliability principle. Accountants that can find ways to adapt accounting practices that value environmental action will increase the positive rewards available to their firms.
The second primary quality of useful information is relevance. Relevance is interpreted in terms of specific information components. Information is relevant when it has predictive value, is timely, and provides feedback to the stockholders. Unfortunately relevance is interpreted in the narrow sense of management stewardship of the funds entrusted to it by stockholders and creditors. In that context, the societal concern for our environmental commons is just that, context. Relevance is therefore the poor cousin to reliability when it comes to determining what useful information is. If the profession is to be supportive of public concern about the environment, this interpretation will have to be changed. If accountants can see the stockholder as an investor and as a member of society facing a mounting environmental cost, then this situation can change. Regulation is likely to make future environmental costs relevant but the profession can initiate this change on its own.
THE ENVIRONMENT AND FINANCIAL ACCOUNTING CULTURE ::
Accounting is more art than science. It is a reflection of our prevalent culture. As long as we realize accounting is a powerful social tool it can play a role in leading cultural change. There are many examples within the accounting literature that encourage optimism regarding the role of accounting. One aspect of this discussion is the conflict within the profession regarding current value accounting in the move to adopt globally harmonized accounting standards (IFRS). There is a push to have all assets and liabilities “marked to market” more frequently. This debate is caused by the push to harmonize accounting standards around the world. Recording the environmental impacts quickly will result in immediate reporting of unrealized gains and losses. It is not hard to see why society will argue that accounting reports will be more predictive and therefore relevant, should a change in how we evaluate relevance is made.
The reference to art is important. Every self regulating profession is imbued with the dominant culture that surrounds it. Therefore, a final and important consideration in this discussion is the inclusion of environmental studies in the process of educating accountants. The education process changes slowly to protect past wisdom from fads. Fleischman and Schule have rightly noted that, “The profession needs to ensure that it adjusts for past failures. While the education requirements for entry into the accounting profession, the pro-activity of government in promoting environmental awareness, and the acceptability of environmental research on the part of accounting faculty vary widely between the US and the world at large, the end result is, unfortunately, the same. Accounting education has not successfully communicated the message to students entering the profession, either as public or managerial accountants, which environmentalism is an ethical issue which requires them to consider the interface between the public interest and the well-being of the client/stockholders they serve. Moreover, in the event that accounting professionals become more involved with environmental reporting, it will be necessary for the higher education system to begin processes of creating a greater awareness of the issues and the additional expertise that may be required.”
Every accounting educator can do their part by extending every aspect of the curriculum to include consideration of the impact of accounting on business, the economy, and society. The author has become increasingly concerned with how easy it has been to pass off the social context of accounting to others because there is so much technical content to cover. There was a point at which recording the coal usage and keeping good inventory was irrelevant. The process was no doubt comforting and purposeful in the short run. The environmental agenda will face a serious headwind until the language of business reflects our new societal value of environmental preservation.
Accounting is the language of business. That language can include the environment. Until accountants embrace the importance of environmental issues the financial part annual reports will understate social reality. In other words, accountants will be contributing to the understatement of the private costs associated with the damaging level of use to the commons. Accounting will be an excellent vehicle for discourse about reporting, auditing, and recording issues associated with the proposed solutions to the environmental crisis. This is the basis of our opportunity to help firms be ready to profit from the changes that lie ahead. Accounting can provide useful information for the strategic decisions faced by investors when it comes to evaluating a firm’s position in a society where the costs of environmental degradation are low but rapidly increasing.
PROFIT FROM ACCOUNTING POLICY INITIATIVES ::
This research has considered how unreasonable and irresponsible it is for business leaders to accept a simple statement advocating a market solution to address environmental degradation. Society needs responsible discourse that takes into account efficient economic solutions. Accountants that have a deeper understanding of the economic and political situation can contribute to their employers and society more effectively. The society will gain if the environmental agenda includes the concerned voice of accountants. As a profession, there is a great deal to be considered and studied that is missed with simplistic statements that market solutions are best. The language of business can incorporate societies need to elevate environmental issues, now that we are reaching the practical capacity of this public good. It is time for this to be treated as a professional responsibility.
The Kyoto accord left countries a great deal of flexibility with regards to the mechanisms they would use to comply with treaty obligations. Even though there is flexibility, the discussion has focused on trading carbon credits based on quota’s and productivity scales. These public policy responses will be extremely difficult to incorporate into accounting policy. The accounting profession has to respond with more than a recommendation to added sustainability as a measure in the balanced scorecard. Therefore, it can be advocated for three categories of response by professional accountants: (i). Inclusion of carbon gas emission markets in the capital budgeting process (ii). Reporting environmental impacts in financial reports (iii). Advocating for the most efficient regulatory approach for each sector of the economy. Accountants that respond in these ways will contribute to the competitive advantage of their firms and society. The first step is to consider future costs in capital budgeting models. A carbon credit market based on output permits is costly to implement. Many businesses can expect that the cost of this will be higher than an input tax such as the one we have on gasoline now. Since one cannot assure a change in policy direction, it is prudent to make investments with the output mechanism in mind. Retrofitting existing systems and processes to record emissions is expensive and disruptive. Firms that build in such capacity now, create a competitive advantage in the future. Costs of training are also likely to sky-rocket. Firms that establish relevant training now will compound their cost advantage. The return on these investments will be a great benefit to the stockholders. This is no more than good risk assessment. Enlightened accountants will look for and emphasize these preparatory investments when they are evaluating capital budget proposals and participate in setting budgetary priorities.
The second opportunity is to report environmental assets and liabilities on the balance sheet now. There is a long learning curve required to incorporate carbon credits into the reporting process. Firms can develop experience with carbon assets by preparing procedures for determining market values and disclosing unrealized gains or losses on a pro-forma basis. They can also implement processes to collect and disclose carbon emissions much like those we have for disclosing future lease and debt payments. This disclosure will increase awareness of future costs and create stockholder confidence in firms that can give a clear accounting. Reporting on carbon offset projects, as we now report on research and development pipelines, form a third opportunity. The market will be able to value the firms’ ability to create marketable credits in relation to their competition. In every case, a proactive accounting policy enhances the ability of management to see tangible benefits from environmental investments. Every time regulation is increased firms that employ enlightened accounting processes will be rewarded by a market that can assess their readiness.
A third opportunity for accounting professionals is to advocate for effective regulation. Those that are forming public policy are in a difficult position. They have a duty to take action and deal with a population of voters that do not appreciate the cost of accelerating environmental degradation. When accountants label all regulation as undesirable they miss an opportunity for considerable economic gain. Firms can gain a competitive information advantage when they involve themselves in the process. A model that regulates output efficiency will cause high implementation costs on some sectors. Firms could create a sectoral trade advantage by supporting and endorsing regulation that is less costly.
CONCLUSION ::
This paper has examined how the perception regarding carbon credits can be misleading. Deeper understanding of the issue and the structural problems associated with societal decision-making regarding public properties are needed. Accountants can heighten corporate discussions through broadening their firm’s capital budgeting criteria, developing relevant, forward looking financial systems, and advocating for economically efficient regulation. There is no need for accountants to passively react to the growing problem of environmental degradation. This paper has explored the way accountants can contribute to their firms by fulfilling their professional role in society.
There is a moral hazard for professional accountants. An accountant could identify their effort as small and inconsequential compared to the political and scientific influences within the environmental discourse. That thought could be used as a rationale for not taking action. Taking comfort in that rationale does not fully reflect the pervasive impact of accounting policy has as the language of business. Accountants do play a role in shaping responsible public policy as member of the business community. Their employers and clients will benefit from being able to avoid a crisis caused by lack of preparation if the accounting community takes action. Efforts have been made to examine the passive role of the accounting community. The financial impacts of environmental degradation are far more significant. Attention to accounting policy regarding carbon credits can be the professions positive contribution the societal discourse about environmental degradation!
REFERENCES :
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Dr. Shaileshkumar J. Parmar
Professor,
Department of Commerce & Business Administration,
Saurashtra University, Rajkot (Gujarat)
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