Opening the black box of accounting for Greenhouse Gas Emissions: The different views of institutional bodies and firms

This paper highlights the current accounting approaches to greenhouse gas (GHG) emissions. In particular, it explores and critically discusses the treatment of emission rights (ER) under carbon trading schemes from two distinct angles. On the one hand, it reviews the domestic solutions adopted by accounting bodies and, on the other, it examines current practices followed by firms in the European Energy Exchange (EEX). Regarding the former group, there are substantial differences, which would suggest some potential difficulties in finding a common solution for the future. Not surprisingly, there is still a diversity of approaches with regard to how firms report ER. Although the most common practice is not to include free ER in the main financial statements, the proportion of firms that recognize both ER and liabilities is larger than in prior studies (Warwick and Ng, 2012; Lovell et al., 2010; Ascui and Lovell, 2012; Black, 2013). Leaving aside sample differences, the new auctioning system introduced by Phase 3 of the European Emission Trading Scheme (EU ETS) may have affected firm behavior. Furthermore, it is also worth pointing out the decrease in non-disclosure. Interestingly, we show that local accounting rules on ER issued by EU bodies do not generally affect corporate financial reporting. To the extent this study updates the knowledge about current institutional developments and company practices on ER, it could help the International Accounting Standard Board (IASB) to develop a standard.