Accounting for Corporate Accountability: Pollution Allowances

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Introduction

Global warming, acid rain and smog are a few of the effects of atmospheric pollution brought about by the emission of greenhouse gases such as Sulphur Dioxide, carbon monoxide, carbon dioxide, and many more. To reduce this kind of pollution, nations such as the European Union member nations and the United States of America have come up with Emission Trading Schemes that ensure control and reduction in emission of pollutants in an economically effective way.

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The concept of Emissions Trade started in the 1960s though it remained technically dormant until after 1990 when a law under clean air emissions revived the Scheme. The approach of the new laws gave room for companies to buy pollution/emission allowances (also known as credits) which are produced at different places and therefore enable the company in question to emit pollutants to a certain level depending on the purchased credits.

Companies can acquire pollution allowances through purchasing it under the Emissions Trade Schemes, through government grants or buying from another company with a surplus. These pollution allowances are recorded in accounting books in varying ways by different companies depending on how they have been acquired and their intended purpose.

Pollution Allowances

Pollution allowances are credits that a government unit or an environmental regulatory body issues to a company allowing it to emit a quantified amount of affluence. Greenhouse gases are among the assorted pollutants that governments work hand in hand with the emissions trading programs to control. There exist many trading programs worldwide that aim at having these greenhouse gasses reduced. For instance, the “Environmental protection Agency, EPA, based in the United States solely issues credit cards for sulfur dioxide pollution” (Charlotte, 2007, p.3).

The Trading programs give pollution allowances or credits to companies indicating the amount of pollution that they are limited to emit annually. The issued credits can also be traded or sold depending on the emissions emitted. For instance, if a firm’s emission in a certain year is less than the credits awarded, it may sell its excess credits to another firm that has excess emissions (Stavins 2001). Some companies have their credits pensioned off thereby their net emissions are reduced at the occurrence of a trading period. Some of the local governing authorities have their tax deducted by pensioning off their allowances to nonprofit making organizations prematurely.

Participation is not only limited to companies that pollute the environment but also some environmental organizations buy and pension off their credits or allowances thus the prices of the remaining allowances escalate. A firm that exhausts all its pollution allowance, therefore, has to buy more from firms that have not exhausted theirs or end up getting a penalty for surpassing the limit of pollution permitted. This has a great impact on society in that it punishes the firms that pollutes excessively and rewards the firms that have low pollution (Kasey, 2009, p.6). Eventually, companies reduce the amount of greenhouse gas emissions in an effort to evade penalties of exceeding permitted allowances (the Columbia electronic encyclopedia, 2007).

The Emissions Trading Schemes can be perceived to be of great benefit globally. They play a great role in ensuring sustainable development by reducing pollution hence preservation of the environment. The Schemes have as well spread their wings so as to incorporate many more departments some of which include inspection, planning, operations and compliance among many more (Ragan and Stagliano 2007). This opens up more job opportunities to citizens.

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There has also been tremendous growth in the way trading schemes operate especially in the area of Information technology. For example, the establishment of ecoAsset manager software which is web-based used to monitor and support an organization’s range of ecoAssets and all the reviews within the management. It also guarantees that United States acid rain and European economic and political alliance programs are accounted for swiftly. With the software, handlers can be able to oversee the levels of emissions and supervise other activities within the trading program (Price Waterhouse Coopers, 2008).

If pollution allowances were issued at no cost, then firms would end up not reducing their emissions. This is because a firm that would greatly cut on its emission would end up being awarded less emission credits later. Auctioning of permits has therefore encouraged companies to reduce their emissions (Hepburn, 2006, p. 236).

In the past, big Mult -national companies in the EU member states were being issued with free pollution allowances for example the Cement and steel industries. This presented unfair competition to other smaller companies who had to purchase their permits. The purchasing of permits by all companies has therefore helped to defend internal firms from the unfair international competition (Hepburn, 2006, p.237).

However, the Emission trading Schemes are being criticized for the slow pace in reducing pollution since some companies don’t see the need to reduce emissions if they can afford to pay the fines for over emitting. Consequently, pollution continues to greatly affect the global climate negatively. Some trading Schemes issue a bonus to the heavy polluters as a reward for remarkably producing the highest amount of pollutants and paying the highest penalties in monetary terms, it therefore leads to uncertainty on whether a sustainable development will ever be attained as per Kyoto’s protocol on Clean Air Law.

However much trading schemes have reduced the amount of pollutants emissions, it can be perceived that more drastic measures should be taken by the trading schemes to reduce global warming (Price Waterhouse Coopers, 2008). This would require the society to restructure and come up with new technological measures that would have utmost fossil fuels and other emissions securely disposed beneath.

Trading schemes can be viewed as imperialism in that wealthy states get credits from incompetent firm’s projects while upholding their expenditure (Liverman, 2008, p.16). In addition, some countries ability to develop economically is inhibited in the sense that they have insufficient capital to manage to pay for the permits required in establishing a manufacturing industry.

Accounting for pollution allowances

“Interest in environmental accounting begun some time ago” (Mathews 1993, 1997 as cited in Mathews and Lockhart 2001, p.3) as a result of becoming aware that most companies accounted for only assets and liabilities that are internal to them and overlooked or even ignored external transactions between bodies or firms without any contract arrangements with (Mathew and Lockhart 2001, p. 3) like governments. Pollution or emission allowances are some of the new externalities that an industrial company will have to face in its operations. Whether donated by the government, purchased as a permit to pollute, purchased from a company with excesses allowance or held for future use, numerous studies believe that pollution allowances should be accounted for (Ragan and Stagliano 2007).

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It is believed that differently acquired pollution allowances should be treated differently in the books of accounts. In the past, the US government would issue pollution allowances free of charge to companies (Mathews and Lockhart 2001, p 6). These government pollution allowances according to Sanford (1996) should be recorded in the balance sheets of the companies as donated assets and once the allowances have been used to make up for pollution, their real value should be recorded as a production cost which at the end of the accounting year would be used to estimate the company’s pollution costs.

Ragan and Staglion, (2007, p. 8) in their study on the divergence between theory and practice, found out that different companies treat pollution permits or allowances differently in their balance sheets; some as traded assets, others as liabilities, others as long term intangibles and yet others as stock item. They however suggested that, pollution allowances given by the government should be accounted for as part of a company’s capital and for any allowances in excess for use in the future should be recorded for the true presentation of the financial reports.

According to the Price Waterhouse Coopers (2008) report on how companies can best prepare to manage carbon as an asset, emission allowances measure up the description of intangible assets. The reports argument will hold water in the US for the next couple of years since companies are allowed to buy emission allowances which can still be used in a future period. The definition may however not apply in the European Union nations where the Emissions Trade Schemes only allow emission allowances to be used only over the given compliance period.

Price Waterhouse Coopers (PWHC) agrees with companies that treat pollution allowances for future delivery as derivates as opposed to assets (Price Waterhouse Coopers, 2008). It further suggests that government donated allowances should be recorded at zero value which is what many companies in the US have been practicing over the years. This is a stand that many critics would not agree with.

As for the emission allowances bought by a company from another, the report suggested them to be recorded at fair value as financial assets, a move it however considers to cause instability or unpredictability in the company’s income statements. Nevertheless, due to lack of proper guidelines, some companies have decided to record emission allowances as inventory, a move that the Price Waterhouse Coopers doesn’t considers preferable but has to still put in consideration due to lack of formal proper classification. (P.15 -17)

The different emission schemes in the United States of America and Europe have come about through different approaches such as the laws and regulations. Consequently, in the accounting of such allowance, different approaches have also been used. According to Deloitte Touche (2007) report, the way forward on how to treat emission allowances in accounting books is lacking since the withdrawal of the IFRIC3 (International Financial Reporting Standards) in 2005 by the IASB I(International Accounting Standards Board).

The IFRIC3 guidelines concerning emission allowances was; to record as assets allowances retained for use in the future, as a grants those that have been donated by the government and as liability those allowances that are yet to be delivered yet emissions have already occurred (Epstein, 1996).

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Therefore, IFRIC3 had deduced that all types of emission allowances, whether bought by a company, a government grant or bought from a company with excess, need to be recorded in the books of account of the company as intangible assets.

Conclusion

Pollution allowances, also referred to as emission allowances, came up as innovative and economically motivating approach for reducing atmospheric pollution. Companies that are able to keep their pollution below the maximum permitted level are able to save their allowance for use in a future period. They also have an option of selling their surplus allowance for profits to other companies. Companies try to keep their emissions low so as avoid being penalized for exceeding the allocated allowance. Therefore, pollution allowances and other emission schemes have generally enabled steady reduction in pollution (Price Waterhouse Coopers, 2008).

Since acquiring a mission allowances involves either purchasing or receiving it as a grant from the government or a regulatory body both of which involve accounting transactions, it is important to have them recorded in accounting books. There exist many different and acceptable suggestions on accounting for pollution allowances. This in turn brings about potentially different accounts on the financial statement of companies depending on the accounting approach used. Though the alerts are worldwide accepted guideline on how emission allowances should be accounted for, all companies need to adopt an accounting principle which is not only best for them but also accommodative to other market players and shareholders.

References

Charlotte W. (2007). Accounting For Emission Allowances. Journal of petroleum Accounting and financial Management, (April), p. 2-26.

Deloitte Touche (2007). Accounting for Emission Rights. Web.

Epstein, M.J., (1996). Measuring Corporate Environmental Performance. San Francisco: IMA/McGraw Hill.

Hepburn, C. (2006). Regulating by prices, quantities or both: an update and an overview. Oxford Review of economic Policy 22 (2), p 226-247.

Price Waterhouse Coopers (2008), How your company can prepare to manage carbon as an asset. Web.

Kasey P. (2009). EPA Moves to Regulate Greenhouse Gas Emissions. The state Journal: p. 5-12.

Liverman, D.M. (2008). Conservations of climate change: construction of danger and dispossession of the atmosphere. Journal of Historical Geography: 35(279) p.15-17.

The Columbia Electronic Encyclopedia (2007), 6th ed. Colombia: Colombia University Press.

Ragan, M. and Stagliano (2007). Cap and Trade Allowance Accounting: a divergency between theory and practice, Journal of Business Economics, Saint Joseph’s University.

Stavins, R. (2001). Experience with market-based environmental policy instruments. Accounting Auditing and Accountability Journal,13(1), 27-64.

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