Thursday, June 18, 2009

Cap and Trade: More Impact on Accountants than You May Realize

Intentions of the Obama Administration to reduce pollutants, perhaps through a "cap and trade" tax as well as international meetings on carbon in Copenhagen later this year and the Western Climate Initiative creates a need for businesses (and accountants) to better understand the ramifications of costing carbon-based pollutants. Some specific issues which deserve consideration: increased costs of high pollutant levels (can this be passed on to customers?), integrating "carbon costs" into business strategies (potentially including use of tax incentives to reduce carbon emissions), understanding and assessing risks (examples include price risk, credit risk and regulatory risk), impact on capital budgeting (including purchases of fuel), usage of hedges and carbon offset futures, choice of accounting policies and disclosure of "carbon costs," tax impact of accounting choices well and deductibility of emission taxes, valuation of carbon "assets" (such as options to purchase carbon credits) and risk of fraudulent reporting of carbon costs and "carbon assets and liabilities."

I am aware that with XBRL, IFRS convergence and "mark to market" that accountants need another complicating responsibility like they need a hole in the head, but Obama definitely is pushing for green initiatives and the long-term question here is more likely to be how quickly an accounting scheme can be developed and whether disclosure will on financial statements or in notes rather than whether disclosure will be required. Looks like there is opportunity for tenure-track faculty in accounting to get some publications and presentations by working on systems for reporting costs of pollutants and incorporating these approaches into an accounting model. Perhaps the ISO 14000 series may be of value here.


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