To reduce emissions of pollutants and to transition to a greener economy, governments and other bodies globally are introducing various measures.
- Some measures set mandatory targets – e.g. for reducing CO2 emissions or producing greener assets.
- Others incentivise a voluntary shift to greener sources of energy and investment in green initiatives as part of climate-related strategies.
Therefore, the number and the variety of emissions and green schemes has increased significantly, which has increased the number and the complexity of related financial reporting issues.
There is no single IFRS accounting standard that addresses the accounting for emissions and green schemes. The accounting and financial reporting considerations depend on the company’s role. That role may differ depending on the arrangement.
Polluting company
Polluting company
Subject to mandatory targets under an emissions scheme or voluntarily sets targets and purchases carbon credits – e.g. as part of its net-zero plan.
Green company
Green company
Generates carbon credits by undertaking green projects and sells them to third parties.
Intermediary
Intermediary
Buys carbon credits from green companies and sells them to polluting companies.
Investor
Investor
Invests in green projects for returns, including in the form of carbon credits.
Carbon credits vs emissions allowances – Defining the terms
A common feature of mandatory emissions schemes and voluntary green initiatives is the use of either carbon credits or emissions allowances1 as a mechanism to monitor and manage the transition to a greener economy.
- Carbon credits2 are often issued by a carbon crediting programme and represent an emissions reduction or removal of greenhouse gases (e.g. CO2).
- Emissions allowances are often used under mandatory emissions schemes (e.g. ‘cap and trade’) and can be granted by the government to a polluting company for use during a compliance period.
Telling a clear and connected story about emissions and green schemes
Investors and regulators demand clarity on climate-related matters in companies’ reports, including the impact of emissions and green schemes. You need to provide relevant and transparent disclosures to enable investors and regulators to understand your financial statements.
Also, to tell a connected story, you need to provide a coherent, connected and integrated picture across your financial statements, management discussion and analysis (MD&A) and sustainability-related disclosures.
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1 Different terms may be used to refer to similar items – e.g. carbon credits, carbon offsets, offset credits, renewable energy credits or certificates (RECs), emissions permits or allowances, certified emissions reductions (CERs), environmental credits. Also, different sustainability reporting frameworks may define such terms differently. These FAQs use the term ‘emissions allowances’ to refer to items received from the government under a mandatory emissions scheme. In all other cases, they use the term ‘carbon credits’.
2 The KPMG in the US publication GHG emissions reporting handbook provides an in-depth discussion of offset credits in the context of the sustainability reporting.
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