In 2004, the IASB attempted to address the accounting for emissions credits and allowances in International Financial Reporting Interpretations Committee (IFRIC) and issued IFRIC 3, Emissions Rights (IFRIC 3). IFRIC 3 required GHG emissions and credits to be classified as intangible assets and recorded at fair value regardless of whether the credit or allowance was purchased or issued. However, IFRIC 3 was met with significant resistance from the accounting community who cited that it resulted in a mismatch between assets and liabilities. The mismatch occurred because the credits received would be recognized when obtained and the liabilities would be recognized as it is incurred. The standard was later withdrawn by the IASB in 2005.
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“Instead, the Acid Rain Program introduces an allowance trading system that harnesses the incentives of the free market to reduce pollution” (EPA, 2011). Under the system, each source must continuously measure and record its emissions of SO2, NOx, and CO2, as well as heat input, volumetric flow, and opacity using in most cases a continuous emission monitoring (CEM) system and report hourly emissions data to the EPA on a quarterly basis. Similar to the EU-ETS, any source that exceeds emissions over the allowances held will be fined and violating utilities must offset the excess emissions with allowances in an amount equivalent to the excess.
The NOx Budget Trading Program (NBP) was a market-based cap and trade program created to reduce the emissions of nitrogen oxides from power plants in the eastern U.S during the warm summer months, when ozone concentrations are highest. While the EPA administers the trading program, states share responsibility with the EPA by allocating allowances, inspecting and auditing sources, and enforcing the program (EPA, 2009). While these programs have been active since 1995, there is still no current accounting standard by FASB to address the financial accounting for emissions programs. According to Ernest and Young (E&Y), “both the FASB and the IASB recognize [the need for an accounting standard that provides a framework for climate change accounting that can be applied consistently across all