Carbon Emission Allowances: Analysis and Applications

This assignment delves into the complexities of the carbon emission allowance market. It analyzes various aspects, including the asymmetrical pass-through of energy prices to allowance prices, persistence in allowance price trends, and information linkages between allowance and energy markets. The assignment also considers applications like allocation schemes for specific industries (like air passenger transport) and investigates the efficiency of existing allocation methods within carbon trading programs.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student
Name of the University
Authors Note
Course ID

2CORPORATE ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................3
The Emission Allowance Nature:..............................................................................................3
Measuring the Emission Allowance both initially and subsequently:.......................................4
Significances of Emission Allowance on Fiscal Statement:......................................................6
Conclusion:................................................................................................................................9
Reference List:.........................................................................................................................10

3CORPORATE ACCOUNTING
Introduction:
The existing report is related with the conversation of the characteristics of the
emission allowance. The report will be also placing emphasis on the measurement at the
primary and the succeeding level with suitable entries of journal. Additionally, the existing
study will be focussing on the significances of emission allowance in the balance sheet,
comprehensive income statement and statement of cash flow.
The Emission Allowance Nature:
The definition of the allowance is stated in the Article 3 (a) of the Emission Trading
Scheme Directive where the authority of emission is stated with only one tonne of carbon
CO2 is permitted. The lawful nature of emission allowance is delivered and dealt underneath
the instructions of the “European Union Emission Trading Scheme” and it is neither
defined nor it is harmonized at the European level (Hammoudeh et al., 2014). This shall be
valid only with the objective of meeting the requirements of the ETS directive and will be
considered transferable in compliance with the guidelines defined under the ETS Directive.
In a most significant manner the characteristics of the emission allowance would be
considered to be relevant in the below stated issues;
a. In the determination of law that administers the formation, transmission and
termination of the allowances of the emission,
b. Treatment of emission allowance in the event of insolvency of the registered holder.
c. Treatment of emission allowance for the purpose of taxation and accounting purpose
d. Is there is any form of security can be created over the allowances of emission
In order to consider the omission of the carbon market, it is necessary to understand the
legal characteristics or the nature of the separate firm that is being transacted in the market
(Hammoudeh et al., 2014). An individual can enter through the all-inclusive marketplaces

4CORPORATE ACCOUNTING
that generally comprises of the distribution of the allowance from the responsible agency
along with the institution of the parties that are required to comply with the emission trading
system and other forms of potential intermediaries. There are numerous numbers of legal
regimes that is engaged in the procedures allowance of the emission that raises the several
amount of the lawful query for not least property law, law associated to contract, taxation
law, financial service law and accounting standards. The Emission allowance in the market
for trading purpose possess similarities with the commodities, financial markets and unique
qualities that have improbable characteristics in one or the other of the marketplace. The
other market contains of the acquisition and trade of emission allowance with various
agreements for forthcoming sales of the emission allowance (Pan et al., 2015).
Even though the allowance possess certain type of typical characteristics of the
property rights, they are not explicitly categorised by the laws of the European Union. The
guidelines along with the oversight for any kind of carbon market will be largely dependent
on the present established organization in each of the jurisdiction that will have large role in
determination of the process that are adopted to approach the marketplace omission in a
broader manner. Certain characteristics relating to the nature of the allowance defined under
the article 40 of the registry regulations states that an allowance should be fungible
dematerialized instrument, that can be traded in the market (Liao et al., 2015).
Measuring the Emission Allowance both initially and subsequently:
The board has stated that the liability of the emission allowance division must be
reliable and the assigned allowance along with the accountability for the distribution must be
primarily and subsequently measured in terms of the fair value (Gil-Alana et al., 2016). The
board has cautiously arrived at the decision relating to the measurement of the Emission
Allowances. The board has additionally undertaken the cautious decision that the purchased
allowance must be initially and subsequently measured in terms of the fair value. The IASB

5CORPORATE ACCOUNTING
has bought forward the preference of gross demonstration of the assets and liabilities on the
statement of balance sheet. Under the linked presentation, the assets and liabilities would be
obtainable in the gross form however, the amount would be accessible together and the whole
to the net release asset or net emission accountability. Cautiously it has been stated by FASB
that the assets and liabilities must be recorded on the statement of balance sheet by making
the use of the related demonstration (Chiu et al., 2015). Nonetheless, the FASB also indicate
that there are no such situations where any business organization would be required to intend
to offset the asset and liabilities in order to present the items by making use of the linked
presentation.
In the discussion bought forward by the board it has stated that the measurement of
allowance of emission for both assets and liabilities must be made in the system of cap and
trade. The members of the board have expressed their support for the model that measures of
the allotted allowance and the obligation related to the apportionment must be initially
measured at the fair value which also subsequently measures the allocated allowance at the
fair value. The board tentatively undertook the decision of measuring the assigned allowance
and the accountability relating to the apportionment must be reliable (Schultz & Swieringa,
2016).
In the discussion made by the board it has stated that commercial entity must regulate
the amount of the emission allowance that it would be coming back under the obligation
related to the apportionment along with the circumstances when the commercial entity it is
necessarily under obligations of recognizing the responsibility related to emission, which is
surplus of the liability for the allocation. The board has expressed its support for adopting an
approach that determines the amount of the allowances to be reimbursed based on the
commercial entity anticipations of emissions or reduction of emission (Ren et al., 2015).

6CORPORATE ACCOUNTING
Significances of Emission Allowance on Fiscal Statement:
In the model of accounting for the intangible asset, companies are usually required to
measure the emission credits or allowances that is issued to the entities and that are acquired
at cost in the market (Jiang et al., 2014). As a result of this, when the company is issued with
the emission allowance credits, or allowance it represents only a nominal or zero cost. On the
contrary, emission credits or the allowance that is purchased may consume the cost related
with them. Although not a generally functional practice, however in the accounting model of
intangible asset, it is probable for an organization to imitate the issued emission allowance or
the credits at their fair value when it is received.
According to the disclosure that is made commercial entities usually do not amortize
the allowance of emission. This is because their fiscal advantage is not lessened until they are

7CORPORATE ACCOUNTING
consumed (Reboredo, 2014). The emission allowance are subjected to impairment in the
indeterminate intangible asset model of impairment or under the model of fixed asset for the
finite intangible asset up the degree the organization is amortizing the allowance of emission
(Chiu et al., 2013). The emission credits or the allowance are categorized in the form of long
term in the balance sheet and the inflow of cash and the outflow of cash that is linked with
the emissions credits are categorized under the activities of investment in the cash flows
statement.
On the other hand, consequences of emission allowance on the financial statement is
reflected under the inventory model of accounting, emission credits are usually measured and
measured in respect of the average cost (Hoen et al., 2014). Emission credits that is issued by
the EPA or any other form of regulatory model generally have zero amount of cost basis. On
the other hand, the purchased emission credits are recognized at their purchase price. An
important consideration to be regarded in this context is that the weighted average cost of
emission allowance that is put into use in every phase is charged to the costs of fuel. The
emission allowance is classified in the form of inventory in the balance sheet and the cash
inflows along with the cash outflows is associated with the emission credits that is classified
in the form of operating activities in the statement of cash flows. The emission allowance are
generally subjective to reduced cost of the market methodology to the impairment in the
inventory model (Xu et al., 2016). Organizations that trade under the emission credits are
usually required to follow the model of inventory.
As defined under both the models the industry practice that the organization usually
does is not required to record an obligation of delivering the emission credits to the
regulatory agency until it is noticed that the original degree of emission for a certain period
has gone past the credits that is held on the balance sheet (Trück et al., 2014). As a
consequence of this the gain is typically identified in the time period during which the

8CORPORATE ACCOUNTING
emission allowance are sold off. The practice usually varies concerning the identification of
the gain as large number of businesses have accepted the bookkeeping policies that
necessitates the deferment of gain given that the emission allowance were settled for the
forthcoming years however sold during the present year.
On the other hand, there are two types of consequences of emission allowance on the
income statement (Philip & Shi, 2016). The first originates from the use of numerous diverse
characteristics for the right asset and the liabilities in the IFRIC 3 model. Using the theory of
IAS 38 cost model for the purpose of accounting the allowance asset it leads to disparity amid
the measurement of the liability and the same is re-measured to the current market cost along
with the variations in the net profits together with the measurement of asset on the cost basis.
The next consequence on the income statement originates from the pattern of
expenditure that is recognized and the income statement recognition. If an organization
makes the use of the revaluation method under the IAS 38 it would be required to display the
deviations in the right value of the allowance asset under the statement of income along with
the changes in the fair value of the liability in the net proceeds. Particularly, the IFRIC 3
approach identifies the current period of expenditure that is equivalent to the fair value of the
emission that is generated throughout the period and identifies the income that is equivalent
to the paying back of the government funding related with the apportioned allowances.
In relation to this, the net approach lead to identification of expenditure only on the
circumstances when the emission goes past the allowance received free of charge from the
government. In usual practice, implementation of the net method represents that the liability
will be stated in the balance sheet and the expenditure is noted down in the income statement
given that the original emission level exceeds the total sum of allowance apportioned to the
unit free of cost by the government.

9CORPORATE ACCOUNTING
Conclusion:
On arriving at the conclusion it can be bought forward that the study can be settled by
demonstrating that an in depth description of the legal characteristics or the nature of the
emission allowance has been conferred. The report evidently brings forward the emission
allowance method of measurement at the primary and the succeeding level with appropriate
journal entries. The report evidently provides the consequences relating to the emission
allowance on the financial statement and provides an in depth conversation of consequences
of emission allowance on the balance sheet, income statement and cash flow statement.

10CORPORATE ACCOUNTING
Reference List:
Hammoudeh, S., Nguyen, D. K., & Sousa, R. M. (2014). Energy prices and CO 2 emission
allowance prices: a quantile regression approach. Energy Policy, 70, 201-206.
Hammoudeh, S., Lahiani, A., Nguyen, D. K., & Sousa, R. M. (2014). Asymmetric and
nonlinear pass-through of energy prices to CO2 emission allowance prices. NIPE-Working
Papers Series, 1-29.
Pan, X., Teng, F., Tian, Y., & Wang, G. (2015). Countries’ emission allowances towards the
low-carbon world: a consistent study. Applied Energy, 155, 218-228.
Liao, Z., Zhu, X., & Shi, J. (2015). Case study on initial allocation of Shanghai carbon
emission trading based on Shapley value. Journal of Cleaner Production, 103, 338-344.
Gil-Alana, L. A., Gupta, R., & de Gracia, F. P. (2016). Modeling persistence of carbon
emission allowance prices. Renewable and Sustainable Energy Reviews, 55, 221-226.
Chiu, Y. H., Lin, J. C., Su, W. N., & Liu, J. K. (2015). An efficiency evaluation of the EU’s
allocation of carbon emission allowances. Energy Sources, Part B: Economics, Planning,
and Policy, 10(2), 192-200.
Schultz, E., & Swieringa, J. (2016). Information linkages between emission allowance and
energy markets. Accounting & Finance.
Ren, J., Bian, Y., Xu, X., & He, P. (2015). Allocation of product-related carbon emission
abatement target in a make-to-order supply chain. Computers & Industrial Engineering, 80,
181-194.
Jiang, J. J., Ye, B., & Ma, X. M. (2014). The construction of Shenzhen׳ s carbon emission
trading scheme. Energy Policy, 75, 17-21.

11CORPORATE ACCOUNTING
Reboredo, J. C. (2014). Volatility spillovers between the oil market and the European Union
carbon emission market. Economic Modelling, 36, 229-234.
Chiu, Y. H., Lin, J. C., Hsu, C. C., & Lee, J. W. (2013). Carbon Emission Allowances of
Efficiency Analysis: Application of Super SBM ZSG-DEA Model. Polish Journal of
Environmental Studies, 22(3).
Hoen, K. M. R., Tan, T., Fransoo, J. C., & Van Houtum, G. J. (2014). Effect of carbon
emission regulations on transport mode selection under stochastic demand. Flexible Services
and Manufacturing Journal, 26(1-2), 170-195.
Xu, J., Qiu, R., & Lv, C. (2016). Carbon emission allowance allocation with cap and trade
mechanism in air passenger transport. Journal of Cleaner Production, 131, 308-320.
Trück, S., Hardle, W., & Weron, R. (2014). The relationship between spot and futures CO2
emission allowance prices in the EU-ETS.
Philip, D., & Shi, Y. (2016). Optimal hedging in carbon emission markets using Markov
regime switching models. Journal of International Financial Markets, Institutions and
Money, 43, 1-15.