Contemporary Issues in Accounting: Carbon Disclosure and Agency Theory

This report examines the accounting treatment of carbon emission rights, focusing on the application of agency theory. It investigates the motivations behind carbon disclosure, differentiating between practical and theoretical drivers. The study reviews relevant literature and develops hypotheses based on legitimacy theory, considering factors such as ETS (Emission Trading Schemes), GRI (Global Reporting Initiative) indicators, and the Kyoto Protocol. The research analyzes a sample of 119 global businesses to assess how these factors influence the accounting treatment of carbon emissions, including whether they are recorded as expenses, provisions, or other entries. The findings highlight the diversity in accounting practices and the potential impact on stakeholders. The report concludes by emphasizing the need for standardized international norms to ensure comparability and transparency in financial reporting related to carbon emissions, advocating for collaboration among standard-setting bodies to address inconsistencies.

Contemporary Issues in Accounting
Semester 2-2017
Research question: Carbon Disclosure articles
Application: Agency theory
Student Name:

Table of Contents
Introduction..............................................................................................................................................3
Motivation through Agency Theory.........................................................................................................4
Practical Motivation................................................................................................................................4
Theoretical Motivation:...........................................................................................................................4
Literature Review and Hypothesis Development.....................................................................................5
Base theory – Legitimacy Theory............................................................................................................5
Conclusion................................................................................................................................................7
References................................................................................................................................................8
Appendix:.................................................................................................................................................9

Introduction
There has been a growth in demand of sustainable behaviour special interest with respect to
environment and social effects on businesses (Reverte, 2008); therefore this research has been
carried out to assess the factors of accounting exposure of emission rights.
For carrying out this research, there have been 119 businesses used from all over the world for
the face of year 2011 (Gallego-Alvarez, Martínez-Ferrero and Cuadrado-Ballesteros, 2016). The
findings of this research depict various accounting treatments which are based on different
factors. Particularly, all the businesses which are from nations that have already implied
environmental trading schemes (ETS) have a tendency to record emission rights by use of
provisions, inventory and investments.
From the different environmental issues, this paper focuses on carbon care emissions, which
have been in focus from Kyoto protocol started debate on publication of various laws in national
and international levels. It had set up emissions business way to deal with worldwide guess
emissions. After that, there has been a rise in business rules and regulations and suggestions.
lately milestone was achieved in Paris wins 195 nations gave consent for limiting their carbon
emissions through the Paris agreement 2015, along with the USA that was very much reluctant
to use such contracts. Still a major point that has to be considered is to see the way in which the
carbon gas emissions can be reflected in terms of accounts. As per these contracts and
agreements, it is important that the parties to agreement define the related models, principles,
rules, laws and guidelines for verifying, reporting and accounting for emissions; however the
international standards are not very much developed on this issue.

Motivation through Agency Theory
Agency theory is applied here to know the relations among agents and principals. The agent
symbolizes the principal in a specific trade transaction and is likely to characterize the welfare of
the principal with no consideration for self-interest. The diverse motivations of principals and
agents may turn out to be a basis of conflict, as a few agents might not completely proceed in the
principal's most excellent interests.
Practical Motivation
The business firms are major source of the emitting carbon therefore these are having high
potential for bringing necessary amendments for reduction of carbon in the environment. The
businesses are under rising pressure to show their commitment for minimisation of carbon
impacts. By ETS the firms are allotted a given quota for emitting gases and this quota is decided
by their respective country's environmental policies. As per this quarter trading, the firms have
to perform their operations in a fresh manner so that new knowledge and skills can be
developed.
Theoretical Motivation:
In the middle of 1990s, the UN framework Convention on the climate changes i.e. UNFCCC
observed that there was a requirement of bringing limits to the emission of carbon. In the year
1997, the renowned Kyoto protocol was issued so that the greenhouse gas emissions could be
lessened and there could be redistribution of expenses and costs linked with climate changes by
shifting them from the word nations to the businesses that are actually accountable for such
emissions and make profit out of them. But this protocol came into effect in the year 2005 and
just 37 developed nations signed it. In this the China and the USA were the Nations which did
not sign this protocol and they were the highly polluting nations. The first phase of compliance

finished in the year 2012 and the subsequent phase of this protocol started in the year 2013.
However still this protocol has very few nations playing to do it and these are just the developed
nations (Bae Choi, Lee and Psaros, 2013). But lately in Paris, by the end of 2015 last number of
nations of the world along with China and USA also signed the Paris agreement which is a
substitution for this Kyoto protocol. So the Paris agreement is the worldwide contract for
reduction of carbon emissions and its major benefit is that the nations are obligated to make an
inventory which depicts the amount of net emissions. It also makes them firms to commit to
maintain the global warming less than 2°C. This agreement focuses on the net emissions and has
led to the rise in financial funds given by the most developed and industrialized nations. Thus,
these kinds of agreements have to be considered for determination of accounting approach for
emission rights. Although the Paris agreement substitutes Kyoto protocol still the research
which has been considered here is regarding Kyoto protocol because this research has been taken
from the year 2011, until when the Paris agreement was not made (Phelps, 2014).
Literature Review and Hypothesis Development
Base theory – Legitimacy Theory
For assessing the hypothesis the first in this research, dependency model is suggested where
dependent variables show the diverse accounting treatment of carbon emission rights and
independent variables show the aspects that have effect on this treatment. The results are menace
through leverage, size, sector and profitability.
The hypothesis contains ETS, GRI indicators and Kyoto protocol. So, the relationship between
the independent dependent variables can be shown by graduation as below:

ACCOUNTANTi =β0 +β1ETSi + β2IGRI i +β3INOGRIi + β4KYOTOi + β5Size +β6Leveragei
+β7Profitabilityi + β8Sectori + εi
ACCOUNTANTi is the dependent variable that shows various manners of accounting treatment
for carbon emission rights. It equals 1 in case the firm is treating it to be and expenditure and it
turns out to be 2 in case this is seen as an intensive unless it. It equals 3 if it's observed as a
provision and equals 4 when it's observed to be R&D expenditures and 5 if it is observed to be
any other entry like liability, investment or stock.
Hypotheses
ETSi is seen to be the dummy variable which would be equal to 1 when the phone is part of the
nation which is already set up emissions trading arrangements, or else it would be zero (Black,
2013).
IGRIi is variable which was the indicators regarding carbon emissions and climate change which
are officially documented by the businesses as per the GRI regulations. To make this variable,
there has been different sustainability reports of businesses considered from the sample so that
the total direct and indirect emissions of carbon can be calculated by weight.
Just like that, INOGRIi is a variable which shows different indicators regarding the gas emissions
and climate change which have been documented officially by the business as per the report
created by KPMG and GRI (Black, 2013). This research undertook the contents of sustainability
reports of the sample businesses with different indicators.
KYOTOi is a model/ dummy variable which would be equal to 1 in case the business is of a
nation which is a part of this protocol, or else it would be zero.

Apart from this all the results are managed by entering diverse variables which are size of the
business, firms’ leverage which is decided as ratio of the total debts and Equity. Profitability I is
the profitability of the businesses which is assessed by the EBIT and the sector is the whenever
which shows various sectors which have to be consider while calculating the involvement of gas
emissions. In this research the sample businesses are from different sectors which are Airways,
paper products, aerospace, energy and defence, chemical, metals, Forest and crude oil
production, mining and refining etc.
Conclusion
This research has laid stress on the accounting treatment of carbon emission quotas or their
privileges. Since there has been very less attempt of determining the ways of accounting
decisions for treatment of these, this study was attempted to respond to the below query:
“What aspects decide the various accounting treatment of emission principles on global extent?”
Also a study was performed with a sample of 119 global businesses in the year 2011, from which
the results have been undertaken (Gallego-Alvarez, Martínez-Ferrero and Cuadrado-Ballesteros,
2016). There has been a dependence model suggested for considering the role played by
different factors – GRI and non-GRI signals, Kyoto protocols, ETS. This factor can have
different roles in accounting treatment of carbon gas emission rights.
This study also shows that the businesses which pertain to the nations having ETS have a
tendency of accounting for these, particularly as a provision or by other entries like stocks,
investments, loans etc. Similarly the businesses which have a disclosure on indicators of climate
change and gas emission have a tendency treating these to be the research and development
expenditures or any other kind of expenditures. A few of them might not even record them at

all. Also the businesses which pertain to nations which have approved Kyoto protocol will have a
tendency to just ignore them rather than using them as expense (Lippert, 2015).
This outcome showed that there is huge diversity and accounting treatment of information rights
and there is a negative impact of this diversity on stakeholders. The stakeholders find it hard to
decide because of inadequate compatible information. Therefore it is important that international
norms are standardised for accounting treatment of these gases. The stakeholders have to
consider all these differences while making decisions because when various methods are utilised
then there would the divergences in the financial statements (Kumarasiri and Jubb, 2016).
It is important that the accounting entries are standardised so that corporate performances can be
compared. It is also suggested that FASB, IASB and other international bodies bring any
agreement so that this inconsistency of recording the carbon emissions can be standardised. If the
accounting practices are not consistent, it would be difficult to compare the final reports (Lu,
2014). When the accounting standards for such emissions are made, then the financial users,
stakeholders and employees can rightly assess the emission rights.
References
Bae Choi, B., Lee, D. and Psaros, J. (2013). An analysis of Australian company carbon emission
disclosures. Pacific Accounting Review, 25(1), pp.58-79.
Black, C. (2013). Accounting for Carbon Emission Allowances in the European Union: In
Search of Consistency. Accounting in Europe, 10(2), pp.223-239.
Gallego-Alvarez, I., Martínez-Ferrero, J. and Cuadrado-Ballesteros, B. (2016). Accounting
Treatment for Carbon Emission Rights. Systems, 4(1), p.12.

Kumarasiri, J. and Jubb, C. (2016). Carbon emission risks and management accounting:
Australian evidence. Accounting Research Journal, 29(2), pp.137-153.
Lippert, I. (2015). Environment as datascape: Enacting emission realities in corporate carbon
accounting. Geoforum, 66, pp.126-135.
Lu, Y. (2014). Estimation of Black Carbon Emission of China. Journal of Environmental
Accounting and Management, 2(2), pp.115-122.
Phelps, T. (2014). Truth Delayed: Accounting for Human Rights Violations in Guatemala and
Spain. Human Rights Quarterly, 36(4), pp.820-843.
Reverte, C. (2008). Determinants of Corporate Social Responsibility Disclosure Ratings by
Spanish Listed Firms. Journal of Business Ethics, 88(2), pp.351-366.
Appendix:
Author Dat
e
Title Journa
l
Type of
Paper
(Theoretica
l or
Empirical)
If
empirical
,
research
method
and
sample
If
empirical,
dependent
and
independen
t variables
Gallego-
Alvarez,
I.,
201
6
Accountin
g
Treatment
Empirical Sample of
119
nations
Both

Martínez-
Ferrero, J.
and
Cuadrado-
Ballestero
s
for Carbon
Emission
Rights.
Systems,
taken