Advanced Accounting Issues: Carbon Emission Trading Report, Semester 2

This report delves into the intricate world of accounting for carbon emission allowances, focusing on the challenges and inconsistencies within the European Union Emissions Trading Scheme (EU ETS). The assignment begins with an overview of current developments in emissions trading schemes globally, highlighting the increasing adoption of these systems by both developed and developing countries. It then investigates the consistency of accounting policies among participating countries, emphasizing the significance of the EU ETS as a leading carbon market. The report explores the factors influencing corporate accounting policy choices for carbon emissions allowances, utilizing institutional theory to explain how firms are influenced by market features, regulators, and their own characteristics. A key component of the report is an analysis of financial information disclosures from EU ETS participating companies, including Salzgitter, Acerinox, Outokumpu Oyj, and ArcelorMittal, comparing their approaches to accounting for carbon emissions allowances. Furthermore, the report assesses the consistency of accounting measurements between European companies and ASX-listed companies. The report concludes with findings based on the analysis, offering insights into the complexities and challenges of carbon emission accounting, especially in the absence of a specific International Financial Reporting Standard (IFRS) for emissions allowances.

Running Head: ADVANCED ACCOUNTING ISSUES
ADVANCED ACCOUNTING ISSUES
Name of the Student
Name of the University
Author Note

1ADVANCED ACCOUNTING ISSUES
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................3
Current Development in Emissions Trading Schemes...........................................................3
Consistency between Participating Countries in Emission Trading Schemes.......................4
Factors Influencing Corporate Accounting Policy Choice for Carbon Emissions Allowance
................................................................................................................................................5
Analysis of Financial Information Disclosures about Carbon Emissions Allowances from
EU ETS participating Countries.............................................................................................6
Consistency of Accounting Measurements of Carbon Emissions Allowances between
Europe Countries................................................................................................................8
Comparison of Carbon Emissions Allowances Measurement between European
companies and ASX listed companies...............................................................................9
Findings................................................................................................................................10
Conclusion................................................................................................................................11
Reference..................................................................................................................................13

2ADVANCED ACCOUNTING ISSUES
Introduction
The expansion of the carbon market has produced great challenges for business
organizations in which the accounting for the carbon emission is considered as the least
implied area. The country Europe, which is the experts of the carbon trading are still working
on the agreements regarding the including carbon emissions rights in financial statements.
However, other countries are still struggling with the issues of accounting. Moreover, with
the growth of the carbon market as well as integration of the new constituents more issues of
the accounting will continue to materialize (Ascui 2014). In this concern, globally, the
accounting standard setters have made their foresights on this particular foresight. However,
there is still absence of the accounting standard of firm for dealing with the accounting of
carbon emissions. The topic of carbon trading is getting popular but the managing these
particular issues still putting great challenges because of the absence of the comprehensible
guidelines from the authorities concerned such as IASB and FASB on approaches of carbon
emission accounting in company’s books (Larrinaga 2014).
Hence, in this assignment, discussion will be done on the current development in
emissions trading schemes in developed as well as developing countries around world.
Further, discussion will be on whether the accounting policies for carbon emissions rights are
consistent between the participating companies in emission trading schemes. In addition,
theory will be discussed regarding the factors that may influence choice of corporate
accounting policy for accounting for carbon emissions allowances. Moreover, analysis of the
financial information disclosures about carbon emissions allowances from EU ETS
participating companies will be done along with discussion on the consistency and
comparison between the four international companies based in Europe and ASX based
companies. Lastly, findings will be given based on the analysis.

3ADVANCED ACCOUNTING ISSUES
Discussion
1)
Current Development in Emissions Trading Schemes
There are increasing numbers of the countries as well as regions all around world,
which are developing as well as implementing the emissions trading as the way for putting
the prices on the greenhouse gas emissions. The approach of Emissions trading is the
approach that is market-based for controlling the pollution with the help of providing the
economic incentives for achieving the reductions in emissions of the pollutants. There are
different states, countries as well as groups of the organizations, who have adopted the
emissions trading systems for mitigating the change in climate (Weiet al. 2014).
All around the world, developed as well as developing countries are indulged in)
developing the emissions trading systems. Now, such programmes are in place in the Europe,
some parts of Asia and North America. There exist great difficulties in achieving the
consensus on the measures of the climate change mitigation by the negotiations of the
multilateral climate. There appears to be shifting of the momentum from international level to
national regions and states (Zhou and Wang 2016). In the rapidly developing economies,
there is visibility of strong dynamics, under discussion or already established with the new
trading systems in Brazil, South Korea, India and China. Globally, around thirty-nine national
as well as twenty-three sub-national jurisdictions have already implemented or it is scheduled
for the implementations of the carbon pricing instruments that include emissions trading
systems as well as taxes. Further, the largest carbon market of the world is European
Emissions trading scheme that is abbreviated as EU-ETS has covered the sectors, which
emits each year over 2 billion tonnes of the carbon dioxide (Lovell 2014).
2)

4ADVANCED ACCOUNTING ISSUES
Consistency between Participating Countries in Emission Trading Schemes
At present, there are already thirty-two countries, which are making an effort to
participate in the carbon emissions trading schemes, while other countries are still
approaching on way for adopting such kinds of schemes globally. Among all the countries,
EU carbon emissions trading schemes is considered to be most important as well as largest
schemes in world (Climate Action - European Commission 2016). The accounting methods
of emissions allowances is of the crucial importance because of monetary insinuation of EU
ETS, which is of highly significant in the temperament as well as value as being the global
leading market sector of carbon trading (Black 2013).
The companies that accounts for the carbon emission allowances under the EU ETS,
presents the important information for all stakeholders that includes standards setters as well
as government. The accounting methods for the carbon emissions are espoused by the EU
companies are having the massive global significance because of globalization of this
particular scheme. The approach of the accounting is important in this area because financial
implications that arise from EU ETS may be material in the nature as well as amount. The
total value of the carbon credits that is traded in market is large, which is worth US$92 billion
(Aph.gov.au. 2019). The EU ETS is the major mechanism for the reduction of carbon, which
is the way for providing the information by which the assessment can be done on the impact
of the change in the policies on corporation in market. The differences in practices and rules
within the market can alter the environmental as well as economic impacts. Therefore, as the
result of this, assessment of the effectiveness of these particular markets becomes important
for understanding mitigation measures effectiveness (de Aguiar 2018). Moreover, in absence
of the guidance of the international accounting, there exists no uniformity in the financial
accounting treatment for the allowances of the emissions. The comparable information about
relative firm performance in this particular market will not be distinguished from the

5ADVANCED ACCOUNTING ISSUES
disclosures related to the carbon. It has been projected by commencement of phase III EU
ETS in 2013 that approx. one-half of the free allocations acquires by auctioning as well as
provisions of the free allocations to the installations will get tightened substantially. This
results into companies for holding purchased allowances as well as will be having liabilities
that are more significant. Hence, this treatment of accounting of emission allowances
becomes more relevant but lacks the uniformity in participating countries (Griffin, Lont and
Sun 2017).
3)
Factors Influencing Corporate Accounting Policy Choice for Carbon Emissions
Allowance
In order to assess the factors that influence the choice of corporate accounting policy
for accounting for the carbon emissions allowance, institutional theory perspective is used.
This theory indicates that the firms are faced with the institutional pressures and as the result
of these pressures, the firms within the field tends for becoming same in forms as well as
practices (Wu, Qian and Li 2014). In the frame of the institutional theory, it is not only
regulators but also the market features and the firms characteristics can influences as well as
requires the firm to account for as well as provides the disclosures on the carbon related
information. The company discloses only that information that is feasible, which indicates
that provisions of this information is for altering or reassuring the perceptions of the public or
the government (Zhaoet al. 2016). The GHG reporting of the firm as well as transparency of
carbon disclosures are both associated with the mimetic, coercive as well as normative
institutional pressures and generally, these pressures are having the significant effect on
ensuring that the organizations provide more disclosures of carbon (van der Gaast, Sikkema
and Vohrer 2018).

6ADVANCED ACCOUNTING ISSUES
The organization that is having different characteristics, adopts different disclosures
as well as measurement practices. In the event of the uncertainty for the way of financially
accounting for the carbon emission allowances as well as in event of voluntary disclosures of
carbon, the firms that are affected under the ETS, will may adopt or have the similar carbon
disclosures practices as well as carbon financial accounting (Clarkson et al.2015). Moreover,
other organizations within the particular field of organization because of normative, mimetic
as well as coercive pressures, comprises the characteristics of firm as well as features of
market such as industry, sizes, regulations, auditors, leverage and listing status (Liao, Zhu
and Shi 2015).
4)
Analysis of Financial Information Disclosures about Carbon Emissions Allowances
from EU ETS participating Countries
Salzgitter
The Salzgitte AG is the German based company, which is largest steel producer of
steel in Europe. The company stands for the production, processing as well as global trade of
the rolled steel and the tubular products.Moreover, the rights for emitting carbon dioxide are
being reported under the intangible assets, if intention is for using the emission rights for the
purposes of production. The initial ownership of the emission rights, which was acquired
gratuitously, is being recorded at the cost of acquisition (Salzgitter-ag.com. 2019).
Acerinox
The Acerinox is the manufacturing conglomerate group of stainless steel, which is
based in Spain. It was founded in the year 1970 and has initially received the technical
support from Japanese company Nissin Steel.This company is one of the largest steel
producer of world.Further, the recognition of carbon dioxide emission is as the inventories.

7ADVANCED ACCOUNTING ISSUES
As the IFRS does not have specified regarding the way of classifying emission allowances,
the group has opted for harmonizing the two policies with the help of adopting the similar
criteria for the classification in both individual as well as in both individual as well as
consolidated accounts. The allowances of CO2 emission are measured at the acquisition cost.
The allowances acquired the free of charge under National Allocation Plan are measured
initially at market value at received date (Acerinox.com. 2019).
Outokumpu Oyj
The Outokumpu Oyj is the group of the international companies that is headquartered
in Finland. It is one of the largest producer of the stainless steel in Europe as well as second
largest producer in America. Outokumpu is having seven active sites that operate under the
ETS EU in 2018. In 2018, the pre-verified emission of carbon dioxide under ETS was
approx. 1.0 million tonnes. Free emission allowance has been applied by Outokumpu sites for
trading period of 2013-2020, as per historical activity as well as efficiency-based
benchmarks. The price risk of emission allowance is managed with aim of optimizing and
securing compliance cost for current period of trading. The market price of the power is
based partially on carbon emission prices. It is because of energy intensive processes using
the fuels and power, the indirect exposure to the emission price is significant for the
company. The emission allowance is the intangible assets that are measured at the cost. The
allowance that are received free of the charge are recognized at the nominal value that is zero
carrying amount. The provision for covering obligation for returning the emission allowances
are recognized at the fair value at end of reporting period if emission allowance held by
group does not cover actual emission. The obligations for delivering allowances equal to the
emissions are recognized under the other operating expenses. Lastly, the gains from the
allowances sale are recognized as the other operating income in income statement
(Outokumpu.com. 2019).

8ADVANCED ACCOUNTING ISSUES
ArcelorMittal
The ArcelorMittal SA is the multinational corporation in steel manufacturing that is
headquartered in Luxembourg City. The company is leading integrated mining and steel
company of the world.It formed in the 2006 from takeover as well as merger of the Arcelor
by Mittal Steel. Further, with the establishment of schemes for the trading of emission
allowances, ArcelorMittal has entered into some types of derivatives for implementing their
management policy for the risks associated. In the year 2017-2018, the company is having the
net notional portion of 1,170 with the net positive fair value of 317 as well as net notional
position of 484, with the net negative fair value of 37. The allocation of the emission rights to
company is on-charge basis that is pursuant to the annual national allocation plan. It is
recorded at nil value as well as the recording of purchased emission rights are at the cost
(Corporate.arcelormittal.com. 2019).
4.1)
Consistency of Accounting Measurements of Carbon Emissions Allowances between Europe
Countries
The accounting measurement of carbon emission allowance is consistent between the
four international companies that are based in the Europe. It is because, for all the four
companies, the allocation of the rights of emissions are on the basis of no-charges, which is
pursuant to annual national allocation plan, recording of which is done at the nil value.
Moreover, the rights or the allowances of the emissions are recorded at the acquisition cost in
all the four companies.
4.2)

9ADVANCED ACCOUNTING ISSUES
Comparison of Carbon Emissions Allowances Measurement between European companies and
ASX listed companies.
BHP Billiton
BHP Billiton is the largest mining and the resource companies in world, which is
headquartered in Australia. The company was formed in 2001, which was merger between
BHP- global natural resources company and Billiton that was South African mining
company. The company emission disclosures are consists of operational emissions of
combined scope 1 and scope 2. This is calculated on the operational control basis according
with the GHG protocol corporate accounting as well as reporting standard for the reported
financial year. The UK Companies act 2006 requires company for being practicable to
acquire the relevant information on annual quantity of the greenhouse gas emissions of the
Group that is reported in tonnes of the equivalent carbon dioxide (Bhp.com. 2019).
Activex Limited
Activex Ltd. is the ASX listed company, which is engaged in mineral exploration.
The company focuses on acquisitions, identification as well as delineation of the quality
projects of the natural resources with the help of active exploration. Moreover,the company
has not disclosed any accounting measurement treatment of the carbon emission allowances
or rights (Secureservercdn.net. 2019).
Accelerate Resources Limited
Accelerate Resource Ltd. is the Australian based company, which was incorporated in
the Western Australia in the year 2017 for the objective to pursue different opportunities of
investment in the sector of resources.Further, the company has not made any disclosures of
the accounting treatment of the carbon emissions allowances or rights disclosures in the
annual report of the company (Secureservercdn.net. 2019).

10ADVANCED ACCOUNTING ISSUES
Rio Tinto
Rio Tinto is the ASX listed company that is leading group in mining. The company
focuses on the finding, mining as well as processing of mineral resources of earth. The green
gas emissions of Rio Tinto for the managed operations are reported according to the UK
companies Act 2006 and Regulation 2013.The total emission is addition of emissions of
scope 1 and scope 2. There is exclusion of indirect emission that are associated with the uses
as well as transportation of the products. The scope 1 emission is consists of emissions from
the combustion of the fuel as well as operations of the managed facilities. The scope 2
emission includes the emissions from purchase of heat, electricity, cooling or steam. The
company prepares greenhouse gas intensity index, which includes approx. 98% of the
emissions from the managed operations (Riotinto.com. 2019).
Comparison of Results
It can be analyzed from comparison of accounting measurement of the carbon
emission allowances used by the EU ETS participating companies as well as those by the
Australian companies in specified financial year that EU ETS participating companies are
following the accounting measurement of carbon emission allowance or rights constantly as
well as in consistently. However, in comparison to European companies, the ASX listed
companies does not have any accounting measurement of the carbon emission allowance or
rights. The Australian companies prepare index that shows percentage of the emissions from
managed operations (Black 2013).
5)
Findings
Hence, the firms that are affected by the ETS are increasingly trying for being
engaged in the carbon financial accounting as well as practices of carbon disclosures. ETS

11ADVANCED ACCOUNTING ISSUES
has become now important for the reduction of emissions. The implications of the accounting
may be material in the nature as well as financial amounts. Therefore, research helps the
firms to do the financial accounting under ETS for impact for pricing carbon, which will be
helpful for proving the useful information to the accountants, stakeholders, researchers,
investors, accounting standard setters, accountants, government and financial report preparers
(Aph.gov.au. 2019). Further, lack of the transparency, consistency as well as uniformity in
carbon financial accounting as well as carbon disclosures practices of most of the ETS
affected forms leads to the difficulties for the stakeholders as well as investors in
comparability of the financial statements as well as other carbon related information. In this
concern, institutional pressures act as the determinants of practices of carbon financial
accounting as well as level of carbon disclosures of ETS affected firms. Further, the result of
the comparison of the two countries suggests that the institutional pressure determines the
carbon financial accounting practices as well as extent of the carbon disclosures (Afionis et
al. 2017).
Conclusion
Therefore, it is concluded from the analysis that the emergence of the domestic as
well as international carbon markets in past few years has resulted in the introduction of
market-based mechanism for helping to create the market value for reductions of the GHG
emissions as well as creating the new markets and opportunities of investment. The
emergence of the current international carbon market is not considered as the one market
rather it is mosaic of the market, which includes the allowance based markets from the
international as well as domestic schemes of emission trading. Further, it has been analyzed
that the schemes of EU ETS has the requirement for each member for stating for setting the
cap on the emissions as well as the allowances are appropriately allocated to the amount of
issued allowances. The accounting treatment of the allowance more relevant but it lacks the

12ADVANCED ACCOUNTING ISSUES
practice of uniformity. In addition, it has been analyzed that normative, mimetic and coercive
pressures leads to the firm within the particular field of organization for financially
accounting for the carbon as well as disclosing the carbon related information in the way that
increases their legitimacy and the chances of their survival in the uncertain events. Moreover,
it has been found that there is consistency in the accounting measurements of the carbon
emissions allowances of the four international EU ETS participating companies in Europe. In
addition, after compassion of the ASX listed companies and the EU ETS participating
companies, it can be said that there is huge difference between the approaches of the both
countries. EU ETS participating companies follow accounting measurement for carbon
emission allowance or right but Australian companies does not account for the carbon
emission allowance or right but they prepare the index that shows emission percentage of
company’s operations. Lastly, it can be said that the institutional pressures acts as the
determinants of carbon financial accounting practices as well as level of carbon disclosure of
ETS affected firms.

13ADVANCED ACCOUNTING ISSUES
Reference
Acerinox.com. 2019. [online] Available at:
https://www.acerinox.com/opencms901/export/sites/acerinox/.content/galerias/galeria-
descargas/junta-general/Annual-Report-2018.pdf [Accessed 29 Sep. 2019].
Afionis, S., Sakai, M., Scott, K., Barrett, J. and Gouldson, A., 2017. Consumption‐based
carbon accounting: does it have a future?. Wiley Interdisciplinary Reviews: Climate
Change, 8(1), p.e438.
Aph.gov.au. 2019. Emissions trading schemes around the world – Parliament of Australia .
[online] Available at:
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/BN/2012-2013/EmissionsTradingSchemes [Accessed 29 Sep.
2019].
Ascui, F., 2014. A review of carbon accounting in the social and environmental accounting
literature: what can it contribute to the debate?. Social and Environmental Accountability
Journal, 34(1), pp.6-28.
Ax8.com.au. 2019. [online] Available at:
http://www.ax8.com.au/site/PDF/1223_1/AnnualReporttoshareholders [Accessed 29 Sep.
2019].
Bhp.com. 2019. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed 29 Sep. 2019].
Black, C.M., 2013. Accounting for carbon emission allowances in the European Union: In
search of consistency. Accounting in Europe, 10(2), pp.223-239.

14ADVANCED ACCOUNTING ISSUES
Clarkson, P.M., Li, Y., Pinnuck, M. and Richardson, G.D., 2015. The valuation relevance of
greenhouse gas emissions under the European Union carbon emissions trading
scheme. European Accounting Review, 24(3), pp.551-580.
Climate Action - European Commission. 2016. EU Emissions Trading System (EU ETS) -
Climate Action - European Commission. [online] Available at:
https://ec.europa.eu/clima/policies/ets_en [Accessed 29 Sep. 2019].
Corporate.arcelormittal.com. 2019. [online] Available at:
https://corporate.arcelormittal.com/~/media/Files/A/ArcelorMittal/investors/annual-reports/
2018/annual-report-2018.pdf [Accessed 29 Sep. 2019].
de Aguiar, T.R., 2018. Turning accounting for emissions rights inside out as well as upside
down. Environment and Planning C: Politics and Space, 36(1), pp.139-159.
Griffin, P.A., Lont, D.H. and Sun, E.Y., 2017. The relevance to investors of greenhouse gas
emission disclosures. Contemporary Accounting Research, 34(2), pp.1265-1297.
Larrinaga, C., 2014. Carbon accounting and carbon governance.
Liao, Z., Zhu, X. and Shi, J., 2015. Case study on initial allocation of Shanghai carbon
emission trading based on Shapley value. Journal of Cleaner Production, 103, pp.338-344.
Lovell, H., 2014. Climate change, markets and standards: the case of financial
accounting. Economy and Society, 43(2), pp.260-284.
Outokumpu.com. 2019. Outokumpu s Annual report 2018 published | Outokumpu. [online]
Available at: https://www.outokumpu.com/news/2019/outokumpu-s-annual-report-2018-
published [Accessed 29 Sep. 2019].
Riotinto.com. 2019. [online] Available at:
http://www.riotinto.com/documents/RT_2018_annual_report.pdf [Accessed 29 Sep. 2019].

15ADVANCED ACCOUNTING ISSUES
Salzgitter-ag.com. 2019. [online] Available at:
https://www.salzgitter-ag.com/fileadmin/finanzberichte/2018/gb2018/en/downloads/szag-
ar2018-complete.pdf [Accessed 29 Sep. 2019].
Secureservercdn.net. 2019. [online] Available at:
http://secureservercdn.net/198.71.233.204/j05.234.myftpupload.com/wp-content/uploads/
2019/09/AIV_ANNUAL-REPORT-2018.pdf [Accessed 29 Sep. 2019].
van der Gaast, W., Sikkema, R. and Vohrer, M., 2018. The contribution of forest carbon
credit projects to addressing the climate change challenge. Climate Policy, 18(1), pp.42-48.
Wei, Y.M., Wang, L., Liao, H., Wang, K., Murty, T. and Yan, J., 2014. Responsibility
accounting in carbon allocation: A global perspective. Applied energy, 130, pp.122-133.
Wu, L., Qian, H. and Li, J., 2014. Advancing the experiment to reality: Perspectives on
Shanghai pilot carbon emissions trading scheme. Energy Policy, 75, pp.22-30.
Zhao, X.G., Jiang, G.W., Nie, D. and Chen, H., 2016. How to improve the market efficiency
of carbon trading: A perspective of China. Renewable and Sustainable Energy Reviews, 59,
pp.1229-1245.
Zhou, P. and Wang, M., 2016. Carbon dioxide emissions allocation: A review. Ecological
economics, 125, pp.47-59.