1PwCEmissionstradingsystemsEmissionstradingsystems:TheopportunitiesaheadThecostsandeffectsofcarbonareagrowingglobalconcern.Largeemittersnowarefacedwiththechallengeofhowtopricecarbonandaccountforitsimpact.ISFORAMBITIONISFORAMBITION2PwCEmissionstradingsystemsForewordInNovember2021,nearly200countrieswillmeetinGlasgowforthe26thUNClimateChangeConferenceoftheParties,orCOP26,toonceagainassesstheeffectsofourwarmingplanetonpeople’slivelihoodsandthemeasuresneededtoadapttoandmitigateclimatechange.Thereductionofcarbonemissionsandhowtoreachnetzeroistheagenda.Manythinkthattheprogresssincethe2015ParisAgreementwassignedhasbeentoolittleandtooslow.WhenemissiontargetswerefirstsetaftertheadoptionoftheKyotoProtocolin2005,theEuropeanUnion’sEmissionsTradingSystem(EUETS)cameintoeffect,andtodayaccountsfor40%ofgreenhousegasemissionsinEurope.TheEUETScoversEurope’sbiggestemitters—includingpowerplants,steelmanufacturers,cementmakersanddomesticaviation—andhasproposedexpandingtocoverroadtransportandmaritime.Thisyear,thenumberofemissioncreditsissuedbytheEUETSwilldeclinefurther,whichislikelytodrivethepriceofcarbonhigherandforcemoreambitiousreductiontargetsonthecompaniesinthesystem.TheEUETShashadsignificantsuccess.Itscap-and-trademodelresultedina35%dropincarbonemissionsinEuropefrom2005–19,despiteafluctuatingpriceforcarbonthatsawitdropaslowaszeroin2008.Emissionsreductionshaveacceleratedovertime,falling9.1%in2019andafurther12%in2020.Onecontinuingconcern,however,isthelackofinternationalfinancialreportingstandardsoutlininghowcarbonallowancesshouldberecordedincorporatefinancialstatements.Thisismorerelevanttodaybecauseoftheincreasedneedfortransparencyandaccountabilitywhenitcomestoadoptingmeasuresthatwillgetustonetzero.BecausewebelievetheEUETScanbeusedasatemplateforothercountriesandregions,itismoreimportantthaneverthatcompaniesandtheirinvestorsrecognisethevalueoftheirassetsinawaythatiscomparable,particularlyasthepriceofcarbonisvolatile.Carbonrecentlyhitarecordhighofmorethan€60pertonne,andthepriceisexpectedtorisefurtherovertime.Thisreportisintwoparts.ThefirstlooksattheimportantroletheEUETSplaysonthewaytoachievingglobalnetzero.Thesecondpartreportsandcommentsontheresultsofasurveyof25largecompaniesoperatingintheEUETStoday.Itisafollow-uptoasurveyweconductedin2007abouthowcompaniesareusingthesystem.Itreviewstheaccountingpracticesthatcompaniesemploytoensurethattheirbalancesheetsadequatelyreflecttheircarboncreditsand,insodoing,theirassetvalues.Italsolaysoutexamplesofhowcreditscanbeaccountedforinachangingworld.Wehopethatthisanalysisprovesusefultobusinessleaderswhoareconsideringorwhohaveestablishedtheirorganisation’spathtonetzero.HenryDaubeneyGlobalChiefAccountantandHeadofReportingPricewaterhouseCoopersInternationalLimitedDirkForristerPresident&CEOInternationalEmissionsTradingAssociation(IETA)3PwCEmissionstradingsystems3PwCEmissionstradingsystemsContents04Executivesummary06Keysurveyfindings08Partone:Accountingforcarbonemissions15Parttwo:Surveyresults20Conclusion21AccountingapproachesfortheEUETSandequivalentemissionstradingschemes—PwCview26Appendix:Surveymethodology27Contacts4PwCEmissionstradingsystemsExecutivesummary5PwCEmissionstradingsystemsTheEuropeanUnion’sEmissionsTradingSystem(EUETS)wasapioneeringprogrammewhenitlaunchedin2005,thefirstintheworldtoattempttointroduceacompulsorycarbonmarkettoreduceemissionsinhigh-intensitycarbon-emittingindustries.Intheensuing16years,muchhaschangedasclimatechangehasrisentothetopoftheglobalagenda.Therearenowanumberofexchangesfortradingcarbonemissioncertificatesglobally:threeinEurope,twointheUS,andoneeachinNewZealandandSouthKorea.Andmorecountries,industriesandcompanieshaveadoptednetzerotargets.CompaniesparticipatingintheEUETSalreadyaccountfor40%ofgreenhousegasemissionsinEurope,andtheEuropeanCommissionhasproposedexpandingemissionstradingtoothersectors,includingroadtransportandshipping.GiventheimportanceoftheEUETS—ithasledtoareductionof35%inemissions—andhistory,othercountriesarelookingtoittolearnfromitsexperiences.Asitcontinuestodevelop,theEUETSisoftenseenasatemplateforacoordinatedglobalapproachtocarbonpricing.TheEUETSsetstargetsforemissionsreductionandisnowinitsfourthphase,whichwillapplyfortheperiod2021–30.The2030targetforgreenhousegasemissionswillrequirethesectorscoveredtoreduceemissionsby43%,comparedwith2005levels.RecentproposalsfromtheEuropeanCommissionhavesuggestedincreasingthetargetto61%.Therewillalsobeareductioninthenumberofallowancesissuedannually,andinturn,thepriceofcarbonmaycontinuetorise.Inthe16yearssincetheEUETSlaunched,however,nointernationalfinancialreportingstandardhasbeenagreedtoaddressspecificallyhowcarbonallowancesshouldbeaccountedforinfinancialstatements.Thislackofstandardisationmakesithardforbusinessestopresentthemselvestothemarket,andforthemarkettounderstandthefinancialconsequencesofemissionsandtherelatedcreditsoncompanies’balancesheets.Thiswasthesinglebiggestcriticismofthesystembytherespondentstothesurveyweconductedin2007andtoourlatestsurvey,conductedfromSeptember2020toJanuary2021.Inthe2007survey,thefirmsreportedusingsixdifferentwaystoaccountfortheircarbonallowances.Inthislatestsurvey(seeparttwoofthisreportforfullresults),the25respondentsusedfourdifferentaccountingmethodsforallowancesonthestatementoffinancialpositionandhowtheyaretreatedontheincomestatement.Thelackofuniform,generallyacceptedprinciplesforcarbon-allowanceaccountingmeansthatcompanieshavetoselectfromadiversearrayofpossibilities.Thereisnocleardirectiononthebestoptionsorcomparabilitywiththeirpeers.Investment,transactionandoperationaldecisionsmaybedelayedorhamstrungbythislackofclearaccountingtreatment.IftheEUETSistobeusedasatemplateforcarbonmarketsaroundtheworld,itwillbenecessarytohaveaninternationallyrecognisedwaytoaccountforcarbonallowances.Thiswillgiveinvestorsandstakeholdersclarityonhowcompaniesarefaringontheirpathtonetzero.Inthisreport,wearguethataccountingstandardsarenecessarysoonerratherthanlater.InApril2021,theEUintroduceditsCorporateSustainabilityReportingDirective,whichwillintroducereportingstandardsfromOctober2022onemissionsandwhichcoversalllargecompaniesandallcompaniesregisteredonlistedmarkets.Bothinvestorsandexternalstakeholdersareaskingformoreandbetterinformationaboutwhatcompaniesaredoingtoreducetheircarbonemissions.Thisisnolongerjustanissueforfinancialreporting.Rather,itshouldinformcorporatestrategy.Standardisedaccountinghelpstoensurealevelplayingfield.Inthesecondpartofthisreport,wehighlightbest-practiceaccountingforETS,asitnowstands,givingspecificexamplesbasedonPwC’sexperience.IftheEUETSistobeusedasatemplateforcarbonmarketsaroundtheworld,itwillbenecessarytohaveaninternationallyrecognisedwaytoaccountforcarbonallowances.Thiswillgiveinvestorsandstakeholdersclarityonhowcompaniesarefaringontheirpathtonetzero.6PwCEmissionstradingsystemsKeysurveyfindingsThesurveyincludesresponsesfrom25companies,inindustriesincludingoilandgas,cement,steel,chemicalsandaviation.1ThesurveyandfindingsarepredominantlybasedontheInternationalFinancialReportingStandards(IFRS).ToomanydifferentreportingmethodsAmongthe25respondents,fourdifferentwayswereusedtoaccountforgrantedandpurchasedallowancesandthreedifferentwaystovaluegrantedallowances.2Noobligationisrecognisedunlessthereisashortfall,attherelativecontractpriceforallowancestobepurchasedunderforwardpurchasecontracts,withthebalancevaluedattheprevailingmarketprice6Atcarryingvalueforallowancesalreadygranted/purchased,withthebalancevaluedattheprevailingmarketprice6Noobligationisrecognisedunlessthereisashortfall,withthebalancevaluedattheprevailingmarketprice4Atcarryingvalueforallowancesalreadygranted/purchasedandattherelativecontractpriceforallowancestobepurchasedunderforwardpurchasecontracts,withthebalancevaluedattheprevailingmarketprice4OtherQuestion:Howistheobligationforemissionsinitiallymeasured?Exhibit4:InitialmeasurementsofemissionallowancesSource:PwCandIETAsurvey,September2020toJanuary2021Question:Wherearegrantedallowancesinitiallyrecognisedonthebalancesheet?IntangiblefixedassetsIntangiblefixedassetsAtnilvalueInventoryInventoryAtfairvalueatdateofreceipt,withoppositeentryrecognisedasdeferredincomeonthebalancesheetOtherOtherDebtorsDebtorsQuestion:Atwhatvaluearegrantedallowancesinitiallyrecognisedonthebalancesheet?Question:Wherearepurchasedallowancesrecordedonthebalancesheet?1111136644Other6311Exhibit1:BalancesheetrecognitionforgrantedallowancesExhibit2:ValuingallowancesExhibit3:BalancesheetrecordingforpurchasedallowancesSource:PwCandIETAsurvey,September2020toJanuary2021Source:PwCandIETAsurvey,September2020toJanuary2021Source:PwCandIETAsurvey,September2020toJanuary20211Twenty-fivecompanieswereincludedinthesurvey;threeoftherespondentsindicatedthattheircompanyusesEUETSallowancesonlyfortradingpurposes,andthereforewereexcludedfromthemainanalysis.Companiesusedfivedifferentwaystomeasuretheallowance:7PwCEmissionstradingsystemsQuestion:Whichlineitemoftheincomestatementisusedtorecordthesaleofgrantedallowances?OtheroperatingincomeCostofsalesRevenueOtherThesedifferentreportingmethodsarecausingnearlyhalfofrespondentstobeconcernedaboutthelackofstandardisedreportinganditseffects.45%ofrespondentsraisedconcernsthatthereisnosingleaccountingtreatmentforemissionscredits,whichleadstoalackofcomparabilityinemissionsaccounting.Lackofconsistentaccountingguidanceinthisareaiscausingsignificantdiversityinpractice.Complianceofficer,largeenergycompany8221Exhibit5:RecordingsalesofgrantedallowancesontheincomestatementSource:PwCandIETAsurvey,September2020toJanuary2021Andenteredthemonfourdifferentlinesontheincomestatement:8PwCEmissionstradingsystemsAccountingforcarbonemissions19PwCEmissionstradingsystemsClimatechangeisarguablythedefiningchallengeofourage.InNovember2021,representativesfromnearlyeverycountrywillmeetinGlasgowforthe26thUNClimateChangeConferenceoftheParties(COP26)—eachwithaplaninhandforhowtheywillcutcarbonemissions.Onekeyaspectofmanyofthosestrategiesislikelytobeanationalorregionalemissionstradingsystem,whichgovernmentsareincreasinglyrealisingcanchangepollutingbehaviour,spurinnovationandhelptheglobalcommunityrespondtotheclimatecrisis.2Inthefirsthalfof2021,boththeUnitedStatesandChinarampeduptheircommitmentstocombatingclimatechange.PresidentJosephBidenpledgedthattheUSwouldreachnetzeroemissionsby2050.ThatannouncementcameafewmonthsafterPresidentXiJinpingsaidChinawouldaccelerateitsownemissionsreductiontargets,bringingtheworld’stwobiggestemittersintogreateralignmentwiththeEuropeanUnion’sambitiousclimategoals.TheEU’slongstandingtargetofreducingemissionsinlinewiththegoalsoftheParisAgreementhasbeenunderpinnedbythesuccessoftheEUETS,whichcurrentlycovers40%ofthebloc’stotalgreenhousegasemissions.Thatfigurecoulddoubleoverthenextdecadeasemissionstradingexpandstonewsectors.AndastheUS,Chinaandothercountriesbegintodevelopnewtradingschemesorintegrateexistingonesintoabroaderglobalsystem,theEUETSiswell-placedtoactasatemplate.Onekeyconcern,however,remainsthelackofstandardisedaccountingforcarbon,somethingthathasnotchangedoverthelifeoftheEUETS.PwCandtheInternationalEmissionsTradingAssociation(IETA)asked25largecompaniesinEurope—arepresentativesampleofthecontinent’sbiggestemitters,inindustriesincludingsteel,cement,petrochemicalsandpower—howthemechanicsofreportingwithinthesystemwereworking.Itwasafollow-uptoasimilarsurveyconductedin2007.Wefoundthatwhilethecarbonmarkethaschanged,therearestillconcernsabouthowcompaniesaccountfortheiremissionscredits.Halftherespondentsconsidertheallowancesanintangiblefixedasset;one-quarterconsidertheminventory.Infact,thecompanies’approachesdifferonnearlyeveryaspectofhowemissionsandrelatedcomplianceobligationsaremeasured,valuedandrecordedonthebalancesheettotheextentthatonewouldbehard-pressedtoassumethattheywerepartytothesamecarbontradingsystem(seeparttwoforhowthisaffectsreporting).Companieswantconsistencybecauseinvestorsdemandit,andstandardisationwillgainevengreaterimportanceasmorecompaniesjointheEUETS.Consistencymatterstoleadersfarbeyondthecomplianceandfinancedepartments,giventhegrowingimportanceofcarbonasacommodity.Anenvironmental,socialandgovernance(ESG)revolutionisunderway,influencinghowcompaniesdefinetheirstrategyandreporting.ESGistopofmindinboardrooms,andC-suiteleadersneedtounderstandtheeffectsofcarbonemissionsandcarbonpricingontheirbusinesses.Accountingforcarbonwillbecomeakeymetricandcouldinfluenceimportantcorporatedecisions.ESGisleadingtosignificantbusinesstransformations,andnotjustinbusinessesthatarecarbonintensive.Inresponsetocallsforgreatertransparencyaboutgreenhousegasemissions,companiesmustbeabletocommunicateclearlyandunambiguouslyexactlywhattheyaredoingtocutemissionsandhowthoseactionsaffecttheirbottomline.Theglobalcommunityneedstocometogethertogiveemissionstradingsystems,liketheEUETS,afirmfoundationonwhichtohelpcompaniesmakeandmeettheircarbonreductiontargets.Therehavebeeneffortstodothisinthepast,butsofartheyhavefailed.2Taylor,MargaretR.,Innovationundercap-and-tradeprogrammes,ProcNatlAcadSciUSA.27March2012;109(13):4804–4809.Publishedonline12March2012.doi:10.1073/pnas.111346210910PwCEmissionstradingsystemsBackgroundTheETSisthecentralpillaroftheEU’sambitiousclimatestrategyandwastheworld’sfirstmajorgreenhousegastradingschemewhenitlaunchedin2005.Itnowlimitsemissionsfromaround10,000powerandmanufacturingfacilities—includingsteelandothermetalworks,andthechemicals,glassandpaperindustries—alongwithairlinesthatoperatewithinthebloc,whichbuyandsellcarbonallowanceswithinthecap-and-tradesystem.Suchsystemscreatealegallybindingenvironmentalresultandtargetforemissionsreductions.TheEUsetsacaponthetotalamountofemissionsthatcompaniesinthesystemcanproduce.Attheendofeachyear,companiesareobligedtosurrenderallowancesrepresentingtheiremissions.Companiesthathavedecarbonisedfasterthanexpectedcankeeptheirspareallowancesforthefutureorsellthemtoothercompanies.TheETScaponemissionshasshrunkovertimetoforcereductionsandwillcontinuetodosoaswenear2050.Thathasdrivenupthepriceofcarboncreditsbymorethan600%since2018,andthepriceofcarbonisonlyexpectedtorisefurther(seeExhibit6).Exhibit6:CarbonpricesarerisingICEFront—DecemberEUAsettlementprice1Jan081Jan091Jan101Jan111Jan121Jan131Jan141Jan151Jan161Jan171Jan181Jan191Jan201Jan21€60.00€50.00€40.00€30.00€20.00€10.00€0.00Source:ICEEndex11PwCEmissionstradingsystemsWithaneyeoncarbonneutralityby2050andanewtargetofa55%netreductioninemissionsby2030,theEuropeanCommissionhasproposedrevisingandexpandingthescopeoftheETStoincludeindustriessuchasroadtransportandshipping.Thecommissionalsoaimstoincreasethepaceofannualcapreductions.Thatmeansasthenumberofinstallationscoveredinthemarketexpandssignificantly,attemptsarebeingmadetostrengthenandtightenthemarket.SoastheEUETSentersitsfourthphasethisyear,itsgoalisthattheoverallnumberofemissionallowanceswilldeclineatanannualrateof2.2%from2021onwards,comparedwith1.74%currently.AglobalconversationThesemovesreflecttheurgencyoftheglobalconversationaroundclimatechange.Climateactivistshavebecomemorevocalandmoreinfluential,andmanyconsumersnowdemandalevelofclimateconsciousnessfromthecompaniestheypatronise.APwCsurveyinApril2021intheUSofmorethan5,000consumers,forexample,foundthat80%saidtheyweremorelikelytobuyfromacompanythatstandsupfortheenvironment.3Investorsalsoneedtounderstandhowexposedtheirportfoliosaretoemissionsandtheirpotentialcosts.Webelieveboardsshouldhavearesponsibilitytoensureconsistencybetweenthecorporatenarrativeaboutdisclosuresofclimaterisksandcompanyfinancialstatements.TheEUCorporateSustainabilityReportingDirective(CSRD),arevisiontotheNon-FinancialReportingDirective(NFRD),specificallytargetscompaniesthat“oftenomitinformationthatinvestorsandotherstakeholdersthinkisimportant.”ItwillintroduceanEU-widelimitedassurancerequirementforreportedsustainabilityinformationfrom1January2023.Althoughthenon-financialreportingstandardsarenotyetagreedupon,inareflectionofhowseriouslypolicymakersareaboutstandardisation,theEuropeanCommissionisaimingtoalignitsnon-financialreportingrequirementswithglobalnorms,includingthoseestablishedbytheInternationalSustainabilityStandardsBoard(ISSB).TheEUhasalsoproposedexpandingthenumberofcompaniesthatmustadheretotheCSRD(comparedtotheNFRD)from11,000to50,000,includingalllistedandunlistedlargecompanies.Listedsmallandmedium-sizedenterpriseswouldbeheldtosimplerstandardsbutarebeingbroughtinbecause“thetransitiontoasustainableeconomyislikelytomeanthatcollectingandsharingsustainabilityinformationbecomescommonbusinesspracticeforcompaniesofallsizes.”Thatcombinationofreputationalandregulatorydriversischangingthebusinessimperativearoundclimatechange.Companiesmustnowcurbtheirpollutingpracticesforthesakeofboththeirbrandandbottomline.Policymakersarepushinginthesamedirection,andthatislikelytoleadtotheintroductionandintegrationofevenmoreemissionstradingsystems.EUETSasgloballeaderThe2015ParisAgreementsetthestageforanevengreaterproliferationofinternationalcarbonmarkets,andEuropeanpolicymakershavetakenahands-onapproachtotheirdevelopment.AsafoundingmemberoftheInternationalCarbonActionPartnership,theEUisalsoworkingwithroughly17countriesinpreparingtheirownsystems.Givenitslonghistory,theEUETSseesitselfasamodelforglobalcarbontrading.Indeed,nationalandsubnationalschemesthatfollowitsleadareindevelopmentoralreadyoperatinginCanada,China,Japan,NewZealand,SouthKorea,theUKandtheUS.Lastyear,SwitzerlandestablishedalinkwiththeEUsystem.AndRussiawilllaunchapilotcarbon-tradingprogrammeinthefareasternislandregionofSakhalininthenearfuture,withaviewtopossiblyexpandingitnationwide.3PwCConsumerIntelligenceSurvey,June202112PwCEmissionstradingsystemsIdeally,long-termcooperationwillleadtothedevelopmentofsystemsthatallowforagreaterdegreeofinteroperabilityandconnectivity.Thoselinkswillallowmultinationalstotradecarbonallowancesacrossjurisdictions,levellingtheinternationalplayingfieldbyharmonisingcarbonpricesandmakingthemmorestablewhileincreasingliquidity.Anintegrated,internationalcarbonmarketwillnotonlyreducethecostofcuttingemissions—whichwillspurcompaniestocutemissionsfurther—butitwillalsobolsterglobalcooperationonclimatechange.TalkofaminimumglobalpriceforcarbonislikelytobeakeytopicatCOP26.TheneedforchangeTheEUisonthecuspofsubstantialenvironmentalpolicychangesresultingfromtheEUGreenDealthatarelikelytoexpandandtightenthecarbonmarket,fundamentallychanginghowitoperatesintheregionandtransformingmanyofitskeydesignfeatures.PoliciesexpectedtoaffecttheEUETSincludetheproposedCarbonBorderAdjustmentMechanism(CBAM).WhilesomegoodsmadeintheEUaresubjecttoacarbonpricethroughtheEUETS,importsfacenosuchcharge.TheCBAMwouldactasawaytoleveltheplayingfieldbyimposingalevyonsomecarbon-intensivesectors,includingsteelandcement,tohelpensurethatEUproducersarenotplacedatapricedisadvantageorthatEuropeandecarbonisationeffortsarenotunderminedthroughcarbon-intensiveimports(so-calledcarbonleakage).TheCBAMismeanttoactasanincentiveforothercountriestoimplementcarbonpricing,ifonlytokeeptheircompaniesfrombeingpenalisedwhensellingtotheEuropeanmarket.Thepolicyiscontroversial,andtherearelikelytobemorediscussionsbeforeitsproposedimplementationin2023.Whatevertheoutcome,thistypeofpolicyinterventionisexpectedtoquickenthespreadofemissionstradingsystemsaroundtheworld.13PwCEmissionstradingsystemsThedevelopmentofthevoluntarycarbonmarketThevoluntarycarbonmarket(VCM)drivesinvestmentinprojectsthatdeliverindependentlyverifiedcarbonreductionsthroughthesaleofcarboncredits.Thesecreditsrepresentthereduction,avoidanceorsequestrationofCO2emissionsandcanbetraded.IncontrasttocompliancecarbonmarketssuchastheEUETS,carbonreductionsfromtheVCMarenotusedtomeetlegalrequirements.Anycompaniesorstateactorsthatsetemissionsreductiongoalscanusethem.VCMsemergedinthe1990swhenclimateactivistsdevelopedpioneeringwaystofightclimatechange.In2008,theInternationalCarbonReductionandOffsetAlliancewasestablishedtodevelop,applyandadvancebestpracticesinvoluntaryclimateactionthroughacodeofbestpractice.AlthoughVCMsaresignificantlysmallerthantheregulatedcompliancemarkets,theiruseisgrowingexponentially.Attheendof2019,theVCMmarketwasvaluedatUS$320m,comparedwithUS$249bnfortheEUETS.VCMshaveakeyroletoplayinenhancingglobalclimateambition.Today,severalcountries,includingColombiaandSouthAfrica,arestartingtoleverageVCMmechanismsfortheircompliancepolicydesign,tobringflexibilityandtransparency.ButtheVCMfacestheproblemoflackofstandardisationofaccountingprinciples,similartotheEUETS.Inaddition,thereisnouniformpriceforcarbonandalackofqualitycontrolacrossVCMprojectstoverifylevelsofemissionsreductionoravoidanceofemissions.Launchedin2020,theTaskforceonScalingVoluntaryCarbonMarketsisanewglobalinitiativelookingtodriveevenmorefinanceintoVCMsandmayleadtofutureworkonaccountingtreatmentofVCMassets.14PwCEmissionstradingsystemsAccountingstandardisationiskeyStandardisationofaccountingforcarbonallowanceswouldallowbusinessleaderstoshowinvestorsandconsumersmoreclearlythecostoftheiremissionsandtheimpactoftheireffortstoreduceemissions.ThisisnotonlyforthecompaniescurrentlycoveredbytheEUETS(see“Thedevelopmentofthevoluntarycarbonmarket,”page13).Inaddition,standardisedaccountingofemissionsimprovestransparencyaroundcarbonpollution,bothintermsofwhatacompanyisachievingandwhereitmightbefallingshort.Thathasbothregulatoryandreputationalbenefitsthatgobeyondwhatmightcurrentlyseemlikethescantmaterialityofcarboncreditsonacompany’sbalancesheet.Theimportanceofprovidingclearinformationwillgrowwiththeincreaseofmandatednon-financialreportingandwiththeincreaseof(expected)futurecash-flowimplicationsofemissions.TheInternationalAccountingStandardsBoard(IASB)isconsultingonitsworkplanforthenextfiveyears,andthereisanopportunityforcompaniestovoicetheirconcernsaboutthelackofstandardisation.Commentsaredueby27September2021.OneofthepotentiallargeprojectsidentifiedbytheIASBis‘pollutantpricingmechanisms,’whichwoulddealwithemissionstradingschemessuchastheEUETS,andpossiblyothersystems.Ifenoughstakeholdershaverespondedinsupportofcarbon-accountingstandardisation,thatwillgiveimpetustoamovementthathasstalledoverthepastdecade.Withthefocusonaglobalpriceforcarbonandtheprospectofmoreintensedebatesintherun-uptoCOP26,webelievemanystakeholderswillconsiderthisimportantandcontinuetopushforchange.Itwillbenefittheindustryandhelpcompaniesdeveloptheirsustainabilitystrategiessecureintheknowledgethatthereisaconsistentwaytoaccountforemissionsundercap-and-tradesystems.IfcompaniesimpactedbytheEUETScanleadthewayonthis,itwillstrengthenitspositiontobecomethetemplateforaninteroperableglobalemissionstradingsystem.TheInternationalAccountingStandardsBoard(IASB)isconsultingonitsworkplanforthenextfiveyears,andthereisanopportunityforcompaniestovoicetheirconcernsaboutthelackofstandardisation.Commentsaredueby27September2021.15PwCEmissionstradingsystemsSurveyresults2TheEUETScoversthemorethan10,000powerandmanufacturingfacilitiesthatmakeup40%ofallemissionsinEurope.Itisanemissionstradingsysteminwhichinstallationsbuyand/oraregrantedemissionallowancesthatpermitalevelofpollution.Theseallowanceshaveavaluethatmustbeaccountedforinfinancialstatements.Toobtaininsightsintotheaccountingforemissionsandrelatedallowances,PwC,inconjunctionwiththeIETA,conductedaglobalsurveyfromSeptember2020toJanuary2021ofcompaniesparticipatingintheEUETS.Thisisafollow-uptosimilarresearchconductedin2007.ThequestionsinthesurveyfocusedontheaccountingapproachesappliedbymajororganisationsthatarepartoftheEUETS.Theresultsdemonstratethedifferentapproachestoaccountingforcarbonallowancesthatareusedtodayandmayprovidevaluableinsightsforotheremissionstradingschemes.RespondentsTherewere25completeresponsestothesurvey.ThreeoftherespondentsindicatedthattheircompanyusesEUETSallowancesonlyfortradingpurposes.Becausethesecompaniesdon’treceiveallowancesbasedonallocationdataanddon’tpurchaseallowancestocoveremissions,somequestionsinthesurveywerenotrelevant.Toensurethatthesurveyresultswerepresentedonthebasisofconsistentactivities,weexcludedthesethreecompaniesfromtheanalysisbelow.ThesampleisrepresentativeofthecompaniesparticipatingintheEUETS.Itincludes22companies.Almostallofthecompanies(91%)arelargeenterprises.Withtheexceptionofone,allpreparetheirfinancialstatementsinaccordancewithIFRS.Thecompaniesareactiveinarangeofindustries.Halfareinironandsteelandoilrefining(seeExhibit7).Thecompaniesthatareinan‘otherindustry’includemanufacturers,chemicalcompaniesandlogisticscompanies.Themainconcernssharedbytherespondentsarethelackofasingleaccountingtreatmentandlackofcomparabilityinemissionaccounting.Thishighlightstheimportanceofcomparabilityandtransparencyandindicatestheneedforconvergencearoundthetreatmentofcarbonemissionsforaccountingpurposes.Exhibit7:Mainindustriesofsurveyrespondents16PwCEmissionstradingsystemsOther36%Ironandsteel23%Oilrefining14%Cement9%Aviation5%Paperandboard5%Petrochemicals5%Powerstationsandothercombustion5%Source:PwCandIETAsurvey,September2020toJanuary202117PwCEmissionstradingsystemsShortlybeforetheEUETSlaunchedin2005,theInterpretationCommitteeoftheInternationalAccountingStandardBoard(IASB)issuedwhatwasknownasIFRIC3onEmissionsRights,whichwasslatedtogointoeffectinMarch2005.IFRIC3requiredentitiestoaccountfortheemissionallowancesthattheyreceivedfromgovernmentsasintangibleassets,recordedinitiallyatfairvalue.Aliabilitywasthereforerequiredtoberecognisedfortheobligationtodeliverallowancesequaltoemissionsproducedandmeasuredatthebestestimateoftheexpenditurerequiredtosettlethepresentobligationatthebalancesheetdate(usually,themarketprice).InJune2005,however,withintwomonthsofitseffectivedate,theIASBdecidedtowithdrawIFRIC3,primarilybecauseofthemismatchesitcausedbetweenthevaluationofassetsandliabilities,whichresultedinartificialincomestatementvolatility.AlthoughexistingstandardswithinIFRSdoindirectlydealwiththeaccountingofemissions,thewithdrawalofIFRIC3meanttherewasnospecificguidanceoncarbonaccountingattheinternationallevel.Therehavebeenmovestoremedythis,andsince2005,accountingforemissionstradingschemes,laternamed‘pollutantpricingmechanisms,’hasbeenontheIASBagendamultipletimes,thoughnonewguidancehasbeenpublished.InthecurrentroundoftheIASB’sThirdAgendaConsultationforitsfive-yearworkplan,whichclosesinSeptember2021,pollutantpricingmechanismsareoneoftheproposednewIASBprojects.Thisisduetothecontinuedlackofcomparableaccountingstandardsinthisarea.AlthoughsomecompaniesusedtheguidanceinIFRIC3afteritswithdrawal,otherwaysofaccountingforemissionsallocationsemerged.Thisisreflectedbyoursurveyresults,whichshowavarietyofapproaches.ThesurveyThesurveyaskedquestionsonhowemissionallowancesareaccountedforandhowtheiruseimpactstheiraccountingtreatment.Here,wepresenttheresults,whichclearlyhighlightthelackofstandardisation.ASSETSGrantedandpurchasedallowancesThemajorityoftherespondentsrecognisegrantedallowancesatnilvalue.Thisisnotsurprising,asthisapproachcanreducethevolatilityintheincomestatement.Asmallergroup(27%)recognisesgrantedallowancesatfairvaluewiththecorrespondingentryindeferredincome(seeExhibit8).Question:Atwhatvaluearegrantedallowancesinitiallyrecognisedonthebalancesheet?AtnilvalueAtfairvalueatdateofreceipt,withoppositeentryrecognisedasdeferredincomeonthebalancesheetOtherExhibit8:ValuationofgrantedallowancesSource:PwCandIETAsurvey,September2020toJanuary202159%27%14%18PwCEmissionstradingsystemsHalfoftherespondentsrecogniseallowancesasintangibleassets,28%asinventory,9%asdebtorsand18%as‘other.’Althoughthereisalevelofconsistencyinthewaycompaniesrecognisetheirgrantedallowancesandpurchasedallowances,notallrespondentsrecogniseboththeirgrantedallowancesandtheirpurchasedallowancesinthesameway.AmortisationandrevaluationRespondentsareunanimousontheiraccountingpolicywithrespecttotheamortisationordepreciationoftheallowances:norespondentsamortiseordepreciategrantedorpurchasedallowances.Aclearmajorityoftherespondents(77%)donotrevaluegrantedandpurchasedallowancessubsequenttotheirinitialrecognition.Theremainingrespondents(23%)dorevaluetheallowances,andthemajorityofthese(18%ofthe23%)recordtheoppositeentryintheincomestatement.Onerespondentrecognisesthecorrespondingentryinequity.Giventhevolatilityofthemarketpriceforallowancessincetheschemebeganin2005,thesedivergentapproachescanleadtoverydifferentincomestatementresultsfromoneperiodtothenext.ReleasingdeferredincomeAsindicatedinExhibit8,27%oftherespondentsrecognisegrantedallowancesatfairvalue.Alltheserespondentsalsorecognisedeferredincomeontheirbalancesheet.However,noconsistentapproachcanbeidentifiedinthewaytheyreleasedeferredincometotheincomestatement:67%ofthesecompaniesreleasethedeferredincomeinlinewiththeemissionsproducedinaperiod;33%founddifferentsystemicallocationbasesovertheperiodforwhichtheallowancesweregranted,forexample,onastraight-linebasis.Halfofthecompaniesthatreleasedeferredincometotheincomestatementreleasethisdeferredincometocostofsales.Theotherhalfreleasedeferredincometoeitheroperatingexpensesorother(operating)income.LIABILITIESObligationThesurveyresultsshowedavarietyofrecognitionandmeasurementapproachesfortheobligationassociatedwiththeproductionofemissions(seeExhibit9):36%oftherespondentsdonotrecogniseanobligationunlessthereisashortfall;45%oftherespondentsdorecogniseanobligationatthecarryingvalueoftheallowancesalreadygrantedorpurchased.Exhibit9:AccountingtreatmentforemissionsobligationQuestion:Howistheobligationforemissionsinitiallymeasured?Atcarryingvalueforallowancesalreadygranted/purchased,withthebalancevaluedattheprevailingmarketpriceNoobligationisrecognisedunlessthereisashortfall,withthebalancevaluedattheprevailingmarketpriceAtcarryingvalueforallowancesalreadygranted/purchasedandattherelativecontractpriceforallowancestobepurchasedunderforwardpurchasecontracts,withthebalancevaluedattheprevailingmarketpriceOtherSource:PwCandIETAsurvey,September2020toJanuary202127%27%18%Noobligationisrecognisedunlessthereisashortfall,attherelativecontractpriceforallowancestobepurchasedunderforwardpurchasecontracts,withthebalancevaluedattheprevailingmarketprice9%18%19PwCEmissionstradingsystemsSaleofgrantedallowancesThirteencompaniesrespondedthattheyvaluetheirgrantedallowancesatnilvalue.Ofthese13companies,70%accountforasaleofgrantedallowancesasagainondisposalrecognisedimmediatelyasacredittotheincomestatement,and15%ofthesecompaniesaccountforthesaleofgrantedallowancesasagainondisposalrecognisedasdeferredincomeandreleasedtotheincomestatementovertheremainderofthecomplianceyear.Themajorityofthe13companies(62%)recordthesaleofgrantedallowancesasotheroperatingincome.Othercompaniesrecordanoffsettothecostofsalesorasrevenue.ForwardcontractsTwelveofthe22companiesrespondedtothequestiononaccountingapproachesforforwardcontractstopurchaseorsellemissionallowances.Thismayindicatethatonlyhalfoftherespondentsengageinforwardpurchasesandsalearrangementswithregardstoemissionallowances.Forwardpurchasecontractsaretreatedinavarietyofwaysforaccountingpurposes,dependingonfactsandcircumstances.Somecompaniesapplyhedgeaccountingandrecognisetheeffectiveportionofforwardcontractgainsorlossesinothercomprehensiveincome,andlateradjustthecostoftheallowancespurchasedbytheseamounts.Othercompaniesenterintoandcontinuetoholdforwardcontractstopurchaseallowancesinaccordancewiththeirexpectedusagerequirements.Theseforwardcontractsmayqualifyfor‘ownuse’andareaccountedforasexecutorycontracts(off-balance-sheetcommitments).Athirdgroupofcompaniesrecordsforwardcontractsatfairvaluethroughprofitandloss.Ofthethreecompaniesthatwereexcludedfromthemainanalysesofthesurvey(becausetheyuseemissionallowancesonlyfortradinganddidnotcompletethesurveyinfull),twoaccountforforwardcontractsatfairvaluethroughprofitandlossintheincomestatement.PurposeofemissionallowancesTwenty-tworespondentsindicatedthattheyuseemissionallowancestocomplywithregulation.Thisisinlinewithexpectations,giventhatallbutonereceivegrantedallowancesundertheschemeandallpurchaseallowancestooffsetemissions.Nexttocomplyingwithregulation,respondentsalsouseemissionallowancestovoluntarilyoffsetemissions,totradeonthemarketandtoregulatecashflows.Thethreeremainingrespondents(excludedfromtheanalysisinExhibit10)indicatedthattheyonlytradeallowancesandthattheydonotreceiveallowances.Exhibit10:PurposesofuseofemissionallowancesQuestion:Forwhatpurposedoyouuseemissionallowances?TocomplywithregulationTooffsetemissionsvoluntarilyTotradeonthemarketToregulatecashflows100%27%9%9%Note:Multipleanswerswerepossible.Source:PwCandIETAsurvey,September2020toJanuary202120PwCEmissionstradingsystemsConclusionThesurveyresultsin2021alignwiththeconclusionsreachedinoursurveyconductedin2007,showingthatlittleprogresshasbeenmadeonestablishingstandardisedaccountingprinciplesforcarbonemissions.Giventheevolutionofthecarbonmarketinthepast14years,theincreaseinpricesandtheincreaseinthescopeoftheEUETS,wewouldarguethatthiscontinuestobeanareathatwouldbenefitfromcommonaccountingtreatment.Thediversityofaccountingapproachesinoursurveyresultsshowsthatasofnow,thereisnoclearwaytocomparecompanies’financialstatementsregardingemissionsaccounting,andthismakesclearcommunicationwithkeystakeholdersmoredifficult.WithpollutantpricingmechanismsontheIASB’sradaragainaspartofthe2021AgendaConsultation,thereisapossibilitythatprogresswillbemadeinreducingdiversityinpracticeandincreasingtransparencyinaccountingforcarbonemissions.21PwCEmissionstradingsystemsAccountingapproachesfortheEUETSandequivalentemissionstradingschemes—PwCviewTable1:Threeacceptableaccountingmodelsforemissionschemesthatwehaveobservedbeingappliedinpractice‘Fullmarketvalue’approach(IFRIC3)‘Costofsettlement’approach‘Initialmarketvalue’‘Nominalamount’Grantedandpurchasedallowances(asset)WhentorecogniseRecognisewhenabletoexercisecontrol.HowtomeasureMeasureinitiallyatfairvalueatthedateofinitialrecognition.Measureinitiallyandsubsequentlyatcost.Forgrantedallowances,thisisusuallynil.Purchasedallowancesaresubsequentlysubjecttoimpairmentreview.Measuresubsequentlybasedoneithertheamountinitiallyrecognised(costmodel)ortherevaluedamount(revaluationmodel).Measuresubsequentlybasedoneithertheamountinitiallyrecognised(costmodel)ortherevaluedamount(revaluationmodel).GovernmentgrantWhentorecogniseRecogniseatthesametimeasallowances.HowtomeasureMeasureinitiallybasedonthefairvalueoftheallowancesatthedateofinitialrecognition.Amortiseoverthecomplianceperiodonasystematicandrationalbasis.Measureinitiallybasedonthefairvalueoftheallowancesatthedateofinitialrecognition.Amortiseoverthecomplianceperiodonasystematicandrationalbasis.Measureinitiallyandsubsequentlyatanominalamount(usuallynil).22PwCEmissionstradingsystems‘Fullmarketvalue’approach(IFRIC3)‘Costofsettlement’approach‘Initialmarketvalue’‘Nominalamount’Emissionsobligations(liability)WhentorecogniseRecognisewhentheliabilityisincurred.HowtomeasureRemeasuretheliabilitybasedonthefairvalueofallowancesateachperiodend(oravaluebasedonaforwardrate—seeparagraphsbelow),whethertheyaretobesettledusingtheallowancesonhandorpurchasedfromthemarket.Remeasuretheliabilityateachperiodend.Theliabilitytobesettledusingallowancesonhandismeasuredatthecarryingamountofthoseallowances(seebelowformethodologies).Anyexcessemissionismeasuredatthemarketvalueofallowancesattheperiodend(oravaluebasedonaforwardrate—seeparagraphsbelow).Remeasuretheliabilityateachperiodend.Theliabilitytobesettledusingallowancesonhandismeasuredatthecarryingamountofthoseallowances(seebelowformethodologies),whichisusuallynil.Anyexcessemissionismeasuredatthemarketvalueofallowancesattheperiodend(oravaluebasedonaforwardrate—seeparagraphsbelow).GovernmentgrantsWhenagovernmentgranttakestheformofatransferofanon-monetaryasset,itistypicaltoassessthefairvalueofthenon-monetaryassetandtoaccountforbothgrantandassetatthatfairvalue.IAS20alsoallowsanalternativeaccountingtreatment,whichistorecordbothgrantandassetatanominalamount.Governmentgrantsrelatedtoassets,includingnon-monetarygrantsatfairvalue,shouldbepresentedinthebalancesheetbyeithersettingupthegrantasdeferredincomeorbydeductingthegrantinarrivingattheasset’scarryingamount.Inbothcases,thiswillresultinthegrantincomebeingrecognisedinthesameperiodinwhichtheassetisdepreciated.Inapplyingthisaccountingtreatment,thegrantincomeisrecognisedinprofitorlossinthesameperiodastheexpenditurerelatingtotheasset.Furthermore,IAS20offerssomeflexibilitywithregardstowheregrantincomeispresentedintheincomestatement.Grantsrelatedtoincomearesometimespresentedasacreditintheincomestatement,eitherseparatelyorunderageneralheadingsuchas‘otherincome.’Alternatively,theyaredeductedinreportingtherelatedexpense.ImpairmentTheintangibleassetsrecognisedarenotamortised,providedresidualvalueisatleastequaltocarryingvalue(IAS38paragraph103).Emissionallowancesrecognisedasanassetshouldbetestedforimpairmentwherethereareindicatorsofimpairment,inaccordancewiththerequirementsofIAS36.FIFOversusweightedaverageThereisanadditionalconsiderationforentitiesusingthe‘costofsettlementapproach,’becausethemeasurementoftheobligationforwhichallowancesareheldwilldependonwhetherthecarryingamountofallowancesisallocatedtotheobligationona‘firstin,firstout’oronaweightedaveragebasis.Thisisaparticularissuewhereabalancesheetdateisnottheendofacomplianceperiod—forexample,ataninterimbalancesheetdate(inwhichthefinancialyearisthesameasthecomplianceperiod)oratafinancialyearend(inwhichthefinancialyearisnotthesameasthecomplianceperiod).23PwCEmissionstradingsystemsMarketrateandforwardrateWhereanentityrecordssomeorallofitsemissionsobligationsatfairvalue,itshouldordinarilycalculateitsprovisionusingthemarketpriceatthebalancesheetdateoftherelevantallowancesthatitwillneedtopurchase.However,totheextentthattheentityhasenteredintoaforwardcontracttobuyallowancesatafixedpriceonafuturedate,itispermissibletoprovideattheforwardcontractedrate(ratherthanthemarketrate),becausethisisthebestestimateoftheamountthattheentityexpectstopaytosettleitsobligation.Thiswouldbeacceptableprovidedtheentitymeetsthe‘own-useexemption’inIFRS9withrespecttoitsemissionallowanceforwardcontracts.Usingtheforwardrateisnotappropriatewheretheentitytradesintheseemissionallowances.Oncetheentitycommencestrading,theseinstrumentsfalloutsidethe‘own-useexemption’inparagraph2.5ofIFRS9.Theaccountingpolicychosenforemissionsobligations,whichshouldbeconsistentlyapplied,willdependontheoverallaccountingmodelthatisbeingusedforemissions(includingallowances).Entitiesshouldmakeclearintheiraccountingpolicynotewhichapproachisapplied.ExampleToillustratetheimpactonthefinancialstatementsofthesethreeaccountingapproaches,considerthefollowingscenario:•CompaniesA,BandCparticipateinacap-and-tradeschemeforemissionsrights.•Allcompanieshavefinancialyearendsof31December20X1.•Eachcompanyreceives10,000grantedallowanceson1January20X1.•Themarketpriceofanallowance(equivalenttoonetonneofcarbondioxide)at1January20X1isC10,givingafairvalueofC100,000(C=currency).•Eachcompanyrequires12,500allowancestocoveritsobligationforthe20X1complianceyeartobesettledinFebruary20X2.•Themarketpriceat31December20X1isC12perallowance.Accountingpoliciesadopted:•CompanyAhasadoptedthe‘fullmarketvalue’approach,subsequentlyapplyingtherevaluationmodel(IFRIC3).•CompanyBhasadoptedthealternativeapproach1(‘initialmarketvalue’),subsequentlyapplyingthecostmodel.•CompanyChasadoptedthealternativeapproach2(‘nominalamount’).24PwCEmissionstradingsystemsTable2:Thecompanies’financialresultsandbalancesheetforthe20X1yearend‘Fullmarketvalue’approach(IFRIC3)Alternativeapproach1:‘initialmarketvalue’Alternativeapproach2:‘nominalamount’FiguresinCCompanyACompanyBCompanyCIncomestatementReleaseofdeferredincomeEmissionscostNetincome(loss)Othercomprehensiveincome(loss)BalancesheetIntangibleassetsLiabilityNetassetsCurrentyearresultRevaluationreserveShareholders’funds100,000i(-150,000)ii(-50,000)20,000120,000iii(-150,000)ii(-30,000)(-50,000)20,000(-30,000)100,000i(-130,000)iv(-30,000)n/a(100,000)i(-130,000)iv(-30,000)(-30,000)n/a(-30,000)0(-30,000)(-30,000)vn/a0(-30,000)v(-30,000)(-30,000)n/a(-30,000)i:10,000allowancesreceivedmeasuredatfairvalueatgrantdateC10perallowance(10,000xC10=C100,000)ii:12,500obligationmeasuredatfairvalueatperiodendofC12perallowance(12,500xC12=C150,000)iii:10,000allowancesreceivedmeasuredatthefairvalueatperiodendofC12perallowance(10,000xC12=C120,000)iv:Liabilitybasedonallowancesheldmeasuredatcarryingamount,andliabilityrelatedtoexcessemissionfairvalueatperiodend[(10,000xC10)+(2,500xC12)=C130,000]v:2,500shortfallinobligationmeasuredatfairvalueatperiodendofC12perallowance(2,500xC12=C30,000)•Itisimportanttonotethateachentity,producingthesamelevelofemissionsandholdingthesamenumberofallowances,willultimatelyberequiredtomakeupthesameshortfallinallowances.Intheexample,eachcompanywillhavetofinancetheshortfallofallowances,which,ifthepriceofallowancesremainedconstant,wouldcosteachcompanyC30,000.ForCompanyA,thedecisiontovaluetheentireobligationattheprevailingmarketpriceofallowancesmeansthatthereisamismatchinthetimingofrecognition,withthefollowingyearrecognisingacredittotheincomestatementofC20,000astheliabilityissettled.Thishighlightsthevolatilityinearningsthatcanarisewiththeuseofthismethod.•Furtherdifferencesinresultscouldarisewhenconsideringwhentheshortfallisrecognisedunderthecostofsettlementapproach.ThisisbecausethemeasurementoftheobligationforwhichallowancesareheldwilldependonwhetherthecarryingamountofallowancesisallocatedtotheobligationonaFIFOoronaweightedaveragebasis.Thisisaparticularissuewhereabalancesheetdateisnottheendofacomplianceperiod—forexample,ataninterimbalancesheetdate(inwhichthefinancialyearisthesameasthecomplianceperiod)oratafinancialyearend(inwhichthefinancialyearisnotthesameasthecomplianceperiod).25PwCEmissionstradingsystems•EntitiesusingtheFIFOmethodmeasuretheobligationatthecarryingamountperunitofemissions,uptothenumberofallowances(ifany)heldatthebalancesheetdateandattheexpectedcost(thatis,themarketpriceatthebalancesheetdate)perunitfortheshortfall(ifany)atthebalancesheetdate.•Entitiesusingtheweightedaveragemethodmeasuretheobligationusingtheweightedaveragecostperunitofemissionsexpectedtobeincurredforthecomplianceperiodasawhole.Todothis,theentitydeterminestheexpectedtotalemissionsforthecomplianceperiodandcomparesthiswiththenumberofallowanceunitsgrantedbythegovernment(and/orpurchased)andstillheldbytheentityforthatcomplianceperiod,todeterminetheexpectedshortfall(ifany)inallowancesheldforthecomplianceperiod.Theweightedaveragecostperunitofemissionsforthecomplianceperiodisthecarryingamountoftheallowancesheld(whichmightbenilforthosegrantedfornilconsideration)plusthecostofmeetingtheexpectedshortfall(usingthemarketpriceatthebalancesheetdate),dividedbytheexpectedtotalnumberofunitsofemissionsforthecomplianceperiod.Inotherwords:Theweightedaveragemethodisconsistentwiththeapproachtomeasuringitemsataninterimdate(listedinparagraphsB1toB23ofIAS34),suchastax,bonusesandvolumerebates.Theprincipleunderthisapproachisthat,whereanentityhasanobligationtheeffectiverateablemeasurementofwhichisdeterminedbyreferencetoafullperiod’sactivities,measurementismadeonthebasisofthevolumeofactivitygivingrisetotheobligationuptotheinterimdateattheexpectedeffectiveratefortheperiod(determinedonthebasisofexpectedactivityforthefullyear).Thisprinciplecanberationalisedonthebasisthatthereisapresumptionthattheentitywillcontinueoperatingandthatthebestestimateoftheamountthattheentityexpectstopayshouldrecognisethis,aswellasthefactthatsettlementcan,inreality,onlybeforaspecifiedperiodthatstraddlestheinterimperiod.AccountingforforwardpurchasesorsalesofemissionallowancesThemainquestionwhenaccountingforforwardpurchaseorsalesofemissionallowancesiswhethertheseforwardpurchaseorsalecontractsforemissionallowancesfallwithinthescopeofIFRS9.IFRS9—FinancialInstruments—appliestocontractstobuyorsellanon-financialitemwherethecontractscanbesettlednetincashoranotherfinancialinstrumentorbyexchangingfinancialinstruments(netsettleablecontracts).Contractstobuyorsellemissionallowancescouldbeexamplesofsuchcontracts.SuchnetsettleablecontractswillbeoutsidethescopeofIFRS9wherethecontracttopurchaseorselltheemissionallowancewasenteredintoandcontinuestobefortheentity’sexpectedpurchase,saleorusagerequirements.Thisiscommonlyreferredtoasthe‘own-use’exemption.Anexampleofownuseinthiscontextmightbeaforwardcontracttopurchaseemissionallowancesthattheentityentersintoandcontinuestoholdtomeetashortfallintheentity’semissionsobligation,i.e.,wheregrantedallowancesand/orpurchasedallowancesheldbytheentityarelessthantheexpectednumberofallowancesrequiredtomeettheentity’sobligationforaspecificperiod.However,entitiesshouldcarefullyassessthatallthecriteriaforownusearemetbasedonthetermsofthecontract,thecompany’scontinuedintentforphysicalsettlementanditspastdealingswithsuchcontracts.Whereanetsettleablecontractdoesnotmeettheown-usecriteriaoranentityusesthelimitedelectionprovidedbyIFRS9nottoapplytheown-usecriteria,itwillberecordedatfairvaluethroughprofitandloss(FVTPL)bydefault.However,analternativetreatmenttoFVTPLmaybetoapplycash-flowhedgeaccounting,wherebythechangeinthefairvalueofthecontractisrecognisedthroughothercomprehensiveincome.TheadoptionofthisapproachissubjecttomeetingstrictapplicationcriteriawithinIFRS9andrequiresdocumentationattheoutsetofthehedge.ContractsthatarenotnetsettleablecontractsareoutsidethescopeofIFRS9,althoughsuchcontractsshouldstillbereviewedfortheexistenceofembeddedderivatives.Carryingamountofallowancesheld+CostofmeetingexpectedshortfallExpectedtotalunitsofemissionsforthecomplianceperiod=Weightedaveragecostperunitofemissionsforthecomplianceperiod26PwCEmissionstradingsystemsAppendix:SurveymethodologySurveyapproachInconductingthesurvey,ourprimaryfocuswastotargetcompaniesthatreceivedthelargestamountsofallowancesundertheEUETS.Wecomposedatargetlistbasedontheallocationstostationaryinstallationsandaircraftoperatorsin2020asincludedintheEuropeanUnionTransactionLog.WesupplementedourtargetlistwithcompaniesinthenetworkoftheIETAthatareaffectedbytheEUETSaswell.ThesurveywasinthefieldfromSeptember2020toJanuary2021.Oursurveyreached88respondents,andwereceived25completeresponsesfromarangeofindustries.Thegroupofrespondentsincludesmultiplelargeplayersinthecarbonmarket,responsibleforsignificantcarbonemissions.SurveyquestionsCompanyprofileA.Whatmainindustrysectordoesyourcompanyoperatein?B.Whatisthesizeofyourcompany?C.IsyourcompanyexposedtotheEUEmissionsTradingScheme?D.Theconsolidatedfinancialstatementsofmyfirmarepreparedonthebasisof[IFRS,USGAAP,UKGAAP,other].Accountingtreatment1.Wherearegrantedallowancesinitiallyrecognisedonthebalancesheet?2.Atwhatvaluearegrantedallowancesinitiallyrecognisedonthebalancesheet?3.Wherearepurchasedallowancesrecordedonthebalancesheet?4.Aregranted/purchasedallowancessubsequentlyamortised/depreciated?5.Aregranted/purchasedallowancesrevaluedsubsequenttoinitialreceipt/purchase?6.Wheregrantedallowancesareinitiallyrecordedatfairvalueanddeferredincomeisrecognised,howisthedeferredincomereleasedtotheincomestatement?7.Wheregrantedallowancesarerecordedatfairvalueanddeferredincomeisrecognised,whereintheincomestatementisthedeferredincomereleasedto?8.Howistheobligationforemissionsinitiallymeasured?9.Istheobligationforemissionssubsequentlyremeasured?10.Intheeventgrantedallowances(thatarerecordedatnilvalue)aresold,howisthesaleaccountedfor?11.Whichlineitemoftheincomestatementisusedtorecordthesaleofgrantedallowances?12.Howareforwardcontractstopurchase/sellemissionallowancesaccountedfor?13.Forinterimreportingperiods,intheeventexpectedemissionswillexceedallowancesheld,howistheobligationforemissionsrecognisedoverthecomplianceyear?14.IncaseyoureportunderadifferentGAAPthanIFRS,pleaseexplainwhetheryouareawareofanyadjustmentsbetweenIFRSandyourlocalGAAP.15.Forwhatpurposedoyouuseemissionallowances?16.Doesthepurposeofemissionallowances(tomeetobligation,tocompensateemissionsvoluntarily,toregulatecashflows,orother)impactyouraccountingtreatment?Ifso,how?17.DidyouchangeyouraccountingpolicycomparedtothefirstphasesofEUETS?Ifso,canyouexplainhowandwhy?18.Doyouexpectthatthetransferfromphase3tophase4oftheEUETSwillimpactyouraccounting?Ifso,canyouexplainhowandwhy?19.Howmaterialaretheemissionallowancesforyourfinancialstatements(expressedasapercentageofcarbonallowancesovertotalassets)?20.Doesyourcompanyhaveexposuretootheremissionschemes?21.Whatisyourmainconcern/issue/worrywithrespecttoemissionaccounting?27PwCEmissionstradingsystemsContactsImportantNotice:Thisreportcontainsinformationobtainedorderivedfromavarietyofsources,asindicatedwithinthereport.PricewaterhouseCoopers(PwC)andtheInternationalEmissionsTradingAssociation(IETA)havenotsoughttoestablishthereliabilityofthosesourcesorverifiedtheinformationsoprovided.Accordingly,neitherPwCnorIETAassumeanyresponsibilityforanyinaccuracyinthedatanorfortheaccuracyoftheunderlyingresponsessubmittedbythoseparticipatinginthesurveyandnorepresentationorwarrantyofanykind(whetherexpressorimplied)isgivenbyPwCorIETAtoanypersonastotheaccuracyorcompletenessofthisreport.PwCandIETAacceptnodutyofcaretoanypersonforthepreparationofthereport.Accordingly,regardlessoftheformofaction,whetherincontract,tortorotherwise,andtotheextentpermittedbyapplicablelaw,PwCandIETAacceptnoliabilityofanykindanddisclaimallresponsibilityfortheconsequencesofanypersonactingorrefrainingtoactinrelianceonthereportorforanydecisionsmadeornotmadewhicharebaseduponsuchreport.Thereportisnotintendedtoformthebasisofanyinvestmentdecisions.Thisdocumentmaybefreelyused,copiedanddistributedontheconditionthatapprovalfromPwCisfirstobtainedandthateachcopyshallcontainthisImportantNotice.PricewaterhouseCoopersreferstoPricewaterhouseCoopersLLP,alimitedliabilitypartnershipincorporatedinEngland,or,asthecontextrequires,othermemberfirmsofPricewaterhouseCoopersInternationalLimited,eachofwhichisaseparatelegalentity.AboutPwCAtPwC,ourpurposeistobuildtrustinsocietyandsolveimportantproblems.We’reanetworkoffirmsin155countrieswithover284,000peoplewhoarecommittedtodeliveringqualityinassurance,advisoryandtaxservices.Findoutmoreandtelluswhatmatterstoyoubyvisitingusatwww.pwc.com.AboutIETAIETAisthevoiceofbusinessoncarbonmarketsaroundtheworld.Establishedin1999,IETA’smembersincludegloballeadersintheelectricity,oil/gas,cement,aluminium,chemical,mining,technology,standards,verification,broking,trading,legal,finance,accountingandconsultingindustries.PwCScottBanduraPartner,PwCCanada+14035096659scott.bandura@pwc.comGaryBerchowitzPartner,PwCUK+447535100574gary.x.berchowitz@pwc.comArjanBrouwerPartner,PwCNetherlands+310610885455arjan.brouwer@pwc.comHenryDaubeneyGlobalChiefAccountantandHeadofReportingPartner,PwCUK+447841569635henry.daubeney@pwc.comHeatherHornPartner,PwCUS+13108745449heather.horn@pwc.comDarrellMcGrawGlobalEnergy,UtilitiesandResourcesAssuranceLeaderPartner,PwCMiddleEast+13054322837darrell.mcgraw@pwc.comKarinMeijerPartner,PwCNetherlands+310620303990karin.meijer@pwc.comJonathanRoseDirector,PwCUK+4407595850848jonathan.a.rose@pwc.comInternationalEmissionsTradingAssociation(IETA)DirkForristerPresident&CEO,IETAforrister@ieta.orgAdamBermanEuropeanPolicyDirector,IETA+3228930239berman@ieta.orgLisaSpaffordManagingDirector,IETA+41227370500spafford@ieta.org©2021PwC.Allrightsreserved.PwCreferstothePwCnetworkand/oroneormoreofitsmemberfirms,eachofwhichisaseparatelegalentity.Pleaseseewww.pwc.com/structureforfurtherdetails.Thiscontentisforgeneralinformationpurposesonly,andshouldnotbeusedasasubstituteforconsultationwithprofessionaladvisers.pwc.com/emissions-trading
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