Ernst & Young report: Carbon market readiness

This is one of the logical next steps - getting accountants involved so that they can do financial analysis and planning, among others. The report is here

New Ernst & Young LLP report examines greenhouse gas reporting practices as the SEC releases new climate change disclosure guidelines

The new report, Carbon market readiness: accounting, compliance, reporting and tax considerations under state and national carbon emissions programs, concludes that, while the timing and scope of climate change legislation in the US is uncertain, many countries around the globe (and many states) have some type of regulatory program to manage carbon emissions. With the strong likelihood that there will be more regulatory activity in the US, companies should consider carbon emissions requirements as part of their businesses and financial management strategies now, including establishing plans for measurement, monitoring, reporting and accounting.

“Being carbon market ready is logical business,” explains Steve Starbuck, the newly appointed Leader of Americas Climate Change and Sustainability Services for Ernst & Young LLP. Starbuck, a 30-year veteran of the Firm, coordinates climate change and sustainability services in the Americas and is a member of the climate change advisory board of the Global Ernst & Young organization. “The global carbon market is likely to grow significantly in the future. Preparing for and identifying related business risks and opportunities up-front, can better position an organization for growth and provide a competitive edge. Last week’s SEC action further highlights the increasing need for companies to have the systems and processes in place to keep their stakeholders informed,” Starbuck continued.

Ernst & Young’s report reveals that, in a survey of more than 1,000 US public registrants with revenues between $1 billion and $100 billion, just 29 companies disclosed an accounting policy related to emissions credits or allowances in notes to their financial statements. Additionally, far fewer than half of the approximately 1,000 corporate representatives participating in an Ernst & Young webcast on January 12, 2010 –- Climate change and carbon markets: what every business needs to know and why –- claimed to have a strategy in place to deal with carbon emissions regulations or markets.

Following various state and federal reporting frameworks, as well as the evolving accounting standards and tax regulations governing carbon emission management could pose many challenges. To stay ahead of the curve, companies should fully embed carbon-related considerations in their business strategies to address climate change issues effectively. They should review their risk management processes as well as day-to-day business operations, accounting and tax planning.

Nature of Carbon Markets

I just started looking at it and came across this somewhat dated but fascinating article.

A collapsing carbon market makes mega-pollution cheap

As recession slashes output, companies pile up permits they don't need and sell them on. The price falls, and anyone who wants to pollute can afford to do so. The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters such as the steelmaker Corus: industrial assistance in camouflage.

I need to study this a bit more. It doesnt strike me as being fundamentally problematic if polluters dont get to hoard these permits indefinitely. Atleast superficially, the fall in prices is due to reduced demand, i.e., reduced output. If the gap between demand and available credits is not high enough (say 100 & 95 units instead of say, 100 & 70 units), it might make more sense for companies to wait to take advantage of regular market fluctuations, e.g., a company going bankrupt, instead of investing in alternatives. Thats seems to be the point the article is making. Now the question is whether people and companies would let the policy makers create higher scarcity to create stability in the price of carbon. Regulatory capture to some degree or other is the norm.

Other questions were raised about the whole issue of whether we really trust the credits being offered or not. This is an overview paper:

Accounting and the environment

Introducing a discussion of some of the ways in which accounting and other calculative mechanisms are involved in environmental matters, the article focuses on a number of questions that emerge from accounting for carbon emission permits and corporate environmental reporting. Both are areas where there is already a need for more research and where that need will increase in the coming years. Identifying some of the interests and pressures that already influence approaches in the area, the case is made for the need for both critical and facilitative research.