Accounting for pollution: The effects of emissions trading

Abstract

Companies typically do not record the effects of their pollution in their financial statements. Historically, this omission has been due, in part, to an inability to accurately measure emissions and the lack of an objective value of pollution. In recent years, however, both of these concerns are being addressed; the former by the development of sophisticated emissions monitoring devices that may be installed on polluting equipment and the latter by emissions trading facilitated by the Clean Air Act Amendments of 1990 (CAAA) and similar legislation.As a result of the CAAA, utility companies are annually issued emission allowances (EAs) by the federal government; each allowance allows a company to emit one ton of a certain pollutant, sulfur dioxide, into the atmosphere. Companies that reduce their pollution below a benchmark level do not need all of the allowances that they are given, so they may sell their excess EAs to other companies or investors, save them for future purposes, or donate them to environmental organizations. If a company's annual emission levels exceed the number of allowances they are given, that company must acquire an adequate amount of EAs commensurate with their pollution. These allowances, consequently, are marketable commodities, and their market prices and trading activity have increased materially since inception of the CAAA in 1995.Unfortunately, however, current accounting and disclosure requirements result in financial statements that inadequately reflect corporate pollution and EA activity, even though objective values of emissions and the related allowances now exist for many companies. This paper explains a study of the public utility companies affected by the first phase of the CAAA which revealed that many companies have had several transactions regarding EA sales, purchases, donations, and receipts from the federal government, but their financial statements fail to disclose these events.Because emissions trading is widely considered successful and may become a part of the business environment for any polluting organization, financial accounting requirements regarding this phenomenon should be revised as many financial statement users may consider information regarding pollution and EAs influential to their decisions. This paper presents three proposals for incorporating pollution and emissions trading into financial accounting.

Citation

Beets, S.D. (2001), "Accounting for pollution: The effects of emissions trading", Lehman, C.R. (Ed.) Advances in Accountability: Regulation, Research, Gender and Justice (Advances in Public Interest Accounting, Vol. 8), Emerald Group Publishing Limited, Leeds, pp. 21-59. https://doi.org/10.1016/S1041-7060(01)08004-X