5 | PwC Emissions trading systems
The European Union’s Emissions Trading System (EU ETS)
was a pioneering programme when it launched in 2005, the
first in the world to attempt to introduce a compulsory carbon
market to reduce emissions in high-intensity carbon-emitting
industries. In the ensuing 16 years, much has changed as
climate change has risen to the top of the global agenda. There
are now a number of exchanges for trading carbon emission
certificates globally: three in Europe, two in the US, and one
each in New Zealand and South Korea. And more countries,
industries and companies have adopted net zero targets.
Companies participating in the EU ETS already account
for 40% of greenhouse gas emissions in Europe, and the
European Commission has proposed expanding emissions
trading to other sectors, including road transport and
shipping. Given the importance of the EU ETS—it has led to
a reduction of 35% in emissions—and history, other countries
are looking to it to learn from its experiences. As it continues
to develop, the EU ETS is often seen as a template for a
coordinated global approach to carbon pricing.
The EU ETS sets targets for emissions reduction and is now
in its fourth phase, which will apply for the period 2021–30.
The 2030 target for greenhouse gas emissions will require
the sectors covered to reduce emissions by 43%, compared
with 2005 levels. Recent proposals from the European
Commission have suggested increasing the target to 61%.
There will also be a reduction in the number of allowances
issued annually, and in turn, the price of carbon may continue
to rise.
In the 16 years since the EU ETS launched, however, no
international financial reporting standard has been agreed
to address specifically how carbon allowances should
be accounted for in financial statements. This lack of
standardisation makes it hard for businesses to present
themselves to the market, and for the market to understand
the financial consequences of emissions and the related
credits on companies’ balance sheets. This was the single
biggest criticism of the system by the respondents to the
survey we conducted in 2007 and to our latest survey,
conducted from September 2020 to January 2021.
In the 2007 survey, the firms reported using six different ways
to account for their carbon allowances. In this latest survey
(see part two of this report for full results), the 25 respondents
used four different accounting methods for allowances on the
statement of financial position and how they are treated on
the income statement.
The lack of uniform, generally accepted principles for
carbon-allowance accounting means that companies have
to select from a diverse array of possibilities. There is no
clear direction on the best options or comparability with their
peers. Investment, transaction and operational decisions may
be delayed or hamstrung by this lack of clear accounting
treatment.
If the EU ETS is to be used as a template for carbon
markets around the world, it will be necessary to have
an internationally recognised way to account for carbon
allowances. This will give investors and stakeholders clarity
on how companies are faring on their path to net zero.
In this report, we argue that accounting standards are
necessary sooner rather than later. In April 2021, the EU
introduced its Corporate Sustainability Reporting Directive,
which will introduce reporting standards from October 2022
on emissions and which covers all large companies and
all companies registered on listed markets. Both investors
and external stakeholders are asking for more and better
information about what companies are doing to reduce
their carbon emissions. This is no longer just an issue for
financial reporting. Rather, it should inform corporate strategy.
Standardised accounting helps to ensure a level playing field.
In the second part of this report, we highlight best-practice
accounting for ETS, as it now stands, giving specific
examples based on PwC’s experience.
If the EU ETS is to be used as a template
for carbon markets around the world, it will
be necessary to have an internationally
recognised way to account for carbon
allowances. This will give investors and
stakeholders clarity on how companies are
faring on their path to net zero.
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