Global warming

Emission Trading Report

1.0 Executive Summary

2.0 Introduction

Global warming is an important issue all over the world, each country tries to think how to reduce and prohibit excess pollution to affect the temperature. In an effort to reduce global warming, the government plan to reduce emissions by offering financial incentives to companies and individuals. The government also offers money for increased research and development for technology to reduce pollution. Educate and subsidy to encourage consumers to buy hybrid and fuel-cell cars and solar heaters. There is currently no formal guidance at the International on how to account for permits issued under emission trading schemes. There is however various accounting treatments adopted in other country. Therefore, this report is designated to explain the accounting principles and requirements on how to measure, recognize and disclosure the emission trading allowance in the different condition.

The most important issue the government concern about is our next generation, because they are our future and our hopes. They are the future owner. We rely on them to develop our world in future time. How could they survive if we ruined all the resources? In this several years, we human beings start to suffer the consequence of how we ruin the earth. Global warming seems to be a very serious problem now happening in the world because of too rapid development. Regardless of the pollution, we only focus on the benefit that we make. We have already lost a lot of resources for example a lot of animals being exhausted because we convert the food chain system. Although the earth is being damaged, it is always never too late to start to propose and fulfill some ideas to protect the piece of land that we are standing.

3.0 Discussion

3.1.1 Nature of allowance

Emission Trading Schemes are designed to achieve a reduction of Greenhouse gases through the use of tradable emission permits. Governments currently issue the majority of allowance to emit free of charge to entities. The nature of the allowance should be “licence to emit”. It presents a specific amount of the emission right. The main reason of not the “form of emission currency” is the fair value of the emission currency is fluctuated base on the emission right is needed. The Government can be easily to measure the amount of the entities used.

The purpose of the emissions trading scheme is to reduce the pollution, government try to provide allowance to some entities to restrict the emission level by offering some license to them. An emissions allowance is an allowance, permit, licence or right to emit during a specified period, a specified amount of six types of greenhouse gases, where such allowance, permit, licence or right issued by a government. In the beginning of issue such scheme, government is free to issue an allowance to them.

3.1.2 Emissions allowances are assets

To identify the emission allowances are asset, an asset would be controlled by an entity as a result of past event; from which future economic benefits are expected to flow to the entity.

The emission allowances are government grant for a specific amount of the emission right, they are existence of asset; the entities have the right to control the allowance use for maximize who pollute or sell the unused amount for the other entities; the outsider (include the Government or other entities) cannot or should not have the power to deprive the entity of the future economic benefits without compensation, that means other entities want to pay for the emission allowance if they want to buy the unused emission allowance form this entity.

The entities can trade their unused emission allowance for other entities at current fair value so which future economic benefits are expected to flow to the entity.

After we decide that the allowance is a license, we need to determine the whether allowance is allocated by government or purchased and meet the definition of intangible assets and accord to IAS 38 Intangible Assets. If allowances are purchased are initially recorded at cost in balance sheet. However, if allowances are allocated by government are initially recorded at fair value. The difference between this two methods is the amount paid and fair value is treated as a government grant and within the scope of IAS 20. Although the amount initially recorded is the fair value, the allowances are either recorded at cost or as per the revaluation model at a revalued amount being its fair value at the date of revaluation with changes in value recognized in equity in accordance with IAS 38.

3.1.3 Measurement and recognition of emissions allowance as assets

An asset shall be recognized if, only if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; the cost of the asset can be measured reliably. The emission allowances is probable that the expected future economic benefits if the emission allowances are less than they needed, the entities can trade the residual allowance for other entities. The cost of the emission allowances seem to difficult for measure reliably because it is grant by the Government. The entities want to pay start up cost, administrative cost and running cost for the emission allowances. The initial cost of the emission allowances are the start up cost, administrative cost and running cost.

First of all, we need know that whether the emissions allowances can achieve the definition of an asset. It is a probable future economic benefit obtained or controlled by an entity because of a past event or transaction. Ignore of how to obtained, an emissions allowance meets the above definition. Recognition criterion and measurement attribute are the asset must have a relevant measurement attribute that possesses sufficient reliability. According to IAS 38, emissions allowance is an intangible asset.

3.1.4 Corresponding entry on recognizing an allowance issued by government

According to the IAS 20, the emission allowances seem to be non-monetary grants. The corresponding entry for the entity that received the allowances from the government free of charge seems no entry would be recorded. However, the grant relating to asset may be presented as deferred income because the entity will get the economic benefit in a given financial period. So the deferred income of the entity should be increase. The entry should be debit the Asset and credit the deferred income (i.e. Dr. Emission Income Deferred (Balance Sheet) Cr. Deferred Income (profit and loss)).

3.1.5 Emissions allowances are liabilities

According to the accounting standing AASB137, a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entities of resources embodying economic benefits. As result of exceeding emission of an entity which is a past event, the entity has a present obligation to deliver the economic benefit base on the market value of the emission allowance. It shows that the emission allowances exists a liability.


In the light of IFRIC 3 Emission Right, the entities produce emissions. It should be recognize as a provision because it is uncertain timing and amount for its obligation to deliver allowance. The provision is normally measured at the fair value of the allowances need to settle. The liability of emission should be recognized as the reliability of the measurement of its obligation so the both initial and subsequent measurement would like to the current fair value of the exceeding emission.


The timing for the recognized the emission allowances have a mismatch between the beginning of the period the asset exists and the corresponding liability builds up over the period if the entity surpasses the level agree. This issue can be deal with the principles of cash flow hedging. The cash flow hedging is when the entity has only the allowances during the period, and fair value hedging after the emissions have been made. In addition, the measurement of the emission allowances is not clear. According to the IAS39, the measurement is at the fair value. However, the assets of the emission allowances are measured at the market price.

3.1.8 Difference between “Cap and trade” and “baseline and credit” scheme

The “cap and trade” scheme introduced through the Kyoto treaty, forces entities to pay penalties or purchase additional emission allowances if their emissions were exceeding the agreed level. The entities can choose to emit the quota within the agreed level, without any penalties, or sell the unused portion of the quota to other firms, creating significant financial returns. The total amount of the emission allowances in the scheme is unchanged.

On the other side, in “baseline and credit” scheme does not count for total amount of the emission allowances. The scheme encourages the entities reducing their emission under a baseline level. If the emission of the entities were exceeding the baseline level, the entities want to offset the exceeding emission.

3.2.1 Comparison with Two companies

I have found that there are two companies (within energy industry) from the list of Global Fortune 500. (These) companies 2008 have mention Emissions trading schemes in their 2008 annual report 2008, which is (they are E.ON and Rwe which) ranking 26 and 89 (respectively). The company is E.ON and Rwe from the energy industries and both from companies both locate in Germany. E.ON is an energy company which provide reliable power and gas solutions for around thirty million people in more than thirty countries around the world ( ). Rwe is engaged in generation, trading, transmission and supply of electricity and gas and supply over 20 million customers with electricity and gas in Germany, UK, Central and South Eastern Europe ( ).

3.2.2 Emission trading schemes in annual report

According to E.ON Group annual report 2008, we found (It shows) that there are three methods to report the emission trading allowance. On page 100, it mentions the allowance as intangible assets include emission rights from different trading system with a carrying amount; page 119 in other miscellaneous provisions include provision from emissions trading system and page 130 emissions-related derivatives are valued separately at their forward rates and price as at the balance sheet date. E.ON group has entered into emissions-related derivatives with a nominal value.

From the annual report 2008 of Rwe, (on the note of Consolidated Financial Statement, page 162 shows the emission allowances are accounted for as intangible assets and reported under other assets; page 165 point out that a provision emission allowances of is recognized to cover the obligation to deliver CO2 to the competent authorities and it is measured at the book value of the CO2 allowances;) on page 188, emission allowance is under the heading of other receivables and other assets and page 195 include in other provisions, the reporting is almost same as E.ON Group, except there is no emissions-related derivatives mention in Rwe.

3.2.3 Assets or liabilities in emission trading

In E.ON Group annual report 2008, we found that the emission trading is recognizing in intangible assets and other provision. In the balance sheet, intangible asset is recognizing under the heading of non-current assets, other provisions include in non-current liabilities.

As we mention in 3.2.2, the emission trading in Rwe recognize in other receivables and other assets and other provision. In the balance sheet, other receivables and other assets is under the heading of current assets, other provision include in non-current liabilities.

3.2.4 Treatment and disclosure of tradable offsets between two companies

From the E.ON Group, according to IFRS, emission rights are reported as intangible assets, it is held under national and international emission-rights systems for the settlement of obligations. Because emission rights are not a part of the production process, and no amortization should be made if it is reported as intangible assets. If the government allocated an allowance free of charge, or the company need to pay money buy the rights, such rights are capitalized at cost when issued for the respective reporting period as partial fulfillment of the notice of allocation from the government. The measurement of emission rights are under the heading of intangible assets from different trading systems with a carrying amount of €1,094 million. In annual report, E.ON Group also makes the provision of emission trading system. The provision is measured at the current market price of emission allowances. The note of supplemental disclosures of cash flow information mention that the operating activities in cash flow statement reflect that there was 23 percent lower in 2008 than in 2007. The reason is the decrease was due to the accumulation of emission rights positions at the Group's trading operations. In order to minimize the risk in the prices of commodities, E.ON use the principal derivative instruments to cover commodity price risk exposures, such as electricity, gas, coal and oil swaps and forwards, as well as emission-related derivatives. At the end of 2008, the E.ON Group has entered into electricity, gas, coal, oil and emissions-related derivatives with a nominal value of €101,109 million.

Rwe accounted for an emission allowances as intangible assets and reported under other assets in the annual report. If the allowances are purchased and allowances allocated free of charge are both stated at cost and are not amortized. Except the emission allowance recognized as intangible assets, a provision is recognized to cover the obligation to deliver emission allowances to the competent authorities, this provision is measured at the book value of the allowances capitalized for this purpose. If a portion of the obligation is not covered with the available allowances, the provision for this portion is measured using the market price of the allowances on the reporting date. Under the note of other receivables and other assets reflect that the emission allowances are €1,216 in 2008 higher than €390 in 2007.

In the annual report of Rwe, the emission balance show us that the electricity generation operations emitted 172.1 million metric tons of CO2 is less than 187.1 compared with 2007. Rwe received free allocation of certificates equal to 104.6 million metric tons of CO2. This is because the new allocation rules effective in the second allocation period of the EU emissions trading scheme. Therefore, Rwe had to buy more certificates even though the emissions decreased. Because of the shortage of emission certificates, Rwe has to other way to obtain the certificates.

3.2.5 Comparison useful and relevant to decision making

According to 3.2.4, both companies have mentioned the emission allowance is accounted for intangible assets and provision. New allocation rules effective in the first allocation period of EU emissions trading scheme, the allocated by government is free of charge or purchased in the market are intangible assets and should be accounted for in accordance with AASB 138, Intangible Assets. Allowances that are allocated for less than fair value shall be measured initially at their fair value. Allowances shall not be amortized, but are to be tested for impairment under AASB 136, Impairment of Assets. Both companies have accounted for emission allowance as intangible assets and provision. Emission allowance is recognized as intangible assets and reflected as fair market value.

Therefore, I think that if the allowance is not enough to reduce the emission, the company need to buy from the market. This may use a huge amount to buy a right in the market. It is useful for us to know the value of emission rights and how much the company will pay in the second allocation period. It will affect our decision making on company financial position.

4.0 Conclusion (150)

5.0 Recommendations (100)

6.0 Reference list

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