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The EU Emission Trading Scheme

Aspects of Statehood, Regulation and Accounting

Series:

Stefan Veith

The emission trading scheme is the most recent instrument of the EU environmental policy. Its underlying mechanisms and economic consequences are yet less straightforward than policymakers initially had expected: As this study shows, the regulation probably yields unintended distributional effects and imposes additional risk on the regulated companies. Consequently, meaningful accounting for emission rights is not only a necessity for regulators and customers, who need transparency, but also for investors on capital markets, who bear the additional regulatory risk. This study empirically assesses the usefulness of various accounting alternatives and provides evidence that cost and fair value approaches dominate the widely used mixed models.

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3 Mapping Emission Rights to Accounting 61

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3 Mapping Emission Rights to Accounting 3.1 Framework for Accounting Analysis Accounting for emission rights poses new challenges as it differs from treat- ments for other environmental policies: an ETS develops its coercive effect via the restricted budget, and fluctuations in prices are derived from the quantities traded. For the time being, accounting relies on the monetarisation of observ- ables, and hence can only capture the composed price-quantity realisation of al- locations, trades and obligations to surrender. The way in which the ETS framework is transposed to accounting treatments depends on two factors: the purposes of accounting and the degree of codification and standardisation. Dif- ferent accounting purposes create different information needs, and hence pro- mote different recognition and measurement techniques (Schneider, 1994: 28). The stricter an accounting system is codified or the higher it is standardised, the accountant has fewer degrees of freedom in formulating specific techniques. With respect to these two criteria, management accounting29 has to be distin- guished from financial accounting. That is why in the remainder, management and financial accounting are analysed separately. Accounting for internal uses most commonly follows either of two distinct approaches: accrual costs or imputed costs. Their application patterns vary with national traditions and resulting path dependencies, and hence neither of them can be excluded in a comprehensive review of methods applicable for European firms. By means of a normative analysis, the available techniques are at first ap- plied to the case of emission rights, and are subsequently evaluated with respect to...

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