Carbon Emissions Management and the Financial Implications of Sustainability

The concentrations of greenhouse gases in the atmosphere have risen dramatically leading to the possibility of costly disruption from rapid climate change. This calls for greater attention and precautionary measures to be put in place, both globally and locally. Governments, business entities and consumers would be impacted by the extent to which such precautionary measures are incorporated in their decision making process. Business entities need to consider issues such as trading in carbon allowances (or permits), investment in low- CO2 emission technologies, counting the costs of carbon regularity compliance and passing on the increased cost of carbon regulation to consumers through higher prices. Such considerations require information for informed decision making. This paper reports on a qualitative research study undertaken to consider the impact of the Kyoto protocol mechanisms on the changing information paradigms of cost and managerial accounting. It is demonstrated that the information from strategic cost management systems will be particularly useful in this new carbon-economy, especially in evaluating the ‘whole-of-life’ costs of products and services in terms of carbon emissions. Similarly, the study discusses how strategic management accounting information would facilitate decisions on business policy, human resource management, marketing, supply chain management and finance strategies and the resultant evaluation of performance. Under various carbon emissions trading schemes proposed around the world (including the United States), organizations will need to implement carbon management schemes to meet carbon ration targets, earn revenue and reduce costs. Emission Trading Schemes will impact the accounting profession significantly; however, discussions on how to report these transactions are in the very formative stages. So far the accounting literature has focused on the reporting of current carbon assets and liabilities in the balance sheet and the timing effects of carbon releases in the income statement. However, there has been little or no discussion as to how to value and report the underlying non-current assets (and liabilities) that produce or use carbon allowances on the balance sheet. This paper summarizes the ongoing dialogue in this area.