Emissions Trading Schemes under IFRS

The paper examines the accounting deficiencies in the EU Emissions Trading Scheme (EU ETS) under IFRS, specifically the lack of authoritative guidance following the withdrawal of IFRIC 3. It critiques the common 'net liability approach' where free allocations are recognized at nil, arguing that this hides the economic value of assets and windfall profits. The authors propose a framework where allowances are initially recognized at fair value, balanced by a government grant as deferred income, and subsequently measured based on whether they are held for compliance or trading. This approach aims to treat CO2 emissions as a cost of production and increase transparency for investors regarding a firm's low-carbon transformation.

• The absence of authoritative guidance under IFRS has led to a diversity of accounting practices for the EU ETS, as the International Financial Reporting Interpretations Committee's (IFRIC) 2004 interpretation (IFRIC 3) was withdrawn in 2005 due to deficiencies that created "artificial income shifts for participants".
• The most common accounting practice, the 'net liability approach', recognizes free allocations at a nominal amount of nil, which the authors argue fails the 'true-and-fair-view' criterion by understating the value of assets and hiding windfall profits.
• The authors advocate for a mandatory fair value approach for the initial recognition of all allowances, regardless of whether they were purchased or freely allocated, to transparently reflect the social and economic costs of carbon emissions.
• To avoid a 'day-one-gain' when using fair value recognition, the paper proposes a government grant approach where the grant is recognized as deferred income and de-recognized as income based on actual CO2 emissions.
• The paper proposes a distinction in subsequent measurement: allowances held for compliance should use the cost or revaluation model (with changes in fair value recognized in other comprehensive income to avoid profit volatility), while those held for trading should be measured at fair value through profit or loss.
• The authors argue that the offsetting liability for emissions should be measured using a 'cost of settlement approach' based on the carrying value of held allowances, rather than a fair value approach based on market prices.
• To prevent volatile quarterly reporting, the authors suggest that the value of the government grant should be allowed to fluctuate in parallel with the market price of the allowances.
• Regarding carbon risk hedging, the paper suggests that cash flow hedge accounting should be the general rule for instruments held for compliance, and the 'own use exemption' should be applied restrictively to ensure carbon intensity is clearly derivable from liabilities.
• The EU ETS is transitioning from free allocations to auctioning, with full auctioning for the power sector starting in 2013 and more than half of all allowances estimated to be sold via auction between 2013 and 2020.

APA

Haupt, M., & Ismer, R. (2011). Emissions Trading Schemes under IFRS. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/cplci-emissions-trading-schemes-under-ifrs-110131.pdf

Chicago

Haupt, Madlen, and Roland Ismer. Emissions Trading Schemes under IFRS. Climate Strategies, 2011. https://climatestrategies.org/wp-content/uploads/2014/11/cplci-emissions-trading-schemes-under-ifrs-110131.pdf.

Wikipedia

{{cite report |last1=Haupt |first1=Madlen |last2=Ismer |first2=Roland |title=Emissions Trading Schemes under IFRS |publisher=Climate Strategies |date=January 2011 |url=https://climatestrategies.org/wp-content/uploads/2014/11/cplci-emissions-trading-schemes-under-ifrs-110131.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{haupt2011emissions, author = {Haupt, Madlen and Ismer, Roland}, title = {{Emissions Trading Schemes under IFRS}}, institution = {Climate Strategies}, year = {2011}, month = jan, url = {https://climatestrategies.org/wp-content/uploads/2014/11/cplci-emissions-trading-schemes-under-ifrs-110131.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }