Emissions Trading Schemes under IFRS

The paper examines the lack of authoritative IFRS guidance for the EU Emissions Trading Scheme (EU ETS), leading to inconsistent accounting practices. It argues that the prevailing 'net liability approach'—recognizing free allowances at nil—understates assets and hides the economic cost of carbon. The authors advocate for a mandatory fair value approach for initial measurement, combined with a government grant model to avoid 'day-one-gains' and a distinction between allowances held for compliance versus trading to ensure a 'true and fair view' of a company's financial position in a carbon-constrained economy.

• The International Financial Reporting Standards (IFRS) currently lack clear, authoritative guidance on how emissions trading schemes should be reflected in financial statements, leading to a diversity of accounting approaches among EU ETS participants.
• The 'net liability approach,' where free allowances are recognized at a nominal amount of nil, is the most common practice but is criticized for failing to represent the resources controlled by an entity and creating hidden reserves.
• The authors argue that free allowances should be recognized at fair market value to improve transparency regarding the social and economic costs of emissions-intensive production and to reveal windfall profits.
• To prevent a 'day-one-gain' when recognizing free allowances at fair value, the paper proposes a government grant approach where the benefit is recognized as deferred income and derecognized systematically as the entity emits CO2.
• The paper recommends a distinction in subsequent measurement: allowances held for trading should be measured at fair value through profit or loss, while those held for compliance should use either the cost model or the revaluation model (via other comprehensive income) to avoid excessive profit volatility.
• The authors advocate for a 'cost of settlement' approach for measuring offsetting liabilities, using the carrying value of held allowances as the best estimate of the expenditure required to settle the obligation.
• 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 can be clearly derived from liabilities.

APA

Haupt, M., & Ismer, R. (2011). Emissions Trading Schemes under IFRS. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Emissions-Trading-Schemes-under-IFRS.pdf

Chicago

Haupt, Madlen, and Roland Ismer. Emissions Trading Schemes under IFRS. Climate Policy Initiative, 2011. https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Emissions-Trading-Schemes-under-IFRS.pdf.

Wikipedia

{{cite report |last1=Haupt |first1=Madlen |last2=Ismer |first2=Roland |title=Emissions Trading Schemes under IFRS |publisher=Climate Policy Initiative |date=January 2011 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Emissions-Trading-Schemes-under-IFRS.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 Policy Initiative}, year = {2011}, month = jan, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Emissions-Trading-Schemes-under-IFRS.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }