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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 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.