An Accounting Analysis of Emissions Trading Systems

The Paris Agreement of 2015 set a goal of limiting the increase in the global average temperature to 1.5 to 2.0 degrees Celsius above pre-industrial levels. Subsequently, the Japanese government announced its policy to achieve carbon neutrality by 2050. To achieve carbon neutrality and decarbonization, carbon pricing is expected to be utilized to place a price on carbon and control emissions. This study summarizes the debate among standard-setting bodies regarding the accounting treatment of cap-and-trade schemes and the practices around emissions trading. It examines their rationale from the perspectives of decision usefulness and achievement of optimal emissions levels. In particular, the method that recognizes the obligation to return allowances at the allocation of allowances (Allocation Method) excels in terms of timeliness and faithful representation of information related to total emissions. However, if profit or loss volatility undermines the predictability of future profits, it is necessary to find ways to control volatility. On the other hand, the Allocation Method is reasonable from the perspective of achieving optimal emissions levels because reductions in total emissions result in reduced liabilities and the recognition of gains. In addition, based on empirical evidence of the relationship between emissions disclosures by firms and emissions, it can be concluded that the current disclosure system contributes to achieving optimal emissions levels.