By CPA Samson Obwanga
Thought For Accounting and Reporting Framework
Carbon Trading is an emerging trading activity both Nationally in Kenya, regionally and internationally. This trading, being undertaken is gaining root as was witnessed through the Carbon credit auction in Kenya, in the month of June 2023. Just like any trading activities which involve spending and revenue generation on the other hand by the trading Companies or the regulators, the Accountants in reporting need to be guided by ; Accounting and Reporting framework that supports his/her recognition of the spending and revenues.
Carbon credits constitute allowances or permits by companies to emit certain amount of Carbon (CO2) to the atmosphere. This can be done through carbon credit markets where companies buy permission to emit carbon credit, in which one carbon credit equates one ton of CO2 emissions. The companies pay the regulators or governments and they can sell excess credits to other companies, with the aim being reduction of adverse climate effects. When the Companies undertake activities to reduce carbon emissions after buying the permissions, this becomes credit offset
Carbon trading can be through Compliance markets or Voluntary markets. Compliance markets are mandatory or regulated markets by international, regional and governments of countries. These regulated carbon credit markets operate under Cap and Trade mechanisms in which they are issued or allocated with a certain number of carbon credits each year and when they have surplus, they can sell the excess credits or allowances and if they have shortage, they can buy additional credits from other companies with surplus carbon credits. In Voluntary Carbon Markets, Companies emitting carbons may decide to buy and sell carbon credits as part of environmental consciousness to reduce carbon emissions without regulatory, legal obligations or conditions on certain amounts. They then venture in projects aimed at reducing or absorbing carbon, a situation called carbon credit offsetting to mitigate the effects of climate change. Whenever they have excess carbon credits, they can sell to other companies with deficits. This demand and supply of carbon credits then creates a carbon credit trading markets, either voluntarily or as part of compliance or mandatory provisions.
Kenya experienced sale of 2.2milliuon tonnes of carbon credits to sixteen Saudi regional and international entities in an auction by the Regional Voluntary Carbon Market Company (RVCMC), which was held in Nairobi on 14th, June, 2023. Carbon Credit Markets have been discussed in international conventions since its introduction in the Kyoto Protocol in 1997 (COP 3), and these include; July 2023 Carbon summit, Paris Agreement in which article 6 permits countries to coordinate in meeting emission reductions, UN COP 28 climate talks in Dubai which included discussions on participation of nations in carbon credit offset markets and meeting the 1.5C.
As Carbon trading takes effect at the National, Regional and International levels, the question which arises therefore is the Basis of Accounting and Reporting framework to guide this trading activities. There could be need to institute a framework to address amongst others:
- Accounting for Carbon Credits and offsets
- Treatment of carbon credit revenues
- Acquisition and sale of carbon credits
- Treatment of carbon credits held for sale
- What constitute allowable expenses in financial reporting
- Tax provisions in carbon credit trading
- The assets and Liabilities position in carbon trading
A few highlights of the need for Accounting and reporting frameworks is when a Company buys carbon credits and makes payments as part of regulatory provisions or voluntarily, what is the basis of recording the expenses and how should the regulator or government recognize such revenues based on reporting framework. When a company realizes that it has excess carbon credits from the allocated and it holds this for sale, could this be recorded as inventory and the basis through which the acquired credits are recorded before full utilization. The company acquiring carbon credit may decide to undertake projects or activities aimed at reducing carbon emissions (Carbon credit offset) or the regulator or government receiving revenue for allowing or allocating carbon credits uses part of the revenue for climate change mitigation (carbon credit offset), what basis will the carbon credit offsets be recorded. Trading has tax implications and as carbon credit trading happens at national , regional and international levels, there arises tax treatment for the expenditures on carbon credits and on carbon credit offsets which need to be recognized in the financial statements as either allowable or disallowable expenses.
At the time the payment is made and probably one off payment, could this be recognized as intangible assets and could liability also arise to regulators.
As there is no clear or specific IFRS dealing with Carbon trading, the discussion therefore awakens the need for debate on the need to come up with a guided Accounting and Reporting framework that supports the emerging trading on Carbon credits.
Partner: Obwanga and associates
Certified Public accountants
Member of PDC
Samson Obwanga obwangaassociates@yahoo.com
