You might not know this, but if your job involves carbon offsets or credits (voluntary or compliance markets), then an interest in – or at least basic understanding of – accounting is crucial. Bloomberg’s Green Daily Newsletter recently wrote about how accounting treatment of carbon offsets or credits is a significant, yet underappreciated, challenge to corporate climate programs and investors. This follows something we blogged about earlier this year, asking if fake carbon credits were sometimes okay (based on an article by Matt Levine, asking “what is a carbon credit?”).
According to the Newsletter article, the big question is whether or not credits/offsets are assets:
“’Carbon credits don’t fit neatly into any jurisdiction’s current interpretation of the definition of an asset,’ [Belinda Ellington, a member of the Unidroit working group and former associate general counsel at Citigroup Inc. in London] said. ‘If you’ve bought something that has no legal identity as an asset, the effect is you cannot be certain you own anything.’”
This uncertainty is threatening the much-hyped future of carbon management programs:
“In theory, a carbon credit is a certificate representing a one-ton drop in greenhouse gas emissions tied to projects such as a wind farm or a tree-planting scheme. They’re bought by companies to compensate for the pollution they produce somewhere else in the world. But, when it comes to the laws that underpin financial markets, the answer to [the question ‘what is a carbon credit?’] isn’t yet clear. Until it’s solved, banks and investors are unlikely to allocate anywhere near the billions of dollars that proponents expect to flow to carbon credits…
‘The vast majority of countries don’t currently have a clear answer to the question of what is a carbon credit, as a matter of law,’ said Simon Puleston Jones, managing director of Emral Carbon, a brokerage and advisory firm, and former capital markets lawyer at law firm Simmons & Simmons. That ‘matters because if you’ve bought something from me and are suffering an economic loss, your loss might not be recoverable,’ he said.”
Most discussions pivot around whether credits/offsets will ultimately mature and be usable by a buyer based on regulatory risk and physical risk (e.g., wildfires consuming forest-based projects). Risk management approaches include buffer pools, insurance products, escrows, project/geographic diversification and contract terms. But this accounting question is a fundamental problem – if you aren’t certain you own offsets/credits, then you can’t really use them, place a hard dollar value on them, develop risk/loss management approaches or include them in financial statements.
Until this accounting matter is resolved, it remains a major obstacle to many companies in carbon reduction investments.
Our members can learn more about carbon offsets here.
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