Are You Ready for Carbon Finance?

John McCain and Barack Obama may not see eye to eye on much, but there's one thing they do agree on: They both want to introduce a cap-and-trade system for greenhouse gas emissions. It's hard to detect much difference between their programs. McCain's plan aims to reduce emissions to a level 60 percent below that of 1990 by the year 2050. Obama's program is somewhat more aggressive, aiming for 80 percent below 1990 levels in the same period.

If a national cap-and-trade system for carbon emissions is implemented in the United States, it will directly impact companies' financial statements, according to a new white paper from PricewaterhouseCoopers. The specific form that impact will take is a knotty question; GAAP specifically related to greenhouse gas emissions cap-and-trade activities don't yet exist in the United States, according to PwC. But the report offers some opinions and guidelines based in part on the historical practices that many U.S. public utilities companies adopted after the passage of the Clean Air Act of 1990, which established a cap-and-trade system for emissions of sulfur dioxide and nitrogen oxides.

The first step in preparing for a cap-and-trade program is to know your carbon footprint, the report notes. That means deciding what approach to take in accounting for emissions from joint ventures and subsidiaries. Companies will need to determine the scope of the emissions to be included in their reporting -- including indirect emissions (from purchased electricity, employee travel, etc.) as well as direct emissions. In addition, they'll need to determine a base year for carbon footprint reporting, identify and calculate the emissions, and set up routines for data collection.

Other issues explored in the paper include:

• The liability recognition model for emissions obligations. The emissions obligation (liability) is recognized only when the actual greenhouse gas emission levels are greater than the allowances the company holds (an asset), PwC argues.

• Classification of emissions allowances on the balance sheet. The audit firm believes that emissions allowances meet the definition of intangible assets as defined by FAS 142, though some companies classify them as inventory.

• Accounting for the sale of emissions allowances. A sale usually results in a gain, which should be recorded as a reduction of cost of goods sold or as other income.

Download the complete PricewaterhouseCoopers report "How Your Company Can Prepare to Manage Carbon as an Asset" here.