Accounting for the Emissions Trading Scheme (ETS)

The ETS started in 2008 following an amendment to the Climate Change Response Act 2002 (the Act).  The Act has been revised since its introduction in 2008, with the Climate Change Response (Emissions Trading and Other Matters) Amendment Act 2012 (the 2012 Amendment Act) being the most recent revised Act at present.

The purpose of the ETS, as stated in the Act, is to support and encourage global efforts to reduce greenhouse gas emissions by helping New Zealand to meet its international obligations under the United Nations’ Framework Convention on Climate Change and the Kyoto Protocol, and by reducing New Zealand’s net emissions below “business-as-usual” levels (which are the estimated emissions levels if the ETS had not been implemented).

The ETS is now operating in the forestry, energy, industrial processes, and liquid fossil fuels sectors. In future years, it is due to come into effect in the waste, synthetic gases, and agriculture sectors.

The ETS is designed to move the cost of greenhouse gas emissions onto those who cause them. It is intended to provide incentives for managing greenhouse gas emissions, investing in clean technology and renewable power generation, and activities that absorb greenhouse gases (such as planting trees) in order to reduce New Zealand’s net greenhouse gas emissions.

Under the ETS, the primary unit of trade is a New Zealand Unit (NZU), which represents one tonne of CO2-equivalent emissions. NZUs are sometimes called ‘carbon credits’.  A NZU can represent one tonne of CO2 or the equivalent of another greenhouse gas (referred to as ‘carbon dioxide equivalent’ or ‘CO2 equivalent’).  Generally, each participant releasing CO2-equivalent gases is required to surrender one NZU to match each tonne of CO2-equivalent emissions. Participants who capture greenhouse gas (eg forests, fisheries etc) receive one free NZU for each tonne of greenhouse gas absorbed from government.

Currently there is no authoritative guidance on how to account for ETS by either participants or governments. This lack of guidance especially affects sectors (eg forestry) that are entitled to receive NZUs (when trees are growing) but are also liable to surrender NZUs when they release back absorbed greenhouse gas (eg when the trees are harvested).  This has resulted in different methods of accounting for ETS.

The most common methods include:

  • Either recognising the free NZUs and associated revenue at a cost of nil, or at the fair value of the NZUs; and
  • Recognising the surrender obligation and expense at the fair value of the full obligation amount, or at the carrying amount of NZUs on hand (which could be nil for free NZUs) plus the fair value of the excess NZUs required to meet the obligation.

Entities also need to decide on an accounting policy for subsequent measurement of any NZUs on hand at balance date. The two options are the cost model and the revaluation model. Under the cost model, the NZUs will continue to be measured at their initial recognition amount (which could be nil for free NZUs). Under the revaluation model, the NZUs will be revalued to fair value at each balance date with the movement going to a revaluation reserve.

Spring 2014

Serious about your success?