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Why organisations should develop policy for carbon credit accounting

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Organisations must have a clear responsibility framework for carbon credits, which includes developing a bespoke accounting policy that is free from bias. PHOTO | SHUTTERSTOCK

Carbon credits are instruments designed to encourage reductions in emissions by introducing a ‘carbon price’. The objective is for market forces to spur industrial and commercial processes towards low emissions or less carbon-intensive approaches than those used when there is no cost to emitting carbon dioxide and other greenhouse gases (GHGs) into the atmosphere.

Carbon credits are allocated or purchased by organisations and then traded among them depending on an organisation’s level of emissions.These kinds of trading schemes have existed in the European Union since 2005 but are becoming common in other territories. There is currently no accounting standard in IFRS (International Financial Reporting Standard) for carbon credit accounting.

Therefore, where no guidance specifically applies to a transaction, organisations are required in IFRS to use their judgement to develop and apply an accounting policy that is both relevant and reliable to the users of the financial statements. There are additional motivations and incentives for developing an accounting policy for carbon credit accounting.

Carbon credits are becoming ubiquitous as governments and organisations work to mitigate the growth in concentrations of GHGs. It has increased the value of carbon credits globally. Therefore, carbon credits now constitute a significant value to most organisations and would require an accounting policy due to the increased number of transactions and its significant quantitative amount in the financial statements of most organisations.

The greater focus on ESG and sustainability reporting has brought renewed attention to carbon credits. Stakeholders in society are demanding more accountability from organisations regarding their carbon footprint and efforts to curb their level of emissions. As a result, organisations have to measure and track their GHG emissions across all three scopes and efforts to offset these emissions are of interest to stakeholders.

Finally, in line with best-in-class corporate governance, it is paramount for organisations to have a clear responsibility framework for carbon credits, which includes developing a bespoke accounting policy that is free from bias.

The writer is an Associate Director at PwC Kenya. He writes and speaks widely on corporate reporting.