Posted: June 27th, 2015

Environmental regulations effects on accounting

 

Outline

  1. Abstract
  2. The overview of the legislation
  • Future carbon liabilities.
  1. Business and industries
  2. Carbon pricing emission and reporting
  3. Managing the commercial and financial impact
  • Organisational consequences
  • Implications of 2011 act report
  1. Regulation and financial accounting
  2. Regulation limitations and analysis
  3. Regulation and financial accounting
  • The impact of carbon emission price
  • Environmental regulations and net export
  • Discussion
  1. Recommendations
  • Conclusion
  • Biography
    Abstract

This paper assesses the economic implications of national green house gas emission in relation to the free market and pro regulatory approach. On November eighth 2011, the Australian parliament passed a clean energy ac consisting of eighteen pieces of legislation to provide a platform for the government to reduce its green house emission. The act effective as from first July 2012 provides a comprehensive plan on how to reduce emissions through carbon pricing, land management, renewable energy and energy efficiency. It is expected that the plan would cause financial impacts on the countries industrial sector.

The overview of the legislation

The report will ensure the concerned companies to pay attention to the act regarding their corporate energy consumption and production, green house gas emissions and abatement actions. This regulation particularly affects companies that emit 125 kt and facilities that emit 25 kt. It has been realised that the environmental impact of the processes of production and supply chain is never measured and therefore the impact should determined from up to downstream of the chain. The clean energy act ensures that companies provide annual reports on carbon emissions, electricity consumption and production. The legislation will affect company’s finances through operational changes and complexities as new responsibilities are introduced (Food and supply chain intelligence 2010)

Companies face the challenge of providing solutions to their environmental impacts and provide recommendations to mitigate their environmental footprints as well as recommending new supply chains. This process will require recognition of each activity in the supply chain efficient equipment are purchased to replace the less efficient ones to minimise the energy input and output (Food and supply chain intelligence 2010).

 

 

Business and industries

Carbon pollution reduction is important in addressing the problem of climate change. More than five hundred companies are emitting green house gases, these companies are required to buy a permit for every tone of emission the make. Carbon tax is one strategy the government has put place to reduce carbon footprint for most business as only a few companies face direct legal obligations. The sectors affected are the stationary industries, processing industries, and decommissioned coal mines. The agricultural and land use sector are not affected. The clean energy finance cooperation has ensured that the government finances the private sector in implementing clean energy projects. The effect of climate change is likely to affect business in the future and the introduction of this legislation will protect the future economy. If actions are not put in place then the future of business will be affected in various ways such as; increase in insurance costs and reduction in farm productivity. Under the scheme four Kyoto protocol green house gases are included that is carbon dioxide, methane, nitrous oxide and perflorocarbons. Synthetic green house gases are included (Australian department on climate change 2010).

Future carbon liabilities.

The government introduced the carbon pricing mechanism to enhance transition towards low carbon economy. The legislation was effective as from first July 2012 to 2015. The price permits are determined and set by the government considering the emission reduction target. If the target is high, the level cap is low while the increasing the emission cost. This is mandatory pro-regulatory approach that does not rely on the market information; the approach is quite effective since atmospheric environment is a common good that is not affected by the free market forces of demand and supply as in the case of normal goods. Individuals and corporates must take responsibilities of their actions. The atmospheric air has no boundary hence vulnerable to destruction from the industrial sector therefore the relevant regulatory institutions must do everything to hold the relevant institutions accountable.

The worrying issue is that the government and the international community have not put in place common standards to account for the carbon emission permits. It is necessary that accounting regulation and policies are put in place as well as options regarding permits prices and liabilities. This will ensure that compensation issues are covered. Disclosure of necessary information will build confidence of the investors and enhance sensitization of the importance of environmental conservation. The introduction of carbon pricing mechanism will require business institutions to make adjustments in financial management especially in budgeting, forecasting and risk management,. It is important for the investors to understand that carbon emission reduction is their corporate responsibility and not punishment ( Dagwell, , wines & lambert 2007).

A fixed carbon pricing will have effect on almost every business sector or cause substantial influence on other sectors that are not directly affected. It is estimated that the change will affect approximately five hundred businesses as below.

 

industry Estimated number
Waste disposal 190
mining 100
Electricity generators 60
Industrial processing 60
Fossil fuel intensive sectors 50
Retailers of   natural gas 40

Kpmg Australia, November 2012

Manufacturing industries: manufacturing industries will be supported by a 1.2billion dollar clean technology program t be set up to enhance energy efficiency and reduce emissions. Large gas electricity consumers and those that are affected directly by the emission reduction mechanism will access 800 million dollars funding from the same program. The government will reward 1$ for every $3 invested. Food and foundries industries are expected to receive $ 200 million as a special assistance and $ 200 million from competitive grants innovation program (kpmg 2011 ).

Coal sector: The coal sector is to be allocated $ 1.3 billion assistance to deal with the transitional impacts.

Electricity sector: The energy security fund will provide assistance on the impacts of carbon price and ensure energy security in Australia. The government will provide support through loans.

Grants and incentives

The legislation will ensure that different sectors are supported so that the direct and the indirect consequences are limited. Assistance can be in the form of providing free allocation permits to industries that are exposed to intensive emission trade under job and competitiveness program. The program would also provide assistance to individual entities in reducing their production`s carbon intensity. Manufacturing industries will receive assistance towards renewable energy innovation investments. The energy security fund will provide payment and electricity generator permits.

 

Carbon pricing emission and reporting

An organisation carbon emission can be classified in to three scopes, that is scope1, scope 2, scope 3,. This classification is based of the mode of emission as direct for burning fuel or indirect for use of electricity or embodied. Each organisation will react differently towards the green house emission act, the financial impact of the legislation lies in the docket of the chief financial officer. The question is prepared to buy a permit of $23 per tonne of emission based on the data collected from the system? What fluctuation will the price of carbon cause on the price of electricity? (kpmg 2011 ).

 

 

Calculating and reporting carbon emission

Scope 1: this is where the emission occurs within the industrial premises boundary. These can be from the power station sources and carbon emission from burning fuel. The emissions are calculated by multiplying the fuel used by emission factors set for that particular fuel (kpmg 2011 )..

Scope 2: these are when emissions occur outside the boundary of an industry. This is calculated by multiplying the electricity consumed and the emission factors set for that particular electricity source. There is no obligation for an organisation on scope 2 to buy a permit but, the financial impact is experienced when the energy is passed using a generator. The carbon emission intensity varies with the energy content of the fuel used and the technology used to generate the energy. When an organisation is exposed to one generator then it is important that it understands the carbon energy of the generator as this helps in purchasing a cost effective generator (kpmg 2011 ). .

Scope 3: this is when emissions occur outside the boundary of the facility as a result of the actions of the facility apart from energy consumption. This include activities from up to downstream the production chain. The final carbon pricing cost of a company will depend on its abi8lity to negotiate with the suppliers and consumers. A scope 3 emission institution covers both scope 1, cope2, and scope 3.

 

MANAGING THE COMMERCIAL AND FINANCIAL IMPACT

Profits and losses effects are likely to be experienced due to cost of permits for liable entities and the cost and the cost experienced in the whole supply chain process. Assistance from grant and the government is also likely to cause profit and losses for eligible entities. Mitigation measures for loss and profit impacts include:

– Carbon emission reduction and abatement cost reduction

– Analysis of the cost pass-through to customers

– Organisation should exploit the flexible price stage to come up with lower permit cost.

– Asses and exploit opportunities that come with assistance and packages

In management of balance sheets; companies should consider their ability to recover assets versus the carbon pricing cost. Carbon permit costs should be considered like trading stock in a rolling balance method because the cost affects the taxable income hence concerned unit should be surrendered (kpmg 2011 )..

The carbon emission price affects individual entities through balance sheet, profit and loss, cash flow and through relates processes. Liable Individual entities may experience increased cost of production emanating from the cost of permits. The cost of the entire supply chain is expected to increase for both liable and non-liable individual entities due to the increased production cost. This will lead to increase in inventory and sales costs. The transport and electrify costs are also expected to increase (kpmg 2011 ).

In a competitive market, winners and losers from carbon emission mechanism is determined by the emission metrics in relation to the company’s competition. Liable entities will try and recover the cost of permit from customers who would do the same and the trend continues up to the last buyer. This will affect a companies competitive ability against the others (kpmg 2011 )..

A company can consider these three responses separately or collectively in response to the emission price.

  1. Reduce carbon emissions metric. The marginal abatement costs and the direct or indirect emission cost would play an important role.
  2. The organisation should asses the cost price through in relation to the market price.
  3. Good negotiations during the flexible price cost would lower the cost of emission permit.

The capital cost would be affected depending on the company’s response towards the carbon price.

Here are some of the consequences and application areas of a cost pass-through that an organisation should have in mind: the individual that u8nderstand carbon emission reduction mechanism should be involved during the negotiation process . The cost pas through introduction can lead to fallouts between consumers and suppliers due to lack of regulations in adjusting product prices to cover for the emission permit costs (kpmg 2011 ).

 

 

ORGANISATIONAL CONSEQUENCES

There are key points to note in understanding the consequences of green house emission reduction through a carbon emission mechanism. Scope 1 entities with emissions higher than 25 000 tonnes at the facility level must buy emission reduction permits. Scope 1 and 2 with emissions above 50 000 tonnes in their corporate group or emissions above 25 00 tonnes at their facility level must provide annual emissions report as provided by the national energy reporting act. Many industries and sectors can access financial support towards clean energy transition process (Delliot 2011).

Risks

The legislation poses financial risks to organisations therefore organisation should be prepared to respond to these risks. Such risks include: permit purchase risk, trade risks, non-compliance with the legislation, inaccurate data, non-respondent with increased emission costs, failure to comply with reporting regulations, unreliable data for decision making.

Costs and profits

These risk can lead to either loss or profit to an organisation therefore responses should be developed for every potential risk to avoid losses. Such responses include evaluation of the abatement cost, development of permit trade strategies and implementation of cost pass-through to customers. If an organisation covers for the losses through cost pass-through by increase in product prices for customers, who in turn increase the price for their customers, it results in to an increase in the market commodity prices. An organisation should manage the cost of permit acquisition during the fixed price phase so that it is able to purchase cheaper permits from entities allocated free permits. The entity can also use the approved off shore credits from the clean development mechanism to meet the 50% of the permit obligations.

                                   

IMPLICATIONS OF 2011 ACT REPORT

 

It is the responsibility of every entity to monitor the continuous disclosure obligation in consideration of the potential financial impact having in mind the effects of regulations on existing and planned investments. The organisation should take on to account the availability of financial assistance and compensation access and the ability to pass through the increased input cost once the report is announced (Delliot 2011)..

Review of the direct cost emissions

The most effective methodologies should be put in place in ensuring that the information and data used in emission cost calculations are accurate and reliable. This is because emission impact is directly related to the emission cost thus the accurate calculation would prevent losses as a result of inaccurate financial planning (Delliot 2011).

Accurate assessment of government support

It is important to assess the chances to access the government assistance. The details of the assistance package is important in planning in that an institution can make losses if it over expect from government assistance.it is also important to find if an organisation is eligible for grants such as the clean energy development funds (Delliot 2011)..

Determination of the cost pass-through

It is necessary to know how far the cost pass through strategy can be effective and its potential impact on profitability to an organisation. Higher estimation of the cost pass- through can lead to losses if the external factors such as the government legislation do discourage the strategy. A cost structure model associated with the cost-pass through of the energy input should be put in place to obtain accurate projections. The agreement based on contracts should be reviewed to support of carbon price reduction (Delliot 2011).

Accounting for carbon permits and tax implications

It is unfortunate that regulations regarding accounting for carbon emissions therefore organisations should review the current voluntary permits in consideration to minimising the carbon liability and carbon price permits.an organisation should the implications of permit payment on cash flow consistent with the company tax payment (Delliot 2011).

Development of management systems

It is important that an organisation develops governance structures and policies systems to manage the complex activities of the carbon emission reduction. Organisations are expected to put in place these structures before the D-day reached to plan for the buying and trading of the permits. Early preparation of each year is a cornerstone in risk and financial management (Delliot 2011) .

Carbon management strategies

It is obvious the emission reduction strategies will affect organisations future income more so in the energy, resources chemical and manufacturing organisations. The chief financial officers should note formulation of financial management strategies is critical in budget planning (Delliot 2011).

Governance and data collection process

In many organisations it is the responsibility of the environmental officer or the operation to collect and process the carbon emission data.

The chief finance officer should overview the extent of data collected and approve the process. The accuracy of the collected data is key in the approval of the national green house and energy reporting. The chief finance officer should understand should understand the impact of the carbon price prior to permit purchase and he can only be confident if he was involved in the data collection process.

REGULATION AND FINANCIAL ACCOUNTING

Pro-regulatory approach

The introduction of the green house reduction requirements by the government is a pro-regulatory approach to ensure accountability. The basic duty of business institutions is to make profit there fore there is no chance that such institution would respond to international standards of operations without mandatory regulations. The pro-free market approach would consider the pro-regulatory approach as a complete market failure. The atmosphere is a `common good’, carbon reduction emission affects the indirect cash flow therefore business entities would consider the carbon price as a liability .organisations and business entities should have in mind that they obtain raw materials from the environment that they must protect to ensure the future availability of the same resources. The financial impacts of the imposed regulations are mitigated by understanding and management of an institutions current emission and energy out put through a range of strategies (Larke, Dean, & Oliver 2003).

It is not possible to obtain the necessary accounting information required to control the public good like the case of a normal market. This is an imperfect market that is not affected directly by the demand and supply forces. The introduction of the regulations is necessary to ensure accountability on the side of the primary producer. The entities that make are concerned with the market are not reliable for financial information, therefore the regulation’s are formulated in consultation with various stakeholders so that the public interest is protected. It is believed that the pro-regulatory approach would provide standardised and more quality information as would be used by institutions like banks and financial analysts. The set regulations does not adversely affect the industrial business since the governments are always sensitive towards the business1s concern therefore compromise while setting the standards

When organisations compliance to the regulations results to profit making. The compliance expenses eventually return to the private resulting in to environmental efficiency and productive efficiency hence a stronger economic performance.

Organisations may protest against the scope of economic cost of environmental regulations as compared to the taxes, wages, benefits and interest rate. High compliance cost may cause some companies to relocate to less costly areas (Stephen M. Meyer).

The impact of carbon emission price

The introduction of the carbon pollution reduction scheme by the Australian government was a step towards implementation of the Kyoto protocol. The new tax introduction increased the cost of business to emitters. The cost of permits flows in the supply chain up to the last consumer. The scheme initiates a market based pricing between carbon producers, emission technologies and renewable energy. The scheme also introduced a regulation that requires companies to meet a certain criteria in their emission, electricity and production annually for every year ending 31tst June.

The chief financial officers of the affected organisations are then faced with the responsibilities in new duties delegation and financial complexities. The carbon price reduction scheme will affect organisations but it is clear that other sectors associated with the affected organisation will as well be affected

Accounting regulation cause economic and social impacts to an organisation. The economic costs occur in the process of preparing the report. The financial reporting regulations will also affect the strake holders in that financial information would be available to the interested parties against their wish. The affected companies would incur costs in relation to the regulation provisions and these information eventually become public document.

As apolitical process the regulatory bodies have to consider the relevant parties and entities.

Environmental regulations and net export

Studies in the U S show that changes on environmental regulation significantly affect net exports. The study was conducted on the manufacturing industries indicating that more strict regulations reduce the net exports. The effect on the chemical industries net exports was found to be much higher. This is because the chemical industries have more environmental regulations than most industries due to the operation risks it posses to the environment (pushkar maitra 2007).

It is believed that a less developed economy can grow to a developed one by opening up the economy. The increase in the international trade as result of an open economy can lead to various environmental consequences. Developed countries have more strict environmental regulations than the developing ones; therefore firms prefer trading with the less developed countries while this would encourage environmental pollution. Policies should invest in research and development programs so that the compliance cost is reduced through adoption of new technologies (Dagwell, Wines, & Lambert, C. 2007).

Regulation limitations and analysis

Incomplete treatment of non-catastrophic emissions

It is assumed that the climate change effects would be widespread and heterogeneous. There is uncertainty about the exact extent of damage due tot the complex nature of the climate change process, the economic situation of the world and the inability in accurate forecast for technological changes. Example the effect of the co2 on the marine wildlife is not quantified monitored and can cause adverse effects in the future (Pushkar Maitra).

Incomplete treatment of catastrophic emissions

There have been several catastrophic effects of green house emissions and one extreme example is the melting of the west Antarctic west sheet. Weitzman(2009) suggested that more bigger catastrophic damages would be experienced in the future such that the calculation of the willingness to pay mitigation cost is infinite. Nordhaus (2009) however responded that the scenario is not applicable on most uncertain scenarios

 

Discussion

Companies and business organisations benefit a country through economic development and social benefits. As companies operate as full legal institutions rights and responsibilities should be observed through power and political influence. The set regulations should protect every department that associate with the company since some company activities cause undesirable social consequences. Individuals are expected under the law to act responsibly in order not to harm others thus companies also should act responsibly through their management and set legal requirements. They freely exploit the available natural resources and intern contributes to the well being of the society. In the last fifty years several Australian corporates have collapsed leading to disastrous impacts to the society and the economy as well as leading to the collapse of the related sectors. An example is the 2011 collapse of the H1H insurance company (Dagwell, wines & lambert 2007).

Companies have imposed laws by the sate laws to control their operations as it owes the state its existence, (a concession theory of a company). The laws are important in operation management as well as in the financial records and the financial reporting as obliged by the state (Gerald & Foster).

 

Recommendations

  • The world resource institute developed the protocol in partnership with the world business council to ensure sustainable development. It is advisable for governments and organisations to understand the green house protocol science it is used world wide in international accounting.
  • Organisation should obtain relevant sufficient information concerning green house gas reduction a mission in development of sound technologies to ensure equitable development
  • Organisations should embrace the world business council for sustainable development as a platform to acquire information about innovative ways of addressing global warming.
  • Companies should take advantage and explore reports and surveys from professional service provider firms in response to introduced regulations.

Conclusion

Organizations and firms have free access to the natural resources thus should protect them to ensure sustainable development. With the current trend of the environmental degradation, the introduction of new regulations such as the carbon emission regulations is inevitable. Organisations and industries should develop frame works to guide them in in understanding and addressing emission reduction challenges. They should also take advantage of the grants and government assistance to reduce the losses incurred in response to the green house gas emission reduction.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Biography

Larke, F. L., Dean, G. W. & Oliver, K. G. (2003). Corporate collapse: accounting, regulatory and ethical failure. Cambridge [u.a.], Cambridge Univ. Press.

Australin department on climate change and energy efficiency.(2010).Tackling climate change.Commonwealth of Australia view: http://www.climatechange.gov.au/

Dagwell, R., Wines, G. L., & Lambert, C. (2007). Corporate accounting in Australia. Sydney, N.S.W., University of New South Wales Press.

Delloit. (2011). Australia’s carbon pricing mechanism. Key issues for business. viewed: http://www.apia.net.au/wp-content/uploads/2011/07/Deloitte-Carbon-Pricing-Mechanism-Key-Issues-for-Business.pdf

Food and supply chain intelligence. (2010). Australia. Sydney 13th, dec, 2012. Viewed: wwwfood-chain.com.au

Gerrard, M., & Foster, S. R. (2008). The law of environmental justice: theories and procedures to address disproportionate risks. Chicago, Ill, American Bar Association, Section of Environment, Energy, and Resources.

Hackett, s. c. (2011). Environmental and natural resources economics:

theory, policy, and the sustainable society. Armonk, NY, M.E. Sharpe.

Glasson, J.Terivel, R. Chadwick, A.(2005). Introduction to Environmental Impact Assessment: Principles and Procedures. Routledge. New York.

Interagency Working Group on Social Cost of Carbon, United States Government. (2010). Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis. Under Executive Order 12866, viewed: http://www.epa.gov/oms/climate/regulations/scc-tsd.pdf

 

Kpmg. (2012).Managing commercial implications of a price of carbon.,australiaViewed: http://www.group100.com.au/publications/g100-kpmg-managing-commercial-implications-of-a-price-on-carbon-nov-2011.pdf

Kpmg. (2009).Managing.financial impacts and reporting of carbon emissions.australia. viewed: http://www.group100.com.au/publications/KPMG_G100-Managing-financial-impacts-reporting-carbon-emissions200909a.pdf

Nicolas loris: January 30, 2009 at 5:00 pm. The Economic Effects of Environmental Regulations. The foundry>

Pushkar, maitra.2007.international economics, finance and trade, Vol III, environmental regulation, international trade and trans boundary pollution.

Stephen M. Meyer, The Economic Impact of Environmental Regulation, viewed: http://web.mit.edu/polisci/mpepp/Reports/Econ%20Impact%20Enviro%20Reg.pdf

Samuelson, p. a., & Nordhaus, W. D. (2010). Economics. New Delhi, Tata Mcgraw hill.

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