Environmental Leader

Driven in part by the Securities and Exchange Commission’s recent guidance that requires public companies to disclose any risks from climate change on their operations and the U.S. Environmental Protection Agency’s new Greenhouse Gas (GHG) emissions reporting requirement, carbon emissions management is becoming an increasingly important business objective for U.S. companies. However, outstanding questions about accounting, reporting and tax considerations have led to inconsistent practices, according to a report by Ernst & Young LLP.

The new report, “Carbon market readiness: accounting, compliance, reporting and tax considerations under state and national carbon emissions programs” (PDF), concludes that companies should consider carbon emissions requirements as part of their businesses and financial management strategies now despite the uncertainty over the scope of climate change legislation in the U.S. The study also finds that many countries as well as states have some type of regulatory program to manage carbon emissions.

The report reveals in a survey of more than 1,000 U.S. public registrants with revenues between $1 billion and $100 billion that just 29 companies disclosed an accounting policy related to emissions credits or allowances in their financial statements.

A key finding from an Ernst & Young webcast in January indicates that far fewer than half of the approximately 1,000 corporate participants in the webcast claimed to have a strategy in place to deal with carbon emissions regulations or markets.

Ernst & Young recommends that companies include carbon-related considerations in their business strategies to address climate change issues effectively, and should review their risk management processes as well as day-to-day business operations, accounting and tax planning.

A major challenge is harmonizing all the various reporting frameworks in an organization, says Herb Listen, Ernst & Young LLP, a co-author of the Report and a partner in the firm’s Americas Oil and Gas Center. He recommends that an overall approach to GHG management should involve a cross-functional team that includes representatives from the tax department to environmental sustainability to help identify and implement carbon management initiatives.

The report also includes methods for accounting for emissions credits and allowances, and the carbon market’s impact on new tax rules.

Similarly, in an informal survey of 117 energy industry professionals attending the EUEC 2010 energy conference, Enviance, a provider of software solutions to help organizations manage and reduce GHG emissions and other regulatory risks, found that 61 percent of the companies surveyed do not have a system in place to record carbon emissions.

Other findings show that 44 percent of respondents support the SEC’s guidance and related carbon reporting, while 56 percent disagreed that this reporting was necessary. Fourteen respondents were not aware of the ruling.

In terms of carbon pricing , 46 percent of respondents said they will need to significantly reduce their GHG emissions in response to either a cap-and-trade program or carbon tax, and 39 percent said it would have no affect on their company, which correlates with the number of respondents that have a carbon management system in place, says Enviance.

Half of the survey respondents also indicated that their company’s primary driver for GHG management is to implement corporate social responsibility and green best practices. Only 34 percent indicated that federal legislation has been the driving factor for prioritizing GHG, says Enviance.