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Cap‐and‐trade emission allowances and US companies' balance sheets

Paul A. Griffin (Graduate School of Management, University of California, Davis, California, USA)

Sustainability Accounting, Management and Policy Journal

ISSN: 2040-8021

Article publication date: 10 May 2013

555

Abstract

Purpose

This study aims to examine the impact of the emission allowances granted under California's cap‐and‐trade program (AB 32) – the first major program of its kind in the USA – on the balance sheets and income statements of the S&P 500. So far there has been little discussion of what a cap‐and‐trade program would mean for the US companies' financial statements.

Design/methodology/approach

The author states and tests an economic model of the relation between greenhouse gas emissions and financial statement variables at the individual company level and use this model to predict emission allowances and obligations for the S&P 500.

Findings

The author's analysis suggests that the average S&P 500 company's balance sheet and net income will be adversely affected under several different accounting treatments for emission allowances, with the greatest impacts in the utilities, energy, and materials sectors.

Practical implications

US and European regulators have yet to set a single standard for emissions accounting. Without a single standard, companies acting in their own interests may use diverse or unclear accounting treatments for similar economic benefits. This can raise the cost of capital and hurt investors.

Originality/value

This is the first study of which the author is aware to document how the emission allowances under the AB 32 cap‐and‐trade program will affect American companies' balance sheets.

Keywords

Citation

Griffin, P.A. (2013), "Cap‐and‐trade emission allowances and US companies' balance sheets", Sustainability Accounting, Management and Policy Journal, Vol. 4 No. 1, pp. 7-31. https://doi.org/10.1108/SAMPJ-01-2012-0001

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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