Accounting Regulation and Issues of Sustainability

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Abstract

The commitment to practicing development that is sustainable and does not harm the environment or the existing delicate ecosystem has to be backed by efficient measures aimed at progressing towards sustainability. Proper accounting techniques have to be practiced in order to achieve the set measures aimed at environmental sustainability (Ahmad, El Serafy, and Lutz, 1989). The issue of climate change is crucial to the secure existence of humankind. If the current recourse utilization practices are left to continue unchecked, the delicate environmental ecosystem is then at risk. The increase in carbon emission is hurting the atmosphere resulting in adverse climate changes and unreliable weather patterns. This has led to setting up of relevant measures aimed at abetting the current carbon emission practices. One of the measures widely used is carbon tax. In this measure, individuals or companies responsible for the most carbon emissions are taxed. The revenue accrued from the carbon taxes is not retained by the government but is redistributed back to citizens or invested in efforts aimed at reversing the adverse effects of environmental degradation. The following paper discusses these issues in detail (Dasgupta, and K-G Mäler, 2000).

Accounting Regulation and Issues of Sustainability

Accounting has been misunderstood by many as an objective technical process. However, accounting goes beyond the limits of mathematical calculations and financial reporting techniques to affect other socially rooted aspects. It is more of a way of life that encompasses the various aspects of human life. For human life to continue in harmonium existence there needs to be further research and practice of sustainable recourse utilization measures. If the current existing recourses are carelessly exploited, the existence of future generations will be hampered and the world as we know it may continue deteriorating beyond a viable solution (Hines, 1988).

One of the main areas of concern in today’s corporate sector is the slow but steady rise in global temperatures. This has been attributed to the high carbon emissions and heavy felling and destruction of plant cover, which in turn leads to heightened global temperatures and inconsistent weather patterns. The damaging implication of this effect makes it inevitable for CEO’s, managers and executive teams to continue ignoring the subject. The current measures under implementation and others being put up will ensure all business entities operate in carbon-constrained and carbon-priced economies from 2010.

One of the major measures under implementation is the Kyoto protocol. It is now evident that many of the developed and developing nations have already agreed to this measure. Some of the pledges being made in accordance with the protocol are to reduce the total greenhouse gas (GHG) emissions within a stipulated period. In meeting this and other pledges, comprehensive and complementary strategies will have to be set up by the signatory governments.

These strategies although having been set up by the government, will be followed by the corporate sector, believed to be the largest emitters of these green house gasses. The strategies will range from changing the current energy production and consumption patterns to the development of new technologies with low carbon emissions. Other strategies include the promotion of abatement activities aimed at decreasing the emissions, and additional investment into renewable energy recourses.

Although the actual ways through which the signatory nations to the Kyoto protocol will meet the targets is not clearly outlined, some of the most easily adoptable measures include the ‘cap and trade’ emissions trading scheme. In this scheme are measures aimed at providing economic mechanism meant for channeling of capital flows. Additionally, measures aimed at research and development activities to the reduction of green house gas emissions and the adoption of alternative energy sources that are more safe, economical and renewable, are included.

The adoption of the ‘cap and trade’ emissions trading scheme will compel corporate business entities to give detailed accounts of their green house gas emissions, energy produced and the energy consumed during specific time intervals. The information submitted will enable the administrative government in acquiring knowledge of the total green house gas emissions, energy produced and the energy consumed thereby assisting in meeting the nation’s international reporting obligations.

There are business entities that have already restructured their business models to accommodate additional investment into low-emission production processes as part of their social responsibility and the anticipation of regulatory strategies. The chief executive officers and the management teams have recognized the immense value brought about by a business institution’s response to climate change. There is a great deal of value attributed to a company that takes an initiative in conservation and sustainability efforts. This makes the public view the company as sympathetic to issues affecting humanity, and is part of the society rather than being only interested in making profits.

As companies come up with relevant changes in their business models in response to issues resulting from climate change, through the practicing of emissions reduction and abatement processes, there will be the establishment of clear and robust communication avenues with the markets and other stakeholders. These communication avenues will be imperative in ensuring the stakeholders have clear information regarding the economic costs to the climate change-related activities. However, having clear communication of the economic consequences with the stakeholder is hampered by the existing and up-and-coming accounting and tax issues (Fankhauser, 1995).

There are certain accounting issues that bedevil proper communication avenues. These issues are held in question, as they do not show accounting’s reflection of social reality. The market lacks detailed accounting standards that govern green house gas emissions and abatement activities. This goes ahead to include the treatment of emissions trading. For there to exist an effective carbon-constrained economy, there requires a setting up of conventional foundations for the operation of global capital markets. This involves the streamlining of the fiscal policy, accounting and corporate reporting. Since there are still no clarified accounting treatments of the ‘cap and trade’ emissions trading scheme, the main challenge is that of coming up with efficient means of communicating to the capital markets the repercussions for shareholder value of a carbon-priced environment.

There indeed lies a great deal of risk involving the making of judgments that are primarily based on incomplete information (Pearce, Hamilton & Atkinson, 1996). The issue of climate change is already being put into consideration during deliberations on portfolio management and valuation models. One of the climate change issues being factored into the valuation models and management decisions is the implementation of carbon tax (Pearce & Atkinson, 1993).

Carbon tax is a taxation imposed on the carbon content of fuels mainly used by large corporate industries. The imposition of carbon tax is relevant in alleviating the current environmental challenges being faced all over the world. Carbon dioxide levels in the earth’s atmosphere are increasing exponentially due to rapid developments in industrialization and other economic facets. This ends up being a threat to the harmony existing in the ecosystem and thereby threatening the very existence of humankind. This calls for rapid reduction in the carbon dioxide levels being emitted mostly by the developed and developing countries. This will go a long way in alleviating the potential environmental crisis and avert severe weather patterns. All the above instances hamper the thriving of any economy (OECD, 1994).

Carbon tax is being considered an efficient means of curbing the exponential levels in carbon emissions. Presently, the oil prices are not inclusive of the adverse costs resulting from their utilization. This aspect acts as a drawback to the measures meant for reducing carbon levels such as the use of energy efficient tools and machines, the use of renewable forms of energy such as wind, solar and geothermal, and the use of low carbon fuels such as bio-fuels from high-cellulose plants and biogas. The inclusion of this extra cost on the prices of fossil fuels will render these fuels expensive hence the need for use of other cheaper sources of energy (Wackernagel, Hamilton, Loh and Sayre, 2001). Additionally, imposing tax on the carbon content of fuels will enhance the incentives aimed at reducing carbon levels in every link in the processes of decision-making and action taking. This will influence an individual’s decision-making in terms of the products being utilized.

The carbon tax imposed is supposed to be revenue neutral. This means that the funds generated from the imposed taxes are not supposed to be retained by the government unlike other taxation revenues. The revenue collected from carbon tax ought to be reinvested in the public with a sizable share being aimed at mitigating the adverse effects of carbon pollution. One of the methods considered for the use of carbon tax is the paying of citizens through regular dividends. The dividends are to be equal to every citizen regardless of one’s social caste or creed. Another method is through compensating for existing taxes. In this method, each dollar accrued from the carbon taxes would be used to reduce a dollar’s worth of existing taxes such as the federal income tax. The above method has its advantages as it ensures the carbon tax revenue is revenue neutral. Additionally, the method is advantageous, as it would go a long way in stimulating the economy through the reduction of payroll taxes thereby enhancing employment (Hamilton, and Clemens, 1999).

The amount of dividends received from carbon tax is not based on the amount of tax an individual pays. In this way, the compensation strategy does not favor those who use more carbon energy. In addition, the relevant strategies and incentives aimed at reducing the use of fossil fuels are not hindered. The employment of revenue neutrality is two fold as it both compensates the poor for the damage to the environment from large companies but is also politics-friendly in its alignment to the “No New Taxes” policy advocated by most of the political parties.

One aspect of the carbon tax, which is inherent from its flat tax nature, is that it is regressive. A regressive tax is one whose taxation rate diminishes as the amount subject to taxation is augmented. However, this aspect can be mitigated through employment of a means that protects the poor from being charged more than they can already afford. The underlying reasoning is that the more affluent members of the society are responsible for most of the carbon emission in the atmosphere. The affluent individuals and families are analyzed as driving high-end carbon-emitting cars, owning multiple homes, using expensive electrical appliances and also flying more. As a result, the more energy demand by these persons results into more carbon emissions (Nordhaus, and Kokkelenberg, 1999). It therefore follows that such individuals, families along with corporations and governments will end up paying more carbon taxes with the government’s carbon tax being distributed equally among all the citizens. This ensures that less fortunate members of the society are protected from high taxes and are ‘compensated’ for other’s degradation of the environment (Lutz, 1993).

In view of the above, climate change is indeed a strategic business imperative. The adverse effects of climate change pose a major risk to the global economy. Reports indicate the effects could possibly shrink the economy by a possible twenty percent. Business entities have a responsibility to play in the protection of the environment. This is because most of the pollutants are from the corporate sector. Management accountants play a key role in the implementation of sustainable strategic and operational decisions. The public view is that the current activities aimed at abetting climate change by management accountants are purely on an ad hoc basis. The quick integration of environmental control measures in the business policies will facilitate the quick mitigation of these factors. These measures include the Kyoto protocol and the carbon tax. Management accountants need to integrate these into their accounting practices for there to be sustainable development.

References

Ahmad, Y.J., El Serafy, S., and Lutz, E., (eds), 1989, Environmental Accounting for Sustainable Development, The World Bank, Washington.

Dasgupta, P., and K-G Mäler, 2000, Net national product, wealth, and social well-being. Environment and Development Economics 5, Parts 1&2:69-93, February & May 2000.

Fankhauser, S., 1995. Valuing Climate Change: The Economics of the Greenhouse.London: Earthscan

Hamilton, K., and M. Clemens, 1999. Genuine Savings Rates in Developing Countries. World Bank Economic Review 13, 2: 33-56.

Hines, R, D, 1988, “Financial accounting: in communicating reality, we construct reality”, Accounting, Organizations and Society, 13, 3: 46-72.

Lutz, E. (ed), 1993, Toward Improved Accounting for the Environment, The World Bank, Washington.

Nordhaus, W., and E. Kokkelenberg eds., 1999, Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment.Washington: NationalAcademy Press.

OECD, 1994. Environmental Indicators–OECD Core Set. Paris.

Pearce, D.W. and G. Atkinson, 1993. Capital theory and the measurement of sustainable development: an indicator of weak sustainability. Ecological Economics 8: 103-108.

Pearce, D.W., K. Hamilton and G. Atkinson, 1996. Measuring Sustainable Development: Progress on Indicators. Environment and Development Economics 1: 85-101.

Wackernagel, M., K. Hamilton, J. Loh and J. Sayre, 2001. Accounting for Sustainable Development: Complementary Monetary and Biophysical Approaches. The World Bank (mimeo).