Competing Accounting Treatments for Emission Rights: A Capital Market Perspective

This study provides comparative tests for the decision usefulness of four accounting alternatives for emission rights. In current accounting practice, cost-based net approaches as well as cost- and market-based gross approaches coexist. Modelling the available accounting treatments as reporting alternatives for a sample of the major polluters within the EU ETS, we present empirical evidence on their suitability in a market valuation setting. We find that the cost-based net approach provides additional information while gross methods, even the full market-based disclosures, do not. We thus show that an increase in reporting complexity does not always yield superior information con-tent. Our results contribute to discussions of the economic impact of emission trading and to appropriate accounting treatments of such schemes.