SNA/M1.21/8.2
15
th
Meeting of the Advisory Expert Group on National Accounts,
6-8 April 2021, Remote Meeting
Agenda item: 8.2
Emissions and the National Accounts
Carbon Pricing (Guidance note EA.XX)
Emmanuel Manolikakis and James Tebrake
One of the research items on the SNA agenda is a re-examination of the treatment and recording of
emissions trading schemes in the national accounts. Currently it is recommended to record all
emissions trading schemes (ETS) as taxes on production, in part because the SNA notes that these
permits do not involve the use of a natural asset
1
. This note proposes an alternative method in which
the atmosphere is viewed as a natural asset and; therefore, proceeds from ETS permits sold by
governments are not recorded as taxes but as sales of non-produced assets.
Introduction to the issue
1. Economic activity is having an increasingly negative impact on the environment. Rising
levels of greenhouse gas (GHG) emissions are having far reaching and permanent impacts on the
climate. GHG emissions are excessive because there is little incentive for firms and households to
change their behavior to reduce emissions. To slow the increase in GHG emissions or eliminate
them altogether, countries around the world have introduced or are introducing various polices
aimed at reducing GHG emissions. In general, these policies apply a price to a broad set of
emission sources that are aimed at encouraging businesses and individuals to innovate and
change their behavior and therefore reduce the level of GHG emissions. For example, it is
reasonable to conclude that carbon pricing will encourage investment in cleaner energy sources
and help countries meet their carbon emissions reduction targets as set out by the Kyoto protocol,
Clean Air and other initiatives, and later in the Paris Climate Agreement.
2. As countries adopt various carbon pricing strategies it is important that the associated
transactions (non-financial and financial) across all sectors are properly accounted for and
transparently presented in the System of National Accounts (SNA). Extensive discussions
regarding the recording of carbon pricing schemes had taken place when the 2008 SNA was
drafted, as reflected in section Q of chapter 17, however emissions trading schemes were in their
infancy. This guidance note proposes recommended updates to the SNA to clarify the treatment of
emissions trading schemes.
1
2008 SNA, para. 17.363
2
Carbon Pricing Policy Instruments
3. There are two main carbon pricing policies employed by governments – carbon taxes and
emissions trading schemes. While this guidance note focuses on the treatment of emissions
trading schemes it is important to also explain carbon taxes in order to differentiate between the
two approaches to pricing carbon.
Carbon Tax
4. Under a carbon tax, the government sets a price that polluters must pay for each ton of
GHG they emit. Businesses and consumers will therefore adjust their consumption and seek out
close substitutes by switching products or adopting new technologies, to reduce their emissions in
order to avoid paying or at least minimize the tax. The effectiveness of this scheme depends on
the chosen level of the tax and the availability of substitutes. For example, if the tax is too low
firms and households are likely to opt for paying the tax and continue to pollute. If the tax is too
high the costs will rise higher than necessary to reduce emissions, impacting international
competitiveness, profits, jobs and household consumption. From a national perspective,
governments need to find the right balance.
5. A carbon tax can be levied at any point in the energy supply chain. The simplest approach,
administratively, is to levy the tax “upstream,” where the fewest entities would be subject to it (for
instance, suppliers of coal, natural gas processing facilities, and oil refineries). Alternatively, the
tax could be levied “midstream” (electric utilities) or downstream (energy-using industries,
households, or vehicles), or some combination of all three. At whichever point in the energy supply
chain these “taxes” are levied they would meet the definition of a compulsory, unrequited payment
to government and so be classified as taxes in macroeconomic statistics. Furthermore, they meet
the definition of other taxes on production, as they are incurred based on units engaging in
production and are levied in relation to an externality rather than the good or service being
produced.
Emissions Permits (Cap and Trade)
6. An emissions permit (cap-and-trade) system is a flexible market mechanism and
establishes a maximum level of pollution - a cap. Companies must have a permit to cover each
unit of pollution they produce. Each permit stipulates the amount of GHG emissions that can be
emitted (quota
). As such, each company must have a permit with a sufficient quota of units of
pollution to cover their polluting needs (emissions). Permits are initially provided by governments
through auctions or are distributed free of charge. The purchase of the permit is not restricted to
the polluting entity. Currently, auction processes are not restricting participants, permits can be
purchased by any market participant - individuals, investors, governments, nonprofit institutes,
3
financial and non-financial companies
2
. It is presumed that only non-financial corporations will
incur emissions liabilities and will need to offset these liabilities with emission permits. If
companies exceed their quota for emissions, they can purchase unused permits from others,
adjust their production or in the longer-term install technology that reduces emissions. Depending
on the adaptability of firms’ production functions, some firms will be able to adjust to the limits
much easier than others.
7. Furthermore, a cap and trade system will set a limit to the amount of pollution in advance,
which will create an emission price setting mechanism that will adjust to market conditions. During
economic expansions the demand for permits will exceed supply and therefore, the price to
acquire additional permits will rise, conversely when demand is less than supply (during a
slowdown in production), the price of permits will fall, ceteris paribus. As a result, a price on
pollution is created by establishing a ceiling on the overall quantity of emissions, which will lead to
a reduction in the overall levels of pollution.
8. In the initial stages of some cap and trade schemes, permits were given to non-financial
corporations freely. As a result, firms did not incur any additional production costs, unless they
exceeded their quota and were required to purchase additional permits from others. More and
more governments have decided to auction permits and allow all institutional sectors to participate
in the auction process.
9. A carbon tax differs from a cap-and-trade program in that it provides a higher level of
certainty about cost, but not about the level of emission reduction that needs to be achieved.
Since carbon taxes generate revenue with a predetermined tax rate, the cost imposed is easier to
determine. Whereas, a cap and trade scheme will require much more organization and
administration to determine the quantity of permits to ensure that the reduction of emissions is
steadily being lowered to the agreed upon limits and that companies are adhering to the permitted
emission levels.
10. From CO2 emitting firms’ perspective, an emission permit looks to be similar to a carbon
tax at the point where the permit is surrendered to government to “pay for” carbon emissions.
However, prior to this point emission permits are tradeable assets, whose value is not directly
established by government but by market conditions. The picture is further complicated by the fact
that the permits have value because of the scarcity of permits relative to the government’s
requirement for the surrender of permits by polluters.
11. Emissions permits also differ from some other types of permits issued by Government
such as casino permits or taxi permits. These permits are issued in order to limit supply and in
effect provide monopoly profits to the approved operators. The mandatory permit fee reflects the
government’s desire to recover some of these monopoly profits and are therefore recorded as
taxes in the national accounts. The primary purpose of emissions permits is not to limit the supply
of goods or services, nor provide monopoly profits to the permit holder. Rather, they are intended
2
Participation restrictions may be introduced in the future.
4
to limit emissions and alter the behavior of firms to adopt environmental technologies and
processes.
Task Force Recommendations
12. The 2008 SNA recommends that payments for permits relating to emissions into the
atmosphere should be recorded as taxes because “These permits do not involve the use of a
natural asset (there is no value placed on the atmosphere so it cannot be considered to be an
economic asset) and are therefore classified as taxes even though the permitted “activity” is one of
creating an externality. It is inherent in the concept that the permits will be tradable and that there
will be an active market in them. The permits therefore constitute assets and should be valued at
the market price for which they can be sold. ” (Paragraph 17.363).
13. Recognizing that the proposed treatment in the 2008 SNA does not fully articulate all the
dimensions of tradeable emission permits, further guidance was requested by the ISWGNA
3
. A
task force (TF) was established in 2009, which examined the issue and produced a final report
“OECD/Eurostat Task Force on the Treatment of Emission Allowances and Emission Permits in
the National Accounts Final Report October 2010”
4
14. The TF took as its starting point the recommendations found in the 2008 SNA manual,
which stipulates that the atmosphere should not be considered as an economic asset, and that
accordingly the permits when transacted with government should be recorded as taxes. Although,
some TF members argued against this view, the discussions were framed within this context. The
TF examined and took into considerations numerous aspects: the timing of the tax event; the
valuation of the tax event; whether the surrender date versus issue date of permits should be used
and what type of assets are emission permits.
15. The TF also reviewed how emission permits should be recorded in the national accounts.
The review considered and provided numerical examples of various options ranging from non-
produced non-financial assets, financial assets, split assets which embody two distinct assets - a
non-produced non-financial asset and a financial asset. The TF even explored the possibility of a
super national body where a distinction between national type programs and international ones
were discussed. The TF recognized from the outset that although emission permits share similar
attributes with some of the options considered, emission permits do not perfectly align with any
and therefore; the TF needed to consider other criteria such as practicality, interpretability, data
3
The following points are summaries of the discussions from THE RECORDING OF EMISSION PERMITS
ISSUED UNDER CAP AND TRADE SCHEMES IN THE NATIONAL
ACCOUNTS, Update to SNA News and
Notes Number 30/31 (February 2011), number 32/33, March 2012.
4
The report may be found at http://unstats.un.org/unsd/nationalaccount/criList.asp
5
availability etc., to formulate a recommendation for the treatment and recording of emission
permits.
16. After much deliberation the TF could not reach a consensus on which alternative was most
suitable in consistently treating the transactions according to the national accounts. TF members
seemed to lean towards two possible options to record emission schemes. Both of these options
aligned with the 2008 SNA recommendation to record payments for emissions permits as other
taxes on production on an accrual basis, however there were differences in the amount of taxes
payable and in the type of assets involved, depending on which treatment was adopted,.
17. The first alternative, referred to as the split asset approach, treats the government auction
of permits as a prepaid tax payable by corporations and a prepaid tax receivable by government.
Upon surrender (as a proxy to the time of emission), government would record revenue (other
taxes on production) at the original issue price and corporations would record a corresponding
expense. As such, the tax accrual will be recorded when the emissions occurred at the original
issuance value. If at any time the price of the permit differs from the original issuance price that
difference will be recorded as a non-produced non-financial asset (NPNF) of the permit holder,
where the value of the asset is equal to the difference between the original issuance price and
market price of the permit. The appearance of the NPNF asset is not considered a transaction
rather it will appear through the other change in volume account (OCVA). With this alternative, the
taxes payable by the non-financial corporation will be equal to the cash received by the
government. One anomaly with this approach is that the value of the non-produced non-financial
asset may be negative if the market price falls below the issuance price
5
. In addition, the expense
that will be incurred by the non-financial corporation upon surrender of the permit and recorded in
their financial statements may not align with the original tax liability to the government
6
.
18. The second alternative, the financial asset approach, treats emission permits as financial
assets valued at market prices. As permits are auctioned, the auctioned price will be the market
price and the issuer (government) will incur a financial liability and the acquirer of the permit will
have obtained a financial asset. What type of financial asset/liability needs to be defined. Given the
marketability of the permit, it is not appropriate to record the financial asset as a prepaid tax as in
the first option. Furthermore, the surrender value will be based on the prevailing market price
which may differ from the issuance (auctioned) price, when a difference arises an other change in
asset account transaction (revaluation) will be recorded. Similar to the first proposal, emission
permits are treated as other taxes on production for polluters and the tax will be recorded at the
time the permit is surrendered (as a proxy to the time when the emissions occurred), and the value
5
If this continues to be the recommended approach perhaps it could be amended not to allow the NPNF
asset to go negative.
6
For further information regarding the split asset approach please refer to the TF document on the
treatment of emission allowances and emission permits in the national accounts pages 11-15 and for
numerical examples starting on page 53.
6
of the permit will be based on the prevailing market price. Unlike the previous alternative, this
treatment would align with the accounting records of the company and the tax accrual amount,
which may differ from the original issuance value. Consequently, the tax revenue anticipated by
the government may not equal the initial sales value of the emission permits
7
.
19. In the appendix, the numerical examples illustrate how these options would be recorded in
the national accounts and highlight the differences in net lending / borrowing (NLB), public debt
and instrument classification. The examples highlight the differences in recording the various
transactions that each of the options will have on the sequence of accounts, the impact on the key
metrics considered by national accountants, and the practicality and interpretability of each option.
ISWGNA recommendation
20. In following the consideration of the Task Force the ISWGNA chose to recommend the
split asset approach. A recommendation which was described in SNA News and Notes numbers
30/31 and 32/33. It was this approach that was later described in the GFSM 2014 and has been
adopted by most countries.
21. There are a number of practical challenges that countries have experienced when trying to
implement the split-asset approach. Key amongst these are (i) how to deal with cross-border
trading of permits and the resultant discrepancy between government revenue from auctions and
the subsequent surrender of permits? (ii) how to treat permits which are freely given away by
governments? These issues were recognized by the Task Force and ISWGNA and discussion of
them can be found in SNA News and Notes.
Guidance according to the 2008 SNA
22. Before presenting the options for recording emission permits in the national accounts, it is
important to recall certain concepts already in the 2008 SNA and examine their applicability to
emission trading schemes.
Taxes
23. The 2008 SNA states that emission permits should be treated as other taxes on
production: “these consist of taxes levied on the emission or discharge into the environment of
noxious gases, liquids or other harmful substances. They do not include payments made for the
7
For further information refer to TF document pages 5 – 11 and numerical examples starting on
page 42.
7
collection and disposal of waste or noxious substances by public authorities, which constitute
intermediate consumption of enterprises”. (Paragraph 7.97f)
24. “Taxes are compulsory unrequited payments, in cash or in kind made by institutional units
to the general government exercising its sovereign powers. Taxes are described as unrequited
because, in most cases, the government provides nothing commensurate in exchange to the
individual unit making the payment. However, there are cases where the government does provide
something to the individual unit in return for a payment in the form of the direct granting of a permit
or authorization. In this case, the payment is part of a mandatory process that ensures proper
recognition of ownership or that activities are performed under the strict authorization by the law”
(Paragraph 22.88).
25. Emission permits are required by firms whose production processes generate pollution; the
emission permit will not determine the optimum output the firm would like to achieve. A firm will
consider the current market price that exists for emission permits and decide the optimal
production function that will minimize costs, maximize profits and comply with the pollution
regulations.
26. There are international emission trading schemes where corporations may purchase emission
permits from one country and surrender them to another country. These cross-border transactions may
imply that a country will be receiving tax revenue from production activities that occurred in another
jurisdiction and consequently there will be a misalignment in both countries institutional sector
accounts. International schemes pose additional data requirements, in addition to information regarding
the number of emissions issued, outstanding, tax revenue received, compilers need to be able to
identify the debtor and/or creditor and their respective jurisdictions. Neither the split-asset or financial
asset approach are able to accommodate cleanly international schemes, additional adjusting entries
are required, as such, the TF proposed a super national treatment (see page 65 of the TF report).
27.
From the above discussion it is not apparent that emission permits fully satisfy the conditions of
taxes as compulsory unrequited payments for all institutional units. A requirement exists for a non-
financial corporation who exceeds the pollution regulation to either surrender an emission permit or face
some punitive fine, however when an institutional unit other than an emitting non-financial corporation
purchases an emission permit, they are acquiring a marketable asset. In addition, cross-border
transactions in emission permits may (and do) create asymmetries for both the issuing country and the
acquirer.
28.
The previous arguments have highlighted some of the implementation and interpretability
issues of treating emission permits as other taxes on production. Is the classification of a prepaid tax
consistent with permit holders other than non-financial corporations? A different treatment could be
considered when permits are purchased for other than emission objectives and by non-residents. The
question that arises is whether the accounts should have a consistent treatment for all institutional
units, or could the treatment vary depending on the intent?
8
Assets
29. According to the 2008 SNA, the system defines an asset as “a store of value representing
a benefit or series of benefits accruing to the economic owner by holding or using the entity over a
period of time.” (Paragraph 11.3). An asset, therefore, must have a life greater than one year;
however, there are some exceptions to the one-year rule – inventories, short-term assets
(commercial paper, trade receivable). Personal attributes that are normally referred to as assets,
such as individual skills and abilities, are not considered as economic assets and are excluded
from the national accounts’ asset boundary. Economic assets are either non-financial or financial.
30. Non-financial assets can be further decomposed as produced or non-produced. Assets
that are created from a production process, are classified as produced non-financial assets (AN1),
whereas economic assets that do not originate from a production process are classified as non-
produced non-financial assets (AN2).
31. Non-produced non-financial assets are further decomposed into the following
subcomponents:
• Natural resources (AN21) such as land and mineral resources;
• Contracts, leases, licenses (AN22) are assets that have been created through government
regulation, legislation or any other legal constructs, they consist of various non-produced
assets: operating leases; licenses to undertake certain economic activities such as taxi
licenses; permits to use natural resources (resource leases) and other government and legal
constructs; and
• goodwill and marketing assets (AN23), a special type of asset that represents the difference
between the acquisition price of a company and the fair value of the assets less liabilities
(excluding equity).
32. In the case of contracts, leases and licenses, the 2008 SNA stipulates, in paragraph 10.186,
that in order to be classified as non-produced assets the following two criteria must be satisfied:
• “The terms of the contract, lease or license specify a price for the use of an asset or
provision of a service that differs from the price that would prevail in the absence of the
contract, lease or license”; and
• “One party to the contract must be able legally and practically to realize this price difference.”
33. Although, emission permits share some attributes to contracts, leases and licenses, they do
not fully comply with the current understanding of a contract, lease or license. First, with licenses the
activity cannot be undertaken before a license or permit has been granted. Secondly, payment of the
license or permit will be treated as a tax in exchange for a non-produced non-financial asset, unless
the government has a financial obligation in which case the license will be shown as a financial
asset, whereas the use of natural resources may be treated as a sale of an asset depending on
9
whether the natural resource asset will be used to depletion and whether the right to use the natural
resource transfers all the risk and rewards to the user.
34. One major difference between non-produced non-financial assets and produced non-
financial assets is the treatment of consumption of fixed capital (CFC). With the latter, an estimate of
the replacement value of maintaining the capital will be included to the sectors current and capital
account to derive the sector’s total saving from all sources. Charges for the depletion of natural
resources or the write-down of a permit or license are not included in the estimation of CFC even
though businesses will expense these as part of their operating costs. Rather, the accounts will
account for these in the other changes in volume accounts. The treatment of depletion of natural
resources is being re-examined as part of the 2025 update to the SNA.
35. Through these definitions the question that arises is whether emission permits satisfy the
conditions of the use of an asset? From the introduction, we know that emission permits will provide
a benefit to the economic owner, either in terms of being able to continue to operate or as a potential
financial investment. Emission permits are designed to have a finite time period but will exist for
longer than a year, the holder of the permit bears all the risks and rewards and they are transferable.
As such, they satisfy the conditions of an economic asset but do not fully meet the existing
definitions of a contract, lease, and license asset?
Valuation of Permits
36. The manual recommends that transactions should be recorded on an accrual basis and not
when the actual payment is exchanged between the parties. This implies that emission permits
should be recorded when the actual emissions occur, the time at which the firm surrenders their
permit being considered a proxy for this. As a result, a timing difference may exist between the
issuance of and the surrender of the permit. This timing difference will give rise to a financial
asset/liability under the current treatment. For instance, if the emission permit is considered as an
other tax on production, then the firm will have a financial asset - prepaid tax (other accounts
receivable) and the government will show a financial liability - prepaid tax (other accounts payable).
37. In the initial discussions of emission permits, the atmosphere was not considered as an
asset and the recommended treatment of emission permits was based on this assumption.
In
addition, there was considerable discussion regarding the proper valuation of emission permits – time of
issuance or time of surrender and it was decided that the latter would be the recommended treatment.
However, if the atmosphere is not considered as an asset and the current treatment as other taxes on
production continues perhaps it would be worthwhile to re-consider the timing and valuation of permits at
the time of issuance.
As such, the initial transactions could be recorded as other taxes received by
the government and the purchase of an asset by the entity purchasing the permit. This recording
would address a number of the practical issues associated with the split asset approach.
Although the two options described in points 16 and 17 were the ones that received the most merit
by both the ISWGNA and the AEG, the question remains whether there are other alternatives that
should be explored, because both of these approaches have important drawbacks.
10
Option 1: The split asset approach
38. Currently the split asset approach is the recommended treatment by the task force and was
adopted as the recommended treatment by the AEG in the SNA News and Notes published on
February 2011 and updated on MARCH 2012. If this approach is adopted, it should be reflected in
the updated SNA manual.
39. In addition, to interpretation and valuation issues, there are other practical data issues with
the recommended split asset approach. Firstly, the data required to ensure the proper identification
and sectoring of permits from the initial sale to the subsequent trading of the permits. Moreover, the
approach requires complex recording of transactions across the sequence of accounts. These data
demands could be very challenging and subject to potential error for even the most advanced
statistical offices.
40. Nonetheless, corporations have been expensing the market value of the permits at the time
of surrender which, as has been highlighted, may not align with the original issuance price. An
additional consideration is that the data requirements for recording this option are significant. In
addition to obtaining information related to the original issuance of the permit, compilers would also
need to obtain information related to the current value of the permit and make additional entries if the
market value and the value at issuance are different.
41. Table 1 and 2 show the significance of cap and trade schemes that have been introduced by
various countries over the years. The tables show that although numerous countries have
implemented an emission permit scheme to reduce GHG emissions, both the price per ton and the
revenue generated are well below what was anticipated. A more practical and less data intensive
approach could be considered.
11
Option 2: Right to Use Asset Approach
42.
The current recommended treatment is based on the fact that the atmosphere is not a natural
asset as per paragraph 17.363 of the 2008 SNA, where it states “these permits do not involve the use of
a natural asset (there is no value placed on the atmosphere so it cannot be considered to be an economic
Table 1 Selected Carbon Pricing Arrangements, 2019
Carbon Taxes
Sources: Stavins 2019; World Bank 2019a; and IMF staff calculations. Note: CO
2
= carbon dioxide; GHG = greenhouse gas; na = not available.
1
The Regional Greenhouse Gas Initiative is a market-based program in 10 states in the eastern part of the United States.
Sources: Stavins 2019; World Bank 2019a; and IMF staff calculations. Note: CO2 = carbon dioxide;
GHG = greenhouse gas; na = not available. 1 The Regional Greenhouse Gas Initiative is a market-based
pr
ogram in 10 states in the eastern part of the United States.
Regional Greenhouse Gas Initiative
1
2009
5
94
21
United Kingdom
2013
24
136
24
Carbon Price Floors
Canada
2016
15
na
70
Korea
2015
22
453
68
New Zealand
2008
17
40
52
China
2020
na
3,232
European Union
2005
25
2,132
45
Emissions Trading Systems
California 2012
16
378
85
Sw eden
1991
127
26
40
Sw itzerland
2008
96
18
35
Portugal
2015
14
21
29
South Africa
2019
10
360
10
Mexico
2014
1–3
307
47
Norw ay
1991
59
40
63
Ireland
2010
22
31
48
Japan
2012
3
999
68
Finland
1990
65
25
38
France
2014
50
176
37
Colombia
2017
5
42
40
Denmark
1992
26
22
40
Country or Region
Year Introduced
2019 Price ($/Ton
CO
2
)
Coverage of GHGs, 2018
Million Tons
Percent
Chile
2017
5
47
39
Carbon Floor
2018 2019
20,292 21,161
23,860 23,671
source: CPI database
Table 2 Government Revenues in the past year (millions US$)
Year
Total Revenue ETS
Total Revenue Carbon Tax
12
asset) and are therefore classified as taxes even though the permitted “activity” is one of creating an
externality.” It is becoming increasingly difficult to argue that the atmosphere is not a natural asset.
Advances in the measurement and valuation of ecosystems recognize more and more the economic
value of natural capital. It is an important step forward for the accounting standards to start recognizing a
broader set of natural assets that contribute to the functioning of the economy and society.
43. Additionally, it could be argued that when the government auctions off emissions permits, they
are placing a value on the right to use the atmosphere and related processes for the purpose of using the
services of the atmosphere. “In many countries permits to use natural resources are generally issued by
government since government claims ownership of the resources on behalf of the community at large”
(paragraph 17.313). Beyond that, the atmosphere confers many benefits such as providing businesses
and households the capability to engage in transactions, improve their production processes and
enhance their overall wellbeing, however we are focusing on only one of those services provided by the
atmosphere.
44. The atmosphere is not owned or controlled by any economic unit and therefore it this proposal
does not suggest that the SNA asset boundary be extended to include the atmosphere. “It must be noted
that the accounts and balance sheets of the SNA are compiled for institutional units or groups of units and
can only refer to the values of assets that belong to the units in question. Only those naturally occurring
resources over which ownership rights have been established and are effectively enforced can therefore
qualify as economic assets and be recorded in balance sheets” (paragraph 10.167). Rather, what is
proposed is the creation of an asset that reflects the right to use the climate regulating services of the
atmosphere as part of specific production activities. These assets first belong to governments stemming
from each governments ability to regulate the behavior of the institutional units in its
jurisdiction. Governments engage in this regulation to limit the degradation of the atmosphere. This is
consistent with permits to use natural resources. When the user of the natural resource is given the right
to use the natural resource without any intervention for a period of time, this “leads to the creation of an
asset for the user, distinct from the resource itself but where the value of the resource and the asset
allowing use of it are linked“ (paragraph 17.315)
45.
Consider the way the SNA recommends recording electromagnetic spectrum. An
electromagnetic spectrum is considered a non-produced non-financial asset. When a government
auctions off the electromagnetic spectrum (by selling transferable licenses), an asset (permit to use
the electromagnetic spectrum) first appears via the other change in the volume of assets account on
the government’s balance sheet. Once its rights are sold there is a sale of an existing asset
recorded in the capital account. The government receives cash and the corporation that purchased
the permit receives rights to use the asset and records these rights to use the spectrum as an asset
on their balance sheet. Since the rights can be sold the asset is recorded at market value and
revalued over the life of the license
8
.Similarly, one could argue that a fishing quota is not related so
8
Emission permits are not exactly the same as the use of the electromagnetic spectrum. First, the rights
to use the spectrum are only given to institutional units that will use the spectrum in their production
process. Secondly, once the spectrum becomes non-marketable, the services of the spectrum will be
returned and will remain intact, whereas, emission permits will degrade the atmosphere.
13
much to the fish but rather to the ocean (similar to the atmosphere). The ocean (ecosystem) can only
produce so many fish – the government needs to restrict the amount of fish that are caught to ensure
sustainability. Fishing quotas are treated as assets because the fish are considered a natural resource.
46.
Should the right to use the atmosphere be treated differently from the right to use the
electromagnetic spectrum? An argument can be made that the treatments should align. Prior to the
advent of cellular technology, the electromagnetic spectrum did not have a value given there was no
use. It could be argued that it was an asset, but the value recorded in the national accounts was
zero (it had a price of zero). When technology advanced to a point that made it an important part of
the production process (in terms of the delivery of communication services), it became valuable (its
price increased) and governments exercised ownership over the asset. The value of the asset
became the market price determined via electromagnetic spectrum auctions.
47.
A similar argument can be made for emissions: prior to the widespread burning of fossil fuels
the atmosphere could tolerate and continue to properly function despite the negative effects of GHG
emissions. As GHG emissions increase, and the atmosphere is being drawn upon more and more in
the production process, the price of one unit of atmosphere is no longer zero. Governments are
deciding to start issuing rights to use the atmosphere in the form of emission permits. Viewing
emission permits from this perspective could lead one to conclude that emission permits are not a
tax but rather an asset (similar to fishing quotas and electromagnetic spectrum).
48.
According to the SNA (p 10.158), “the category other natural resources currently includes
radio spectra. Given the increasing move to carry out environmental policy by means of market
instruments, it may be that other natural resources will come to be recognized as economic assets. If
so, this is the category to which they should be allocated.” One of the key differences in the case of
the electromagnetic spectrum, fishing and other quotas is that in these cases, a natural resource is
being used by an institutional unit to derive economic benefit (supply mobile phone services, or
catch fish), whereas in the case of emission permits the natural resource is not being directly
exploited to provide economic benefit, but rather is being degraded by the activities being
undertaken to provide economic benefit. Hence
, emission permits do not cleanly adhere to the
definitions of natural resources and therefore, a new sub-category could be created to
accommodate assets that involve the use of nature/ecosystems such as wetlands, forest etc. For
example, contract, licenses, permits and right to use natural assets.
49.
By treating permits as ‘right-to-use’ assets, which are created and sold by government, most
of the practical concerns to record permits as taxes are overcome, particularly the issue of how to
value the permit (issuance/prevailing price and the creation of a non-financial asset in the split asset
option); or in the case where an institutional unit other than a non-financial emitter purchases permits
and with cross border flows.
50.
Further, in the case where emission permits are given freely by governments to non-financial
corporations, the treatment will vary depending on whether the permits are considered a tax on
production or an asset. The discussion has demonstrated that permits are valuable and when given
freely could be considered as capital transfers or as subsidies if they are deemed to reduce the
intermediate expenses of non-financial corporations. Such a treatment is straightforward where the
14
government is selling a non-produced non-financial asset, but more challenging and complex in the
split-asset approach where a tax on production is being recorded at surrender, and payments at
auction are prepayments of tax.
51.
If we consider emission permits as an asset and using the examples in the appendix where
we assumed that the government issued 100 units for $10 and both financial and non-financial
corporations bought 50 units. The transaction would be recorded as in Table 3.
52. In the first period, an appearance of an asset (emissions permit) in the government sector
would occur through a volume change in the OCVA account. The appearance of the asset (emission
permit) is not shown in the table, because we assume the appearance and subsequent capital
transfer occur in the same period, hence only the sale of the existing asset (NP1) is shown in the
capital account9. In the capital account there would be a positive entry under acquisition less
disposals of non-produced assets for both corporations and a corresponding negative entry for
government. For simplicity, we assume that there is no ownership transfer cost involved. As can
been seen in Table 3, there is no impact on GDP; however, the NLB of corporations and
governments will be impacted, to show the sale of the existing asset from the government account to
the corporations accounts.
53. In period 2, the market price of a unit of emissions declines to 8. The change in market price
will be shown in the revaluation account for both non-financial and financial corporations. When the
non-financial corporation surrenders its permits, the impact will be recorded in the other change in
volume accounts to illustrate the write down in the asset. In this scenario, there will not be any
implication regarding government tax revenues or debt.
9
In most cases, the asset will be recorded in a prior period and the acquisition in the following.
15
54.
The source data requirements when emissions permits are recorded as a sale of an asset
are relatively straightforward and are aligned with how emissions permits are recorded by some
corporations. Businesses do not provide clear and uniform disclosures of cap-and trade impacts to
the market. It has been noted that when permits are used to offset GHG emissions they are shown
as current assets and valued similarly to inventory valuation. In other cases, they will be recorded as
intangible assets or not disclosed altogether. Table 4 identifies how selected companies have
identified emissions permits on their publicly available financial statements.
ETS = ASSET ETS = Asset
Debit Credit Debit Credit
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Taxes 0 0 0 0 0 0 0 0 Taxes 0 0 0 0 0 0 0 0
Capital
Account
500 500 (1,000) 0 0 0 0 0
Capital
Account
0 0 0 0 0 0 0 0
NLB (500) (500) 1,000 0 0 0 0 0 NLB 0 0 0 0 0 0 0 0
Opening balance sheets Opening balance sheets
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
(500) (500) 1,000 0 0 0 0 0
NPNF
0 0 0 0 0 0 0 0
NPNF
500 500 (1,000) 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Non-Financial and Financial accounts Non-Financial and Financial accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0 0 0
Cash and
deposits
0 0
NPNF
500 500 (1,000) 0 0 0
NPNF
0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
NLB 0 0 0 NLB 0 0 0
Revaluation accounts Revaluation accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
NPNF
0 0 0 0 0 0 0 0
NPNF
(100) (100) 0 (200) 0 0 0 0
0 0 0 0 0 0 0 0 (100) (100) 0 (200) 0 0 0 0
Other changes in the volume of assets accounts Other changes in the volume of assets accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
NPNF
0 0 0 0 0 0 0 0
NPNF
(80) 0 0 (80) 0 0 0 0
0 0 0 0 0 0 0 0 (80) 0 0 (80) 0 0 0 0
Closing balance sheets Closing balance sheets
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0 0 0 0
Cash and
deposits
(500) (500) 0 (1,000) 0 0 0 0
NPNF
500 500 (1,000) 0 0 0 0 0
NPNF
320 400 0 720 0 0 0 0
0 0 0 0 0 0 0 0 (180) (100) 0 (280) 0 0 0 0
Net Worth
0 0 0 0 Net Worth (180) (100) 0 (280)
Table 3 - ETS considered as an Asset
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
T=0, Sale of emission permits (PPP=$10) # 0f Units = 100
T=1, NFC surrender 10 permits (PPP=$8)
T=0, Sale of emission permits (PPP=$10) # 0f Units = 100
T=1, NFC surrender 10 permits (PPP=$8)
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
16
Table 4 – Recording of Emissions Trade Schemes by selected corporations
Reporting Year
Company
Account
Value
2018
Nova Scotia power
Other current assets –
inventory
21 M CAD $
2019
Edison International
Energy report
Other current assets –
inventory
50m US $
2019
Royal Bank
NA
Not disclosed
2019
Morgan Stanley
Capital Group
NA
Not disclosed
2019
Merrill Lynch
Commodities
NA
Not disclosed
2019
Green Future
Opportunity Fund,
LLC
NA
Not disclosed
Option 3: Resource Lease - Prepaid Rent approach
55. The alternative treatment of treating emission permits as resource lease argues that the
atmosphere is an economic asset similar to the treatment of fishing quotas, timber and mineral
resources and is proposing that one of the many services the atmosphere is providing could be
valued by the sale of permits.
56. The notion of a resource lease as mentioned above presupposes that the use of the
atmosphere (as a CO2 sink) is restricted to a one-off application and does not take into
consideration two key elements - time or quantity. Alternatively, one could consider the issuance of
permits as a pre-paid resource rent, where the payment grants the acquirer with the right to emit a
pre-specified quantity of CO2 sometime in the future. One issue that requires further elaboration is
how to deal with the potential change in price of the emission permit when it was acquired and the
market price of the permit at the time of surrender. One approach to overcome the change in price is
to introduce a ‘Forward’, a financial asset/liability which helps to bridge the difference between the
issue price with the price at the time the permit is surrendered.
57. The main objective of the tables below is to illustrate the recording of a rent payment in
connection to using the atmosphere as a sink by emitting certain amounts of CO2. The example
shows the impact when there’s a positive price change and the second example (please see
appendix) when there’s a negative price change. Using the same criteria as in the previous
examples, where we assumed that the government issued 100 units for $10 and both financial and
non-financial corporations bought 50 units. At T=0, the sales of the permits initially lead to an
increase (decrease) in cash for the government (corporations) exchanged for an accounts receivable
for the corporations and a corresponding account payable for the government. Simultaneously, a
forward assets/liability has been created with a zero value. In other words, as soon as the permit is
sold a forward transaction takes place with a market price equal to zero. In the following period
17
(T=1), the market price increases from 10 to 12. The increase in the market price of the permit will in
subsequent periods lead to a financial asset/liability tentatively classified as a forward. In other
words, as the market price of the permit changes the forward obtains a value, however it is only
recognized when the permit is surrendered. A price increase will lead to a financial asset in the
accounts of the permit owners. Conversely, a price decrease will benefit the government, as permits
will have been transacted for a lower price than the prevailing market price. The forward is required
to match the surrender of a permit at the prevailing price with the corresponding counter transactions
in the financial accounts. Table 5 illustrates how these transactions could be recorded and the
impact they may have on the main aggregates in the national accounts.
18
Income Expense
Income Expense
NFC FC
GG
Total
NFC
FC
GG
Total
NFC
FC GG
Total
NFC FC
GG
Total
Taxes
0 0
0
0
0
0
0 0
Taxes 0
0
0 0 0 0 0 0
Rent Rent 120 120
Capital
Account
0
0
0 0
0 0
0
0
Capital
Account
0
0
0 0
0 0
0 0
NLB 0
0 0
0
0
0
0
0
NLB
0
0
120 0
120
0 0 0
Opening balance sheets
Opening balance sheets
NFC FC GG Total
NFC
FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0
0
0 0
Cash and
deposits
(500) (500) 1,000 0 0 0 0
0
Rent
Rent
Receivable
/Payable
0
0 0 0
0 0
0
0
Receivable
/Payable
500
500 0
1,000 0
0
1,000 1,000
0 0 0
0 0 0
0 0
0 0 1,000
1,000 0 0
1,000 1,000
Financial accounts Financial accounts
NFC FC
GG Total NFC
FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500)
1,000
0 0
0 0 0
Cash and
deposits
0 0
0 0 0
0
0 0
Forward
Forward (20)
(20) (20)
(20)
Receivable
/Payable
500 500
1,000
0 0 1,000 1,000
Receivable
/Payable
(100) 0
0 (100) 0
0 (100)
(100)
0
0
1,000 1,000
0 0
1,000 1,000
(120) 0
0 (120)
0 0
(120)
(120)
NLB 0 0
0
NLB (120)
0
120
Revaluation accounts
Revaluation accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0
0
Cash and
deposits
0 0 0 0 0 0
0 0
Forward Forward
100 100
200
Receivable
/Payable
0 0 0 0 0 0 0
0
Receivable
/Payable
0 0 0 0 0 0
0 0
0 0
0 0
0 0 0
0 100
100 0 0
0 0
200
0
Other changes in the volume of assets accounts Other changes in the volume of assets accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
Forward
Forward
Receivable
/Payable
0 0
0 0
0
0 0 0
Receivable
/Payable
0 0 0
0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
Closing balance sheets Closing balance sheets
NFC FC GG
Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0
0 0 0
Cash and
deposits
(500) (500) 1,000 0
0 0 0 0
Forward Forward
80 100 0 180 0 0 180 180
Receivable
/Payable
500 500 0 1,000 0 0 1,000 1,000
Receivable
/Payable
400 500 0 900 0 0
900 900
NPNF NPNF
0 0 1,000 1,000 0 0 1,000 1,000 (20) 100 1,000 1,080 0 0 1,080 1,080
Net Worth 0 0 0 0 Net Worth
(20) 100 (80) 0
∆
Assets
∆ Liabilities
∆ Assets
∆
Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
T=1 Financial Asset Approach Current and Capital Account
T=1, NFC surrender 10 permits (PPP=$12)
∆
Assets
∆ Liabilities
∆ Assets
∆
Liabilities
∆
Assets
∆
Liabilities
∆ Assets
∆ Liabilities
∆
Assets
∆ Liabilities
T=0 Rent Approach Current and Capital Account
T=0, Sale of emission permits (PPP=$10) # 0f Units = 100
Table 5 Rent Approach with Positive Forward
19
4. Recommended approach
58. For both conceptual and practical reasons, we recommend option 2 – Right to use a natural
asset. Emissions permits can therefore be recognized as assets that “appear”, are subsequently sold
and are eventually extinguished. Given the analytical and potentially growing importance of ETS
schemes it is recommended that a separate asset class be developed for ETS. Given the unique nature
of these programs and growing policy importance of ETS a unique class is warranted. This treatment
also aligns (mostly) with SNA 17.358 where “A permit issued by government to undertake a specific
activity may be treated as an asset only when all the following conditions are satisfied:
a. The activity concerned does not utilize an asset belonging to government; if it does the
permission to use the asset is treated as an operating lease, a financial lease, a resource lease
or possibly the acquisition of an asset representing permission to use the asset at the discretion
of the licensee over an extended period;
b. The permit is not issued subject to a qualifying criterion; such permits are treated as either
taxes or payments for services;
c. The number of permits is limited and so allows the holder to make monopoly profits when
undertaking the activity concerned;
d. The permit holder must be legally and practically able to sell the permit to a third party. “
59.
The right of use asset approach minimizes the practical challenges that countries have
experienced when trying to implement the split-asset approach including:
o The issue of recording a negative NPNF asset in the event that the
market price falls below the
issuance price.
o The potential discrepancy between government revenue from auctions and the subsequent
surrender of permits when dealing with cross-border trading of permits.
o Treatment of permits which are freely given away by governments.
o Data inputs required to accurately reflect the transactions and stocks for the sequence of accounts
20
List of references
• 5257.0.55.001 - Information Paper: Recording Emissions Reduction Schemes in ABS Statistics, July
2012, Australia Bureau of Statistics, available from
https://www.abs.gov.au/ausstats/[email protected]/Products/5257.0.55.001~Jul+2012~Main+Features~Record
ing+emissions+reduction+schemes
• 5257.0.55.001 - Information Paper: Recording Emissions Reduction Schemes in ABS Statistics, July
2012_example , Australia Bureau of Statistics, available from
https://www.abs.gov.au/ausstats/[email protected]/Products/5257.0.55.001~Jul+2012~Appendix~Appendix?O
penDocument
• Accounting for emission reductions and other incentive schemes, Ernest and Young
• GOVERNMENT FINANCE STATISTICS MANUAL 2014,
https://www.imf.org/external/Pubs/FT/GFS/Manual/2014/gfsfinal.pdf
• The cost of carbon a key risk for the energy and resource industry, IFRS-Cost-Carbon201201.pdf
• Statistics New Zealand (2010). Measuring the impact of the emissions trading scheme in official
statistics. Wellington: Statistics New Zealand
• OECD/EUROSTAT TASK FORCE ON THE TREATMENT OF EMISSIONALLOWANCES AND
EMISSION PERMITS IN THE NATIONAL ACCOUNTS FINAL REPORT October 2010.
THE
RECORDING OF EMISSION PERMITS ISSUED UNDER CAP AND TRADE SCHEMES IN THE
NATIONAL ACCOUNTS, Clarification by the ISWGNA. SNA news and notes, number 30/31,
February 2011. http://unstats.un.org/unsd/nationalaccount/iswgna.asp
• THE RECORDING OF EMISSION PERMITS ISSUED UNDER CAP AND TRADE SCHEMES IN THE
NATIONAL ACCOUNTS, Update to SNA News and Notes Number 30/31 (February 2011), number
32/33, March 2012
http://unstats.un.org/unsd/nationalaccount/iswgna.asp
• System of National Accounts 2008 https://unstats.un.org/unsd/nationalaccount/docs/sna2008.pdf
• Greenhouse gas emission trading: a cost-effective solution to climate change, www.wci-inc.org
21
Appendix
60. The numerical examples below illustrate how these options would be recorded in the
national accounts and highlights the differences in net lending / borrowing (NLB), public debt and
classification. The examples highlight the differences in recording the various transactions that
each of the options will have on the sequence of accounts, the impact on the key metrics
considered by national accountants, and the practicality and interpretability of each option.
Numerical Example
61. In T=0, the government auctions 100 emission permits at $10 per unit – resulting in a total
value of $1,000. Both financial and non-financial corporations participate in the auction, with each
acquiring 50 units. The permits have been assigned a certain emission allowance which will not vary
with fluctuations in price because otherwise, the emission permit scheme would be counterproductive.
In the following year (T=1), the market price of the permits falls from $10 per permit to $8 and the non-
financial corporation surrenders 10 permits to the government.
62. Table 6 illustrates the transactions according to the split asset approach, table 7 the financial
assert approach and table 8 the rent approach when there’s a positive value for the forward.
22
Current and Capital Account Current and Capital Account
Income Expense Income Expense
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Taxes 0 0 0 0 0 0 0 0 Taxes 0 0 100 100 100 0 0 100
Capital
Account
0 0 0 0 0 0 0 0
Capital
Account
0 0 0 0 0 0 0 0
NLB 0 0 0 0 0 0 0 0 NLB 0 0 100 100 100 0 0 100
Opening balance sheets Opening balance sheets
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
(500) (500) 1,000 0 0 0 0 0
receivable
/payable
0 0 0 0 0 0 0 0
receivable/
payable
500 500 0 1,000 0 0 1,000 1,000
0 0 0 0 0 0 0 0 0 0 1,000 1,000 0 0 1,000 1,000
Financial accounts Financial accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0 0 0
Cash and
deposits
0 0
receivable
/payable
500 500 1,000 1,000 1,000
receivable/
payable
(100) (100) (100) (100)
0 0 1,000 1,000 0 0 1,000 1,000 (100) 0 0 (100) 0 0 (100) (100)
NLB 0 0 0 NLB (100) 0 100
Revaluation accounts Revaluation accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
receivable
/payable
0 0 0 0 0 0 0 0
receivable/
payable
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Other changes in the volume of assets accounts Other changes in the volume of assets accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
receivable
/payable
0 0 0 0 0 0 0 0
receivable/
payable
0 0 0 0 0 0 0 0
NPNF 0 0 0 0 0 0 0 0 NPNF (80) (100) 0 (180) 0 0 0 0
0 0 0 0 0 0 0 0 (80) (100) 0 (180) 0 0 0 0
Closing balance sheets Closing balance sheets
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0 0 0 0
Cash and
deposits
(500) (500) 1,000 0 0 0 0 0
receivable
/payable
500 500 0 1,000 0 0 1,000 1,000
receivable/
payable
400 500 0 900 0 0 900 900
NPNF NPNF (80) (100) 0 (180) 0 0 0 0
0 0 1,000 1,000 0 0 1,000 1,000 (180) (100) 1,000 720 0 0 900 900
Net Worth
0 0 0 0 Net Worth (180) (100) 100 (180)
Table 6 Split Approach
T=0, Sale of emission permits (PPP=$10), # of Units = 100
T=1, NFC surrender 10 permits (PPP=$8)
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
T=0, Sale of emission permits (PPP=$10), # of Units = 100
T=1, NFC surrender 10 permits (PPP=$8)
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
23
Income
Expense Income Expense
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Taxes 0 0 0 0 0 0 0 0 Taxes 0 0 80 80 80 0 0 80
Capital
Account
0 0 0 0 0 0 0 0
Capital
Account
0 0 0 0 0 0 0 0
NLB 0 0 0 0 0 0 0 0 NLB 0 0 80 80 80 0 0 80
Opening balance sheets Opening balance sheets
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0
0 0 0 0 0 0 0
Cash and
deposits
(500)
(500) 1,000 0 0 0 0 0
Other debt
securities
0 0 0 0 0 0 0 0
Other debt
securities
500
500 0 1,000 0 0 1,000 1,000
0 0 0 0 0 0 0 0 0 0 1,000 1,000 0 0 1,000 1,000
Financial accounts Financial accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0 0 0
Cash and
deposits
0
0
Other debt
securities
500 500 1,000 1,000 1,000
Other debt
securities
(80) (80) (80) (80)
0 0 1,000 1,000 0 0 1,000 1,000 (80) 0 0 (80) 0 0 (80) (80)
NLB 0 0 0 NLB (80) 0 80
Revaluation accounts Revaluation accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0
0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
Other debt
securities
0 0 0 0 0 0 0 0
Other debt
securities
(100) (100) 0 (200) 0 0 (200) (200)
0 0 0 0 0 0 0 0 (100) (100) 0 (200) 0 0 (200) (200)
Other changes in the volume of assets accounts Other changes in the volume of assets accounts
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0 0 0
Cash and
deposits
0 0 0 0 0 0 0 0
Other debt
securities
0 0 0 0 0 0 0 0
Other debt
securities
0
0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Closing balance sheets Closing balance sheets
NFC FC GG Total NFC FC GG Total NFC FC GG Total NFC FC GG Total
Cash and
deposits
(500)
(500) 1,000 0 0 0 0 0
Cash and
deposits
(500)
(500) 1,000 0 0 0 0 0
Other debt
securities
500 500 0 1,000 0 0 1,000 1,000
Other debt
securities
320 400 0 720 0 0 720 720
0 0 1,000 1,000 0 0 1,000 1,000 (180) (100) 1,000 720 0 0 720 720
Net Worth
0 0 0 0 Net Worth (180) (100) 280 0
Table 7 Financial Asset Approach
T=0 Financial Asset Approach Current and Capital Account
T=1 Financial Asset Approach Current and Capital Account
∆
Assets
∆
Liabilities
∆
Liabilities
∆
Assets
∆
Liabilities
∆
Assets
∆
Liabilities
T=0, Sale of emission permits (PPP=$10) # 0f Units = 100
T=1, NFC surrender 10 permits (PPP=$8)
∆
Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆
Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆
Liabilities
∆
Assets
24
Income
Expense
Income Expense
NFC FC
GG
Total NFC FC
GG Total NFC FC GG
Total NFC
FC
GG
Total
Taxes 0
0
0 0
0 0
0
0 Taxes
0
0 0
0
0 0
0 0
Rent
Rent
80
80
Capital
Account
0
0
0 0 0
0 0 0
Capital
Account
0 0
0 0 0
0
0 0
NLB
0
0
0
0
0 0 0 0 NLB
0
0
80 0
80
0
0 0
Opening balance sheets
Opening balance sheets
NFC FC GG
Total NFC
FC GG Total NFC FC GG Total
NFC FC GG
Total
Cash and
deposits
0
0
0 0
0 0
0 0
Cash and
deposits
(500)
(500)
1,000 0
0 0
0 0
Rent Rent
Receivable/
Payable
0 0
0
0 0 0 0 0
Receivable/
Payable
500 500 0 1,000 0 0
1,000
1,000
0
0
0
0 0 0
0 0
0 0
1,000 1,000
0 0
1,000
1,000
Financial accounts
Financial accounts
NFC FC GG
Total NFC
FC
GG Total NFC
FC
GG Total
NFC FC
GG Total
Cash and
deposits
(500) (500) 1,000
0
0 0
0 0
Cash and
deposits
0
0 0
0 0
0 0 0
Forward Forward
(20)
(20) (20) (20)
Receivable/
Payable
500 500 1,000
0
0 1,000 1,000
Receivable/
Payable
(100) 0
0
(100) 0 0 (100) (100)
0 0
1,000 1,000
0 0
1,000 1,000 (100)
0 (20)
(120) (20)
0 (100)
(120)
NLB 0
0 0 NLB
(80) 0
80
Revaluation accounts Revaluation accounts
NFC FC GG
Total NFC FC
GG Total NFC
FC GG Total
NFC FC GG
Total
Cash and
deposits
0 0
0 0
0
0 0 0
Cash and
deposits
0 0
0 0
0 0
0 0
Forward
Forward 200 100 100
Receivable/
Payable
0 0 0
0 0 0
0 0
Receivable/
Payable
0
0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0
0 200 0 100 100
0 0
Other changes in the volume of assets accounts Other changes in the volume of assets accounts
NFC FC GG
Total NFC FC GG
Total NFC FC GG
Total NFC FC GG Total
Cash and
deposits
0 0 0 0 0 0
0 0
Cash and
deposits
0 0 0
0 0 0 0 0
Forward Forward
Receivable/
Payable
0 0 0 0
0 0 0 0
Receivable/
Payable
0 0 0 0
0 0 0 0
0 0 0 0 0 0 0
0 0 0 0 0 0
0 0 0
Closing balance sheets Closing balance sheets
NFC FC
GG Total NFC FC GG
Total NFC FC
GG Total NFC
FC GG Total
Cash and
deposits
(500) (500) 1,000 0 0 0
0 0
Cash and
deposits
(500) (500) 1,000 0
0 0 0 0
Forward Forward 0 0 180
180 80 100 0 180
Receivable/
Payable
500 500 0 1,000 0 0 1,000
1,000
Receivable/
Payable
400 500 0 900 0 0
900 900
NPNF NPNF
0 0 1,000 1,000 0 0 1,000 1,000
(100) 0 1,180 1,080 80 100 900 1,080
Net Worth
0 0 0 0 Net Worth (180) (100) 280
0
Table 8 Rent Approach with negative Forward
T=0 Rent Approach Current and Capital Account
T=1 Rent Approach Current and Capital Account
T=0, Sale of emission permits (PPP=$10) # 0f Units = 100
T=1, NFC surrender 10 permits (PPP=$8)
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
∆ Assets
∆ Liabilities
25
63. Under all scenarios, the recording of the auction would not have any impact on GDP, rather
the transactions would all be recorded in the financial account. Both financial and non-financial
corporations would show a decrease in cash and deposits and an increase in a financial asset. The
government would show an increase in cash and deposits and a new liability. There are therefore no
changes in any institutional sector’s net worth. The only difference between the alternatives is in the
classification of the emission permits: the split asset approach would record the emission permits as
an “other asset” (accounts receivable-prepaid tax) for the corporations and a corresponding other
liability (accounts payable) for the government. The financial asset approach could record an
increase in other security holdings of the corporations and a corresponding other debt security
liability for the government. Similar to the split asset approach the rent approach will record an
accounts receivable – prepaid rent for the corporations and a corresponding account payable for the
government.
64. Assume that the following year T=1, the demand for emission permits declines and as a
result, the price of emission permits decreases to $8 per unit. Let’s further assume that the non-
financial corporation must redeem 10 emission permits to satisfy its pollution obligation to the
government. In this scenario, GDP would again not be impacted; however, the decrease in the unit
price of emissions would have a different impact on taxes accrued, NLB, public debt, and net worth
depending on the chosen option.
65. In the split asset approach, the current account of government would show a tax revenue
valued at the original issuance price of 10 despite the decline in the market price. As a result, the
NLB of government will increase by $100. However, NFCs would report an expense of $80 when
they compile their profit and loss statements. Furthermore, the new market price of $8 would create
a new non-produced non-financial (NPNF) asset equal to the difference between the original issue
price of $10 and the current market price of $8. The unrealized capital loss would be reflected as a
NPNF valued at -$80 for non-financial corporations and -$100 for financial corporations and would
be shown in the other changes in the volume of assets (OCVA) account as a decrease in the value
of the NPNF asset for the corporations, and there will not be any impact to government tax liabilities
or debt outstanding
66. In the financial asset approach, the decline in the market price of the emission permits would
be reflected in the tax paid by the corporation to the government. In the current and capital accounts,
the government would have a tax revenue of $80 and the net lending of government will increase by
the same amount and there will be a corresponding decline in NLB of the nonfinancial corporations.
In the financial account there will be an $80 disappearance of government debt security and a
corresponding decline in non-financial debt security assets
10
. Finally, the decline in the market price
of emissions will create a downward revaluation for both financial and non-financial corporations of
10
For illustrative purposes, the emission permit is treated as other debt securities, however we recognize
that the emission permit does not have the characteristics of debt or equity securities. A new financial
instrument could be created, or emission permits can be classified as other assets/liabilities not
elsewhere classified.
26
$-100 and a -$200 revaluation for government debt securities. The decline in the market price of
emission permits would result in a decline in the outstanding debt of government.
67. In the rent approach, the price decrease will benefit the government as the market price is
below the issuance price. The government will receive 80 in rent, that is the NLB will be 80, and the
total debt will stand at 900 however the decrease in price will lead to a forward assets of 180, which
will result to a net worth of 280, similar to the financial asset approach.
Summary NLB Debt Othe r Asse t Net Worth
100 900 100
80 720 280
80 900 180 280
Split Asset Approach
Financial Approach
Rent Approach
27
