Vol. 3 No. 1 (2023): African Journal of Artificial Intelligence and Sustainable Development
Articles

Accounting for Climate-Related Contingencies: The Rise of Carbon Credits and Their Financial Reporting Impact

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  • Piyushkumar Patel
Piyushkumar Patel
Accounting Consultant at Steelbro International Co., Inc, USA
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Published 25-06-2023

Keywords

  • Carbon credits,
  • carbon markets
Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

How to Cite

[1]
Piyushkumar Patel, “Accounting for Climate-Related Contingencies: The Rise of Carbon Credits and Their Financial Reporting Impact”, African J. of Artificial Int. and Sust. Dev., vol. 3, no. 1, pp. 490–512, Jun. 2023, Accessed: Dec. 28, 2024. [Online]. Available: https://africansciencegroup.com/index.php/AJAISD/article/view/228

Abstract

As the focus on climate change continues to shape global priorities, businesses increasingly integrate environmental sustainability into their strategies. A pivotal element in this evolution is using carbon credits—a mechanism allowing companies to offset their greenhouse gas emissions to meet regulatory requirements or align with voluntary environmental goals. Carbon credits, often tradable certificates representing a reduction of one metric ton of carbon dioxide or its equivalent, are gaining traction as tools for balancing emissions while fostering a market-driven approach to sustainability. However, their inclusion in financial reporting raises complex accounting treatment and valuation challenges. Organizations face questions about whether carbon credits should be classified as intangible assets, inventory, or financial instruments, each with distinct implications for balance sheets & income statements. Moreover, the valuation of carbon credits is fraught with uncertainty due to fluctuating market prices, varying quality of credits, and the evolving regulatory landscape. These complexities demand a deeper exploration of how carbon credits influence financial transparency and accountability. Beyond their direct accounting treatment, carbon credits underscore a broader issue: aligning corporate financial disclosures with sustainability goals. Stakeholders—investors to regulators—seek consistent and reliable information about how companies manage climate-related risks and opportunities. Yet, in the absence of universally accepted accounting standards for carbon credits, businesses grapple with inconsistencies in reporting practices, potentially obscuring the true financial impact of these instruments. This highlights an urgent need for harmonized standards that ensure transparency and comparability, fostering stakeholder trust & informed decision-making. By situating carbon credits within the broader narrative of climate-related contingencies, this discussion emphasizes their transformative potential for businesses and financial markets. It also underscores the growing recognition that effective financial reporting is essential for compliance and driving meaningful progress toward global sustainability goals.

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