Accounting for carbon

Abstract

The paper designs an accounting for carbon that reports an entity’s net carbon contribution to society. The accounting is in the same form as financial accounting, reporting a balance sheet and an income statement. In the balance sheet, assets in reducing carbon are compared to liabilities for carbon admissions, reporting an entity’s net position in carbon, with the accumulated difference reporting its progress over time in reaching goals such as a net-zero carbon promise. With a balance sheet, the accounting provides more information than the standard flow number, the current period’s net emissions. By recognizing assets, an entity gets credit for current efforts to reduce carbon that are realized only later, thus dealing with the timing problem between investing in carbon removal and its effect. The accounting is a responsibility accounting that has many attractive reporting and incentive features and enables a pro forma analysis for evaluating carbon strategies. Like financial accounting, it facilitates consolidation accounting across groups such as industries or divisions within firms. It leads to an analysis like financial statement analysis that gets to the drivers of net emissions. Being in the form of financial accounting, it facilitates comparisons with financial metrics to evaluate trade-offs and “sustainability" more generally.

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