Cap‐and‐trade emission allowances and US companies' balance sheets

Abstract

PurposeThis study aims to examine the impact of the emission allowances granted under California's cap‐and‐trade program (AB 32) – the first major program of its kind in the USA – on the balance sheets and income statements of the S&P 500. So far there has been little discussion of what a cap‐and‐trade program would mean for the US companies' financial statements.Design/methodology/approachThe author states and tests an economic model of the relation between greenhouse gas emissions and financial statement variables at the individual company level and use this model to predict emission allowances and obligations for the S&P 500.FindingsThe author's analysis suggests that the average S&P 500 company's balance sheet and net income will be adversely affected under several different accounting treatments for emission allowances, with the greatest impacts in the utilities, energy, and materials sectors.Practical implicationsUS and European regulators have yet to set a single standard for emissions accounting. Without a single standard, companies acting in their own interests may use diverse or unclear accounting treatments for similar economic benefits. This can raise the cost of capital and hurt investors.Originality/valueThis is the first study of which the author is aware to document how the emission allowances under the AB 32 cap‐and‐trade program will affect American companies' balance sheets.