The measurement questions that Accountants face around emissions trading schemes will make financial reports less decision useful.

Carbon accounting is the process of putting a price on the carbon emission by entities in order to decrease the release of polluted greenhouse gases in the atmosphere. Emissions trading scheme is a market based scheme for environmental improvement that allows buying and selling permits for emission of credits in order to reduce emissions of certain pollutants. Its important to have such a scheme because having a price on the exceeded amount of carbon polluted will help companies reduce the release of carbon to the environment, thus having less impact on the environment and the society. However, it can be argued that accounting for carbon is hard to account for and may create some problems in the financial reports, and therefore, it would be less decision useful to the users of the financial statements. For example, since carbon emissions trading would be accountable for the amount used, it cannot be estimated the exact amount which was used, therefore figures come into calculation where the company has to pay tax for the amount of carbon used. This would then be related to decision usefulness theory.

 The assumption behind the theory of decision usefulness is that ‘if we can’t prepare theoretically correct financial statements, at least we can try to make financial statements more useful’ (Scott, 2009). In saying that, the decision usefulness theory tries to provide the constituencies of the financial reports with more relevant and reliable information that will help investors in making short and long-term economic decisions, like whether or not to invest in a company. Accountants face problems when accounting for carbon accounting referring to the allowances distributed by governments to firms as the IASB states that these allowances meet the definition of assets, and decided to measure at fair value. However, allowances are distributed free from charge (Cook, 2009); therefore obtaining the value of allowances would rely on the market mechanism and the efficient market hypothesis. However, it has been proved that the market is inefficient, as according to Kothari (2001), the stock market under reacts to information as soon as the information is released. Instead, the market recognises information impact gradually, in which it leaves room for investor’s irrationality which would lead to volatility in the prices of such allowances. Therefore, adopting FV as a sole measurement can be subject to managerial subjectivity in measuring the value of the allowances, and much further can lead to market crash at the time of financial distress in the allowances market similar to what happened during the global financial crises and how would this have a negative impacts on the reports and its usefulness (Laux & Leuz, 2009).

Fair value accounting (FVA) shows evidence that it discloses informative values to the investors; however the level of the information efficiency is based on professional estimates and judgments. There are various approaches in determining a value for accounting purposes. Fair value measurement is one of the measurement techniques practiced in the world. There is no specific definition of FVA in the IASB or AASB, however, under accounting standard AASB 139, it talks about the Recognition and measurement of financial instruments and AASB 7 discusses the discloser of the financial instruments. Under FAS 157 (similar to AASB 139), mentions that the board's standard on fair-value measurements, of financial assets recorded in fair-value must explain on how they came up with their values.

It would be hard to measure the actual value of carbon emissions trading due to black box issues. This is evident in Mackenzie’s article which states that ‘different gases are made commensurable and the inscription of the mid-1990s’ estimates of global warming potential (GWPs) into the Kyoto Protocol means that uncertainties and changing estimates of GWPs remain inside the black box’. Another issue describe in the article was that GWP was measured for 100 years and was arbitrary if the gas has been emitted in the air which would stay there up to nearly 1000 years which would not  be accounted for. Also, according to Mackenzie (2009) and scientists, the GWP estimates were acknowledged to be subject to significant uncertainty of the order of +/- 35% accuracy. HFC23 as an example was measured to the equivalents of 11700 tonnes of CO2 for the year 2009. This figure has increased by 3100 in the year 2010 to reach 14800 tonnes of CO2. Since carbon emissions trading is considered as an intangible asset, then it would be difficult to revalue the asset in its early years of the plan. Even if revaluation at its fair value is allowed to be used, any changes to the value will not go to the profit and loss. It will go into the equity division of the other comprehensive income. With that if there might be any changes to the liability section then that would go in the profit and loss. This will mismatch the assets and liabilities when carbon is considered.

In conclusion, the accounting standard for carbon emissions would represent a number of challenges for companies when preparing financial reports. Many companies will have to go through a few changes in order to build an effective and efficient conceptual framework so that the information presented in the reports is decision useful to the public. The financial statements have to fulfill the qualitative characteristics of relevance and reliability, while the subsequent presentation of the financial information should be both understandable and comparable (Henderson et al, 2006). This is reflected in decision usefulness theory.