This chapter aims to provide an overview of corporate climate change-related accounting and taxation practices in Portugal and Spain. The Portuguese Accounting and Financial Reporting Standard No. 26: Environmental Matters and the Spanish Royal Decree 602/2016 establish the current accounting treatment for greenhouse (GHG) emissions. While the initial measurement basis is the same in both countries (cost when licenses are acquired or fair value when obtained for free), the accounting regulations prescribe different accounting treatments for the initial recognition. In Spain, allowances are recognized as inventories, while in Portugal, they are recognized as intangible assets. Interestingly, the Portuguese regulation uses the FIFO inventory method to calculate the amortization of the intangible asset. Regarding corporate income tax, there is no specific treatment for emission allowances in either country's tax legislation. Additionally, a reverse-charge mechanism on CO2 emissions trading has been introduced in Europe, resulting in no differences between countries concerning VAT.
TopIntroduction
Due to the rising levels of CO2 and other greenhouse gases, the Earth's climate is undergoing changes that are causing significant economic, social, and environmental damage both in the present and for future generations (Arnold, 2016). As a result, global warming has become a pressing concern for countries and international organizations worldwide.
Since the Kyoto Protocol, European Union (EU) member states have committed to reducing atmospheric emissions. To this end, the creation of a European market for greenhouse gas (GHG) emissions transactions has been one of the most critical measures implemented, based on a cap-and-trade system. A limited number of licenses were granted to entities for a set period, and any excess licenses can be sold or purchased if they become insufficient (Ellerman et al, 2016).
One of the primary initiatives established by the European Emissions Trading Scheme (EU-ETS) was the allocation of free emission allowances to companies through grandfathering to help limit CO2 emissions. Each member state allocates CO2 emission allowances free of charge, which constitutes the initial allocation. It is also possible to auction 5% of CO2 emission allowances during the first phase (2005-2008) and 10% in the second phase (2008-2012). With the introduction of the new Directive 2009/29/EC, there were significant changes, particularly with the start of the third phase (2013-2020), which involved allocating allowances through auctions, while free allocation continued on a marginal basis.
Regarding the accounting of CO2 emission allowances, there is currently no dedicated international accounting standard at either the European or international level. In December 2004, the International Financial Reporting Interpretations Committee (IFRIC), a part of the International Accounting Standards Board (IASB), released an interpretive standard on accounting for emission rights called IFRIC No. 3 - Emission Rights. However, this standard was withdrawn in July 2005 due to opposition from the European Financial Reporting Advisory Group (EFRAG). Since then, no other standard or interpretation has been issued specifically addressing environmental issues.
The lack of a dedicated international accounting standard has resulted in varying accounting treatments adopted by different entities. As a result, some countries such as Portugal, Spain, Belgium, France, and the United Kingdom have developed specific regulations for the accounting treatment of emission licenses within their respective jurisdictions.
In Portugal, the Accounting Standardization System (Sistema de Normalização Contabilística, SNC) was approved, and the Accounting and Financial Reporting Standard (Norma Contabilística e de Relato Financeiro, NCRF) No. 26 - Environmental Matters was published in accordance with Decree Law (DL) No. 158/2009 on July 13th (amended by DL 98/2105). NCRF No. 26 includes an appendix specifically dedicated to the accounting treatment of CO2 emission allowances.
In Spain, the Resolution of the Institute of Accounting and Auditing (ICAC) regarding greenhouse gas emission rights (published in 2006, revised in 2009 and 2010) clarified the accounting treatment of emission allowances received free of charge, purchased, or acquired through non-reciprocal transactions.
Regarding taxation, there is a lack of specific treatment in the tax regulations for operations related to emission allowances. Therefore, it is up to the accounting framework to determine their impact on the results of companies engaging in such operations, which in turn can affect the tax obligations of these companies.
The purpose of this paper is to present an overview of the corporate climate change-related accounting and taxation frameworks for GHG emission allowances in Portugal and Spain.
This chapter is structured as follows: after this introduction, the next section presents the European Carbon Trading market. A section regarding the background and empirical studies on accounting and taxation of GHG emission allowances is also presented. Next, the accounting regulations of greenhouse gas emission allowances are presented, both in Spain and Portugal. Subsequently, the tax regime for greenhouse gas emission allowances is presented, also in both countries. Finally, solutions and recommendations are presented, as well as suggestions for future research and the conclusions.