Climate reporting, carbon pricing and greenwashing — student companion

Accounting Ahead | Original study resource | accountingahead.com.au

Climate change reporting

MODULE 5 | PART F.1 | STUDENT COMPANION

Greenhouse gases let the sun's energy warm the Earth and trap some of the heat. Human activity, mainly

burning fossil fuels and clearing land, is increasing their concentration, and the climate is changing. Climate

change is an externality that conventional accounting leaves out, because of how the elements are defined and

the entity assumption.

The international response

1992

Rio: UN Framework

Convention

Mitigation and

adaptation; countries

report total emissions

and sinks; no binding

limits or enforcement

1997

Kyoto Protocol

Binding targets for 37

industrialised countries:

about 5% below 1990

levels, 2008-2012; offset

credits allowed

2009-11

Copenhagen,

Cancun, Durban

No new binding targets

agreed

2012

Doha

A second Kyoto period,

2013-2020

2015

Paris Agreement

Well below 2 degrees

Celsius, pursuing 1.5

degrees; each country

sets and reports its own

contribution

Trust in Paris depends on accurate national emissions estimates, tracked and independently checked: work accountants are well

placed to support.

Personal social responsibility: individuals also choose how much energy they use, how they travel, how much

waste they create and what they buy. Organisations largely respond to consumer demand, so responsibility is

shared.

Putting a price on carbon

Governments price carbon through carbon taxes or cap-and-trade (emissions trading) schemes. A price per

tonne internalises the cost of emissions, so products are more fully costed. Carbon-intensive producers face

higher costs, which is why carbon pricing is contentious, especially if other countries do not price carbon.

ETHICS & GOVERNANCE | M5 PART F.1 | STUDENT COMPANION

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Cap-and-trade and accounting for

emissions

MODULE 5 | PART F.1 | MECHANICS AND RULES

Stage What happens

Cap The government sets the maximum total emissions for covered companies over a period, then issues

allowances equal to the cap, given out (often based on past emissions) or auctioned. In the EU

scheme one allowance = one tonne of CO2-e. The cap falls over time.

Trade Companies compare actual emissions with allowances held. Those below can sell or bank the

surplus; those above must buy more, directly, through a broker or on an exchange.

0k t

20k t

40k t

60k t

80k t

100k t

120k t

140k t

Emits 120k t

Kestrel Cement

Emits 80k t

Lumen Glass

Allowances held: 100k each

Kestrel: over its allowances

Buys 20,000 allowances at $40 = $800,000, or cuts

emissions if that costs less than $40 a tonne

Lumen: under its allowances

Sells 20,000 spare allowances, or banks them for a

later year

The cap fixes the total; trading lets each company find its cheapest way to cut. Kestrel and Lumen are imagined.

Accounting for emissions uses three scopes: Scope 1 direct, Scope 2 purchased energy, Scope 3 value

chain. Offsets, such as carbon absorbed by a managed forest, may also be accounted for.

In Australia, large emitters over the thresholds must report their Scope 1 and 2 emissions under the NGER

Act. Smaller companies have not been directly regulated in how they account for emissions or offsets, but the

Australian Consumer Law prohibits misleading or deceptive claims, including about carbon neutrality and

offsets.

Voluntary reporters most often use the Greenhouse Gas Protocol.

ETHICS & GOVERNANCE | M5 PART F.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Regulators, standards and greenwashing

MODULE 5 | PART F.1 | GOVERNANCE AND CASE NOTES

ASIC's four recommendations (2018)

1 Consider climate risk, probing and proactive

2 Strong, effective corporate governance

3 Comply with the law: material business risks in the

operating and financial review

4 Disclose useful, specific information

Climate standard: four areas to disclose

1 Governance

How climate risks and opportunities are overseen

2 Strategy

How they are managed

3 Risk management

How they are identified, assessed and monitored

4 Metrics and targets

Performance and progress towards targets

Greenwashing

Greenwashing makes a product or company sound more environmentally friendly than it is. ASIC's guidance for

sustainability-related investment products: be true to label, explain vague terms, and make screening criteria

clear.

Case note - Active Super: on 18 March 2025 the Federal Court ordered the superannuation fund to pay a

$10.5 million penalty. It had told members it had eliminated investments in areas such as gambling, coal

mining, oil tar sands and Russian companies, yet from February 2021 to June 2023 it held such

investments, directly or through other funds. The Court had found the conduct misleading in June 2024. It

was ASIC's third greenwashing court outcome.

Sources: ASIC media release 25-042MR (18 March 2025); ASIC Report 593 (2018); IFRS S2.

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Practice questions

MODULE 5 | PART F.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Allowances

Imagine three companies in a cap-and-trade scheme. Each holds 50,000 allowances (one tonne each), and

allowances trade at $35. Company X emits 62,000 tonnes, Company Y emits 47,000 tonnes and Company Z

emits 50,000 tonnes.

(a) Does each company buy or sell, how many allowances, and what does it cost or earn? (b) Company X could

cut up to 8,000 tonnes at $28 a tonne. Should it, and what would its total cost be?

Question 2 - Spot the greenwash

Claim Why it is a risk, and a fix

(a) A courier advertises "100% carbon neutral delivery",

but offsets only the fuel used by its own vans, not its

warehouses' electricity or its subcontractors' trucks.

(b) A cleaning product carries the label "eco-friendly" with

no explanation.

(c) A clothing brand calls its range "ocean-safe" because

it uses recycled bottles, but the garments still shed

plastic microfibres when washed.

All companies and claims are imagined teaching examples.

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 5 | PART F.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Allowances

Company Position Action Cash effect

X 62,000 - 50,000 = 12,000 tonnes over Buy 12,000 allowances Costs 12,000 x $35 =

$420,000

Y 50,000 - 47,000 = 3,000 tonnes

under

Sell (or bank) 3,000

allowances

Earns 3,000 x $35 =

$105,000 if sold

Z Exactly at 50,000 No trade needed Nil

(b) Cutting costs $28 a tonne, less than the $35 allowance price, so X should cut all 8,000 tonnes: 8,000 x $28 =

$224,000. It still needs 4,000 allowances: 4,000 x $35 = $140,000. Total $364,000, saving $56,000 compared

with buying all 12,000 allowances.

Question 2 - Spot the greenwash

Claim Why it is a risk A fix

(a) Overstates coverage: most emissions, including

Scope 2 and Scope 3, are left out

State exactly which emissions are offset, with what

offsets, or extend coverage before claiming 100%

(b) Vague term with no explanation or evidence Make a specific, verifiable claim, such as the share

of recycled or biodegradable content, with

certification

(c) A broad environmental claim the product cannot

support

Limit the claim to what is true, such as recycled

content, and avoid implying the product is harmless

Remember the Australian Consumer Law: misleading or deceptive environmental claims are prohibited, whether

or not a company is required to report its emissions.

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