Small investors could be big losers under federal climate change legislation

May 7, 2010

(PhysOrg.com) -- Small investors could be big losers if a greenhouse gas reduction plan known as cap and trade becomes law and accounting standards for carbon credits have not been established, according to a new study released today by a University of California, Davis, professor.

In an analysis of pending federal legislation and accounting practices, UC Davis management professor Paul Griffin determined that U.S. companies would receive up to $36 billion in climate change allowances next year under provisions of a bill the U.S. House of Representatives passed last year.

But their balance sheets would show only $7.5 billion in allowances using an accounting procedure set by a federal energy agency. Companies also could choose from one of several other established accounting standards, each of which would produce very different results, according to Griffin.

"There will be confusion," said Griffin, an accounting expert at the UC Davis Graduate School of Management. "The average public investor will be at a disadvantage relative to a professional investor like Goldman Sachs."

When balance sheets do not give a clear picture of assets and liabilities, investors cannot accurately assess a firm's value, according to Griffin.

"It raises an issue of fairness," he said. "Everyone wants openness and transparency now, and this could move us away from that."

Under the bill now before the Senate, total would be capped, and companies would receive annual government emission allowances. Firms with low emissions could sell their unused allowances to firms that have exceeded their limits. The bill thus would create incentives for buyers and sellers of credits to cut emissions.

In 20 years, U.S. firms would receive approximately $700 billion in allowances under the bill.

"These are big numbers that should be reflected in balance sheets," Griffin said.

So far, the debate over cap and trade has been largely about the cost to consumers, the effect on the federal deficit and the impact on global . There has been little discussion of what it would mean for the balance sheets of companies.

"The Securities and Exchange Commission hasn't given any guidance on the debits and the credits that would result from the bill," Griffin said.

In his study, Griffin compiled financial and emissions data of all firms in the Standard & Poor’s 500. Using this data and applying rules that might be used by accountants, he calculated how the financial statements of each of the large publicly traded companies would be affected under different accounting scenarios.

Applying standards used by the European Union, total assets from on U.S. company balance sheets would be as high as $36 billion in the first year of the bill, according to Griffin's calculations. However, under U.S. Federal Energy Regulatory Commission standards, the total benefits received from the government would be shown as zero. According to Griffin, companies could opt for a method that allows them to show zero benefit and zero liability from the government credits.

"A large swath of U.S. companies could account for an aggregate economic obligation of between $39 billion and $44 billion entirely off the books," Griffin said.

Explore further: Cap and trade policies limiting CO2 can increase value of some electricity generating firms

More information: Download the full study at: ssrn.com/abstract=1601122

Related Stories

EPA: Climate bill could cost family $100 annually

October 25, 2009

(AP) -- A Senate plan to tackle global warming would add about $100 a year to the energy costs for a typical household, according to an analysis by the Environmental Protection Agency.

Recommended for you

Study on prehistoric violence published

February 20, 2017

A longtime Cal Poly Pomona anthropology professor who studies violence among prehistoric people in California has been published in a prestigious journal.

'Tully monster' mystery is far from solved, group argues

February 20, 2017

Last year, headlines in The New York Times, The Atlantic, Scientific American and other outlets declared that a decades-old paleontological mystery had been solved. The "Tully monster," an ancient animal that had long defied ...

Mathematical models predict how we wait in line, traffic

February 17, 2017

As New Jersey drivers approach the George Washington Bridge to enter New York City, a digital sign flashes overhead with estimates of the delays on the upper and lower levels of the bridge. Most drivers choose the level with ...

Remembering the need to forget

February 17, 2017

We are built to forget – it is a psychological necessity. But in a social media world that captures – and, more importantly, remembers – everything we say and do, forgetting is becoming a thing of the past. If we lose ...

2 comments

Adjust slider to filter visible comments by rank

Display comments: newest first

MikeLisanke
1 / 5 (1) May 11, 2010
7th paragraph mentions greenhouse emissions and the 10th finally mentions cap and trade.

Did the author think we wouldn't read the article if it talked about how cap and trade was going to cost the little guy (us) lots of money?
marjon
1 / 5 (1) May 11, 2010
And AGWites wonder why so many don't believe you?

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.