Decision-Useful Carbon Information

Abstract

Current carbon accounting practices often obscure firms’ actual emissions and abatement progress. This paper builds on financial accounting standards to propose how to characterize the quality of reported emissions and how companies should account for their emissions to achieve a certain reporting quality. In particular, I first propose that the objective of corporate carbon reporting is to provide carbon information about the reporting firm that is useful to managers, investors, and other stakeholders in making decisions related to the firm. Carbon information qualifies as decision-useful if and only if it satisfies a comprehensive system of qualitative characteristics adapted from generally accepted financial accounting principles. I then develop procedures for accounting for corporate emissions and show that firms adhering to these procedures will produce outcome variables that are relevant and faithfully represent the actual emissions embodied in their economic activities. Overall, the paper shows how standard-setters could revise recent carbon disclosure regulations to improve the quality of reported emissions.

Keywords: carbon accounting, information quality, sustainability reporting

JEL Classification: G18, M14, M41, Q54, Q56