Carbon Accounting Research Qingliang Tang

Carbon Accounting Research Qingliang Tang Scientific Evidence of global warming Damage of global warming Kyoto Protocol Cost of carbon emission control Clean energy: e.g. Solar power generator, wind power, etc. Emission Trading Scheme The role of Carbon accounting

This is summary of review of carbon accounting research in the recent literature. The topics of the carbon accounting research include: Carbon disclosure, Carbon performance, Carbon tax, Corporate governance and carbon activity, Cultural factors and carbon transparency propensity, Carbon management systems, Carbon assurance and carbon auditing The results of the review suggest carbon accounting research is an extension of environmental or sustainability study. But carbon accounting is a unique dimension, so should be separately studied, rather than combined in a basket in sustainability research.

Luo, Qingliang Tang and Y Lan Corporate Incentives to Disclose Carbon Information: Evidence from the CDP Global 500 Report Journal of International Financial Management & Accounting 2012 Why companies voluntarily disclose Co2 information? Large companies play a key role in carbon activity. Significant: 1 Emissions (economic pressure), 2 (GHG) intensive sectors (institutional pressure), 3 firm size (social pressure) Not significant: Information needs of investors The major driving force: general public and government

Luo and Qingliang Tang. Does Voluntary Carbon Disclosure Reflect Underlying Carbon Performance? JOURNAL OF CONTEMPORARY ACCOUNTING AND ECONOMICS, 10 (2014) Whether voluntary carbon disclosure reflects firms carbon performance (or just greening washing)? Is sustainability accounting really for sustainability? (U.S., U.K., and Australian firms) Co2 disclosure: content analysis of carbon reports; Co2 performance: Co2 emissions and mitigation Result: a positive association between Co2 disclosure and performance, consistent with signalling theory

Liao, Luo, Qingliang Tang Gender Diversity, Board Independence, Environmental Committee and Greenhouse Gas Disclosure British Accounting Review 2014 Corporate board s characteristics and Co2 voluntary disclosure 329 largest companies in the UK We find a significant positive association between gender diversity and GHG disclosure. A board with more independent directors or environmental committee show a higher tendency.

Theoretical contribution: The results are consistent with stakeholder theory A diversified and independent board and the existence of an environmental committee may balance a firm s financial and non-financial goals Such as board may moderate the possible conflicting expectations of stakeholders who have disparate interests.

Luo, Qingliang Tang, Lan Comparison of propensity for carbon disclosure between developing and developed countries: A resource constraint perspective Accounting Research Journal, 2013, Best paper of the year This paper investigates differences in voluntary carbon disclosure between developing and developed countries A sample consisting of 2,045 large firms from 15 countries Profitability, leverage and growth were used as proxies for the degree of resource availability Results show that the carbon disclosure propensity is correlated in the right direction with resource availability proxies

This relationship is stronger in developing nations, suggesting that the shortage of resources is one reason for the lack of commitment to carbon mitigation and disclosure in these countries. So resource restriction provides a complementary explanation largely ignored in the existing literature for variation in the carbon-disclosure propensity of firms.

Luo and Qingliang Tang Does National Culture Influence Corporate Carbon Disclosure Propensity? Journal of International Accounting Research Forthcoming 2015 National culture impacts managerial attitudes and philosophies about environmental protection, and thus affects their actions about emissions control and disclosure. A sample of 1,762 firms from 33 countries We found that cultural dimensions of masculinity (negative), power distance (negative) and uncertainty avoidance (positive) are related to carbon disclosure propensity

This is regardless of whether Hofstede or Global Leadership and Organizational Behaviour Effectiveness (GLOBE) culture measures are used. Our results also show individualism and long-term orientation has significant impact under Hofstede measure though not under GLOBE measure. In addition, our evidence implies that national culture may moderate the effect of carbon control mechanisms, such as emissions trading schemes.

Finally, the empirical evidence indicates the impact of culture is not sensitive to national wealth and industry membership. Theoretical contribution The findings suggest culture exerts incremental influences beyond economic and regulatory incentives. The result is useful in negotiation for an international climate agreement that is more acceptable to societies with disparate cultural backgrounds.

Luo and Qingliang Tang. Carbon Tax, Corporate Carbon Profile and Financial Return. Pacific Accounting Review 2014, Volume 26, Issue 3 The impact of the proposed carbon tax (big event in history) on the financial market return of Australian firms We utilise the event-study method. Sample includes 336 firm-event observations. The proposed tax has negative impact on abnormal returns, particularly for the materials, industrial and financial sectors. Scope 1 emission is significantly associated with abnormal returns, but not Scope 2.

He, Qingliang Tang, Wang. Carbon disclosure, carbon performance, and cost of capital, China Journal of Accounting Studies, 2013 Data: S&P 500 firms (CDP) in 2010. The cost of capital is negatively associated with carbon disclosure. This relationship is weaker for firms with good carbon performance. The results contrast with Matsumura et al (2014) that find that, for every additional thousand metric tons of Co2, firm value decreases by $212,000 for US firm in 2006-2008. Matsumura, Ella Mae and Rachna Prakash, and Sandra C. Vera-Munoz. Firm- Value Effects of Carbon Emissions and Carbon Disclosures. The Accounting Review Vol. 89, No. 2 March 2014 pp. 695 724.

Qingliang Tang and Luo. 2014. Carbon management systems and carbon mitigation Australian Accounting Review, Volume 24, Issue 1, pages 84 98, March 2014 Figure 2: The Carbon Management System Carbon Governance Perspective Elements Purposes Proxy variables 1 2 3 Board function To develop overall climate-change strategy and policy Risk and opportunity assessment To identify and assess carbon risk and opportunity Staff involvement To motivate staff and enhance awareness of climate-change issues ClimateCommittee RiskAssess INCENTIVE Carbon Operation Perspective Elements Purposes Proxy variables 4 5 Emission target Policy implementation To set up a mitigation target that is consistent with carbon strategy To enforce carbon policy by prioritising reduction actions and allocating resources to achieve targets TARGET CarbonProgram 6 Supply-chain emission control To reduce supply-chain emissions CustomerGHGAvoid Emission Tracking and Reporting Perspective Elements Purposes Proxy variables 7 8 Carbon accounting Carbon assurance To keep track of carbon inventory and emission footprint To increase the reliability of carbon data and information GHGAccounting GHGAudit Engagement and Disclosure Perspective Elements Purposes Proxy variables 9 10 Engagement with stakeholders Disclosure and communication To strengthen the link with stakeholders To increase the transparency of mitigation activities and outcomes PolicyEngage DISCLOSE

Qingliang Tang Institutional influence and the demand for carbon auditing: Chinese experience (working paper) Table 1: Categories of Carbon Auditing GHG statement assurance Compliance carbon audit Carbon management audit Governmental climate change audit Scope Firm level Firm and project level Firm and project level National or international level Purpose Determine whether Determine whether Determine whether Determine whether the statement is a carbon emissions carbon governmental fair and true and activities are management and climate change presentation of consistent with control measures policy is appropriate GHG emissions legislation and are economical, regulations effective, and efficient Nature Verification Investigation Evaluation Evaluation Users of audit External users External users, Internal managers Public, governmental report internal managers officials

Why is a significant increase in demand for carbon auditing (2009-2013)? A change in economic development model, and the institution of business An explosion of carbon and energy laws and regulations prior to the audit An increasing governmental greening investment Institutional changes make carbon auditing from rhetoric to practice

Increase in carbon auditing (2009 to 2013) 6000 Number of Carbon audits in China Formatted: Font: 20 pt, Bold 5000 4000 3000 Facilities audited 2000 1000 0 Year2003-08 Year2009/10 Year2011 Year2012 Year2013

Development and Structure of Low Carbon Institution in China Environmental Protection Law 1989, 2015, Law of Environmental Impact Assessment 2002 Energy laws Low carbon production and Economy Laws Electricity Law 1996 Coal Law 1996 Renewable Energy Law 2006 Clean production Law 2002 Recycle economy law 2008 Energy conservation Law 2007 Carbon market Carbon market and Finance regulations Carbon finance Carbon trading market trial regulation (State Council 2011,DRC, 2011). Time table for national carbon market,drc, Climate Change Dept 2015 Pollution & Co2 control by third party, DRC, 2014; State Council 2010 CDM foundation, State Council, 2010 Bank s financing support for low carbon projects, (CPB et al 2010); Enterprise Environmental credential assessment system, (Environment Ministry et al 2013)

Theoretical Movements of carbon related index 7 6 5 4 3 2 Emission Law Invest Public Co2 audit 1 0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year 11 year 12

Actual movements of index 18 16 14 12 10 8 6 4 2 0 Year Year Year Year Year Year Year Year Year 1998 2000 2002 2004 2006 2008 2010 2012 2014 Co2 (billion Ton) Co2 laws Co2 invest Public interst (Google) No of Co2 audits (thousand)

Actual movements Co2 laws (02-09) and audits(10-14) 14 12 10 Co2 laws 8 Co2 invest 6 No of Co2 audits (500) 4 2 0

Actual movements of index: public interest and audits 12 10 8 6 Co2 invest 4 2 0 Public interst (Google) No of Co2 audits (500)

Year 1998 Year 1999 Year 2000 Year 2001 Year 2002 Year 2003 Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009 Year 2010 Year 2011 Year 2012 Year 2013 Year 2014 18 16 14 12 10 8 6 4 2 0 Co2 invest No of Co2 audits (thousand)

Pacific Accounting Review, 2014, Volume 26, Issue 3 Carbon Tax, Corporate Carbon Profile and Financial Return Abstract Le Luo, University of Newcastle Qingliang Tang, University of Western Sydney Purpose: This study investigates the impact of the proposed carbon tax on the financial market return of Australian firms. We also consider the differential tax effect on individual firms with different carbon profiles, including factors such as emissions costs, carbon disclosure and climatechange policies. Design/methodology/approach: Utilising the event-study method, we examine the market reaction to seven key carbon legislative information events that occurred from February 2011 to November 2011. Our sample includes 48 different firms whose emissions-related data are available from Carbon Disclosure Project reports; thus, 336 firm-event observations are employed for our crosssectional analysis. Findings: The paper documents evidence that the proposed tax has an overall negative impact on shareholder wealth as measured by abnormal returns. The negative impact varies across sectors, with the most significant effect found in the materials, industrial and financial sectors. We also found that a firm s direct carbon exposure (as measured by Scope 1 emissions) is significantly associated with abnormal returns, whereas the indirect exposure (as measured by Scope 2 emissions) is not, because Scope 2 emissions are not covered by the tax. In addition, our findings suggest that the information content of the events is more notable during the early stages of the development of the carbon tax. Research limitations/implications: Our sample is restricted to the largest firms with relevant carbon profile information. Thus, caution should be exercised when generalising our inferences. Practical implications: The introduction of the carbon tax was largely unexpected and most firms were unprepared for it; thus, their carbon policy appears inadequate and does not impress investors. An understanding of how the carbon tax affects shareholder value and welfare will encourage management to take proactive actions to mitigate the compliance costs of carbon legislation. Originality/Value: The enactment of the Australian carbon tax perhaps represents one of the biggest social and economic restructuring events in the country s history. Our results offer initial insight into its impact and suggest that investors would penalise firms with heavy direct operational emissions. In addition, Australian corporate carbon policy seems inadequate, so does not reverse the negative effect of the tax on the value of a firm. Keywords: carbon tax, corporate carbon profile, greenhouse gas (GHG) emissions, Carbon Disclosure Project (CDP), carbon reduction target

Events We identify the following seven carbon tax-specific information events that would affect the market participants perceptions about the probability of the eventual passage of the legislation and its impact on earnings. #1 10 February 2011 The establishment of an independent Climate Commission 1 #2 24 February 2011 The initial announcement of the carbon tax plan #3 23 May 2011 The release of the Climate Commission report, The Critical Decade: Climate science, risks and responses 2 #4 10 July 2011 The release of the Australian government s Clean Energy Plan #5 23 August 2011 A Labour Senator is involved in a credit-card scandal #6 12 October 2011 Carbon bills are passed in the Parliament House with a vote of 74 to 72 #7 8 November 2011 The Clean Energy Bill and 17 complementary bills pass in the Senate. Note that in event #4, the Australian government released details of the costs, scope impact and operational features of the carbon tax. This was a big shock to the financial market because Prime Minister Julia Gillard had declared that there will be no carbon tax under a Government I lead prior to the 2010 election. In event #5 a Labour Senator, the Chair of the House of Representatives Standing Committee on Economics, resigned. The consequence was the Labour Party would lose a position in the Parliament and the carbon tax would not be passed. All of these events, with the exception of event #5, were expected to increase the probability that the tax would be enacted. 1 http://www.climatechange.gov.au/minister/greg-combet/2011/media-releases/february/mr20110210.aspx (accessed on 1 March 2012). 2 http://www.climatechange.gov.au/en/minister/greg-combet/2011/media-releases/may/mr20110523a.aspx (accessed on 1 March 2012).

Our test model is as follows: where (1) = return for the portfolio of firms for day t = dummy variable that equals 1 for each event window (3-day window) and 0 otherwise. = return on an equal-weighted New Zealand 50 market index for day t = return on an equal-weighted Tokyo market index for day t = return on an equal-weighted Standard & Poor s (S&P) 500 index for day t = return on an equal-weighted FTSE 100 index for day t = return on an equal-weighted Chinese A share market index for day t = return on an equal-weighted S&P 500 index for day t-1 = return on an equal-weighted FTSE 100 index for day t-1 k = the k th event, k = 1,, 7

.01.005 0 -.005 -.01 1 2 3 4 5 6 7 Event Number. AAR of the whole sample AAR of the highest Scope 1 emitters