1. OECD-EUROSTAT TASK FORCE ON EMISSION PERMITS Update 13th OECD – NBS Workshop on National Accounts November 40- December 4, 2009 Haikou, China Contact: nadim.ahmad@oecd.org

2. Background Tradable emission permits gaining increasing economic importance. 2008 SNA provides limited guidance 17.363 Governments are increasingly turning to the issuing of emission permits as a means of controlling total emissions. These permits do not involve the use of a natural asset … … and are therefore classified as taxes even though the permitted activity is one of creating an externality. It is inherent in the concept that the permits will be tradable and that there will be an active market in them. The permits therefore constitute assets and should be valued at the market price for which they can be sold.

3. Current situation Countries beginning to develop methodologies to tackle recording but with divergent views – in particular regarding: –The nature of the asset –The timing of the tax Considerable concern from users on impact on net-lending, taxes, debt and wealth – particularly concerning imputations for free permits.

4. AEG – November 2008 ETS permits issued under cap-and-trade schemes should be recorded as taxes. The group favoured treating payments for permits as pre-paid taxes, paid as emissions took place but noted the implications for the measurement of government debt. No recommendation on whether taxes and subsidies should be imputed when permits are issued without charge or at cost lower than the market price. Discussions did not reach a recommendation about how to record changes in the value of payments during their lives. No recommendations were reached for the treatment of other forms of emissions permits.

5. AEG – November 2008 –What type of asset is the ETS permit? –What transactions should be recorded when a permit is issued? –What transactions should be recorded when a permit is surrendered? –In which period(s) should transactions be recorded? –How should changes in the value of permits be treated? –How should permits that are issued free or at a cost lower than market price be treated? –How should international trade in permits be recorded? –Should all emission permit schemes be recorded in the same way?

6. OECD-Eurostat TF Mandate: Investigate the nature of all relevant aspects of emission permits granted under an ETS and any similar types of emission permits. Develop comprehensive guidelines for recording the associated flows and stocks of emission permits. Consider existing recommendations on the treatment of other licences and permits and justify any apparent divergence from them. Collaborate with any other task force or working group addressing these issues, including the UN Committee of Experts on Environmental Economic Accounting (UNCEEA) First meeting July 2009: Second meeting 9-10 November 2009

7. Key issue Two important perspectives to consider: The perspective of government and cash revenue it generates. And the perspective of companies that surrender permits - in particular their equivalence in permits acquired directly from government, via secondary parties, or from other mechanisms such as Clean Development Mechanisms Still to be finalised but possible recommendation is that permits acquired via CDMs (CERs) etc should be treated as non-financial non-produced assets, with an imputed tax recorded at surrender.

8. Options (a/b) Non-produced non-financial asset Simple analogy with taxi licenses - Taxes recorded when licenses are purchased Cons –But this has significant impact on taxes recorded in that period – particularly for auction tranches. –Taxes do not align with underlying activity (emissions). –Tax payer may not be the emitter – particularly problematic for cross-border. –Impact on net-wealth. –CER/ERU consistency problems vis-à-vis timing. –But: no imputations for free permits and cash=taxes.

9. Options (c) Non-produced non-financial asset Taxes recorded when licenses are surrendered Cons –Cash received taxes recorded –Impact on net-wealth –Imputations for free permits (but no impact on net- lending) –But: taxes align with underlying activity, emitter is the tax payer and no differentiation between types of permits at surrender date (fee, auctioned, secondary, CERs)

10. Options (d) Financial asset Pre-payment of taxes (securities), with taxes recorded when permits are surrendered. Cons –Cash received taxes recorded –Impact on government debt (problematic for cross-country comparability in international schemes, related to the indifference of the emitter to the permits it surrenders – and problematic for recording cross-government debt cancellation) –Imputations for free permits would affect net-lending –Different asset from CERs –But: taxes align with underlying activity, emitter is the tax payer and no differentiation in taxes recorded between types of permits at surrender date (fee, auctioned, secondary, CERs)

11. Options (e) Two (split) asset approach - Part financial asset and part non-financial asset Cons Impact on net-wealth Negative N-P,N-F asset Impact on government debt ( with consequential problems as in financial asset case) Taxes do not reflect opportunity cost to emitter – plus, indifference of emitter also has adverse impact on taxes recorded. But: taxes align with timing of underlying activity, emitter is the tax payer and cash=taxes – however this identity requires taxes on production to other governments.

12. Options (f) Two (split) asset approach - Part financial asset and part non-financial asset but recording market price at surrender as the tax. Cons Cash received taxes recorded Impact on net-wealth Negative N-P,N-F asset Impact on government debt ( with consequential problems as in financial asset case) But: taxes align with timing of underlying activity, emitter is the tax payer and no differentiation in taxes recorded between types of permits at surrender date (fee, auctioned, secondary, CERs.

13. Summary No panacea – all options present complications for the accounts, reflecting fact that market sets the price at the surrender date. Choice is ultimately between: Aligning cash and taxes - but this will not reflect opportunity cost to emitter (creates indifference) Or reflecting taxes as equal to market price of permits at surrender – creating problems for taxes raised.