How Will the Billions of ‘Free’ Climate Change Allowances Under Cap-and-Trade Affect U.S. Companies’ Balance Sheets?

This study by Professor Paul Griffin examines the impact of the “free” climate change allowances under the proposed American Clean Energy and Security Act of 2009 on the balance sheets and income statements of companies in the S&P 500, estimated by the Congressional Budget Office to be as high as $700 billion over 2010-2019. Some observers contend that these allowances will generate “large windfall profits to various politically favored industries at the expense of U.S. consumers.”

This study states and tests an economic model that accounts for the relation between greenhouse gas emissions and financial statement variables at the individual company level to assess this contention. My analysis suggests that under the likely accounting treatments for emission allowances, U.S. companies’ balance sheet and profit ratios will show a modest but variable impact, depending on the accounting choice and industry. Some treatments, however, will allow companies to move these allowances and much of the liability “off balance sheet,” so that in these cases the financial impact of emission allowances could be unclear to many investors. When companies use diverse or unclear accounting treatments for similar economic benefits, this can raise the cost of capital and hurt share prices.