Insight - Winds of change.

(From Financial Director)

Byline: Ben King.

On 1 January 2005, the EU's carbon dioxide (CO2) emissions trading scheme (ETS) came into effect as part of the EU's efforts to abide by the Kyoto Protocol, which itself came into effect on 16 February 2005. Companies covered by the scheme will be issued with allowances based on their historical emission of CO2, which they can then buy or sell.

For the first three years of the scheme, companies that don't have enough allowances to cover their emissions will face a EUR40 fine for each excess tonne of CO2 they emit. For 2008-2012, the fine will rise to EUR100.

The ETS covers all power generation installations above 20 megawatts, plus most heavy industries, including the production of coke, steel, iron, glass, paper and ceramics. Transport industries, including airlines, are not included in the scheme.

The scheme will affect many areas of financial reporting and taxation. There is still a degree of uncertainty in some areas, and many UK companies covered by the scheme still haven't grasped them all. "We have been looking at state of readiness across the industry," says Richard Gledhill, head of climate change services and emissions trading at PricewaterhouseCoopers. "In the production operations and systems and monitoring side, the work is either done or well in progress. There has been less progress on the accounting financial reporting and legal side," he says.

"IFRIC 3 (the International Financial Reporting Interpretations Committee guidance on emissions trading) was only finalised in December, and finance teams have had a lot on their plate with IFRS," says Gledhill.