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While the emergence of global carbon markets has created numerous opportunities, it also presents significant challenges. In particular, the new investable assets that this shift has created, in the form of carbon offsets, call for a specific standard for this new asset class. Relatedly, there is a need to review and expand the existing definition of financial instruments in this context. A transparent and faithful accounting representation is needed sooner rather than later, as currently, there is no specific accounting definition for carbon offsets as financial instruments in the financial accounting regulations, nor standard guidelines for this.

The reason for this absence of detailed standards and regulation is the widespread lack of understanding about carbon offsets as new financial instruments and investable assets. While it is important to highlight the efforts of the IFRS Foundation to improve the sustainability standards focused on reporting, these efforts have not yet encompassed financial accounting. Thus, there is still a strong need for a project that addresses how to reflect the financial accounting of these new instruments in the financial statements. Notably, such a project would offer a solution for both sustainability standards and accounting.

In this report, we propose a simple, clear, and robust accounting regulatory framework with just a few measures that will help achieve the required transparency in global carbon markets. In terms of governance and leadership to tackle this project, we believe that the International Accounting Standard Board (IASB) is the most appropriate regulatory body, as it is both more qualified to work on this initiative and more influential than other organisations. The rationale is that the IASB, as the accounting standard-setting board of the IFRS Foundation, should retake the “Emissions Trading Schemes Project” and provide clear and consistent guidance on its carbon markets accounting rules.

Regulatory initiatives and debates have started, and some local regulators have issued different technical approaches. However, we need an international standard to establish a level playing field to avoid regulatory arbitrage.

This policy paper was co-lead by Raul Rosales, Senior Fellow at the Centre for Climate Finance and Investment, and María Ángeles Peláez Morón, Global Head of Accounting & Regulatory Reporting at BBVA.