Carbon Business Accounting: The Impact of Global Warming on the Cost and

Management Accounting Profession

Janek T. D. Ratnatunga, Kashi R. Balachandran

Journal Of Accounting, Auditing & Finance

This paper reports on a qualitative research study undertaken to consider the impact of
the Kyoto Protocol mechanisms on the changing information paradigms of cost and managerial
accounting. The existence of a carbon-rationing and trading market has the potential to affect an
organizations business strategy, financial performance, and ultimately value. Thus, accountants
and other business information providers need to consider measurements and strategies outside
of conventional paradigms.

This paper focuses specifically on strategic cost management (SCM) and strategic
management accounting (SMA), which are referred to collectively as business accounting.
First, the paper demonstrates that some of the classic ideas of cost accounting may be central to
the study of carbon costs. Next, the paper reports on a structured qualitative research study that
was undertaken at thirty-one research symposiums in twelve countries (638 respondents) to
canvass the views of practitioners regarding the wider implications of carbon costs (and potential
revenues) on SCM and SMA tools, techniques, and practices.

The tools and techniques of SCM and SMA as well as issues of global warming and
carbon trading and the impact of these on the business accounting profession was the focus of
discussion at the symposiums. The theory of SCM and SMA were first discussed in the seminars,
and then the carbon-related issues were addressed and participant views canvassed. Although the
discussion of issues was free flowing, the researchers guided the discussion to the carbonemissions area. In the seminars there were always at least two researchers who were involved in
the project present, and the main consensus of the discussion was agreed by the researchers and
the seminar participants and then summarized and captured and classified electronically at the
seminar. The key points extracted from the symposiums are presented in Tables 2 and 3. Whilst

not all issues listed in the Tables were discussed at every seminar, every issue was discussed in at
a minimum of three of the thirty-one seminars conducted. Some key issuesespecially those
relating to the impact of carbon-emissions management on lean manufacturing, life-cycle
costing, marketing communication, and cost of capitalwere discussed in almost all seminars.

The concentrations of greenhouse gases in the atmosphere have risen dramatically

leading to an out-of-balance greenhouse effect that most scientists believe will continue to cause
a rapid warming of the worlds climate. The possibility of costly disruption from rapid climate
change, either globally or locally, calls for greater attention and precautionary measures to be put
in place. Governments, business entities, and consumers would be affected by the extent to
which such precautionary measures are incorporated in their decision-making processes.

Business entities especially need to consider issues such as trading in carbon allowances
(or permits), investment in low-CO2 emission technologies, counting the costs of carbon
regularity compliance, and passing on the increased cost of carbon regulation to consumers
through higher prices. Consumers need to consider whether, given the choice, they are willing to
pay a higher price for CO2- neutral products and services to play their part in reducing CO2
emissions.

Whilst quantitative studies emphasize the measurement and analysis of causal

relationships between variables, the word (qualitative) implies an emphasis on process and
meanings that are not rigorously examined or measured in terms of quantity, amount, intensity,
or frequency Early academic work, no literature available in the academic journals deals
specifically with the impact of carbon trading on cost management and managerial accounting
theory and practice, that is, on leading rather than lagging indicators. Undertaking an empiricaldescriptive study of practices in the field is futile, because the area is so new and there are little
(if any) practices to report. What is required, therefore, is (theory building) research of a
normative or prescriptive nature. Such theory building research is just starting in financial
accounting. This study looked instead at the cost management and management accounting area
(referred to collectively as Business Accounting) by undertaking structured (qualitative

research study) and canvassing the views of practitioners in the area. The literature pertaining to
the areas of SCM and SMA are covered in the main text

This research study avoided this tacking back and forth aspect of the coding and
classification process by approaching the data collection in a very structured manner. This was
done by using the classification framework provided in the syllabuses (theory) of the two
Institute of Certified Management Accountants (ICMA) subjects covering the syllabuses of
Strategic Cost Management (SCM) and Strategic Management Accounting (SMA). The reason
for using this theoretical framework for coding and classification purposes (rather than allow the
classifications to emerge from the data) is elaborated in the main text.