The Price of Carbon

​Courts are scrutinizing climate-change impact estimates for potential fraud.

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​A lawsuit against Exxon Mobil alleges the oil company understated to investors the impact of carbon pricing in evaluating projects, the National Post reports. Court documents in the case filed last year by New York's state attorney general allege that Exxon often used a lower price per ton for greenhouse gas (GHG) emissions and forecast it for future years. That created "the illusion that it had fully considered the risks of future climate change regulations," the documents state.

For example, in Canada, the lawsuit claims Exxon understated carbon pricing of 14 projects in the Alberta oilsands by $30 billion, including understating one project by 94%. Exxon claims the lawsuit does not consider the multiple ways in which the company accounts for climate regulations.

Lessons Learned

Governments around the world are increasingly enacting new laws to put a price on carbon emitted by industrial producers, so it should not be surprising that the question of fraud has come up. As of 2019, more than 70 jurisdictions, representing about 20% of GHG emissions, have put a price on carbon.

This story involves one company, Exxon, and a case of alleged fraudulent carbon pricing that is still before the courts in two U.S. states. What can internal auditors learn about these laws that can help organizations prevent and detect what could become a more frequent fraud issue?

  • Keep up knowledge of environmental laws and carbon-pricing regimes. In particular, internal auditors should learn about the requirements and methodologies for dealing with the pricing and taxing of carbon globally. For example, a section of the World Bank's website defines and measures carbon-pricing regimes around the world. The website's up-to-date dashboard sets out the various kinds of carbon-pricing regimes in place, planned, or being implemented in various jurisdictions, including both emissions trading systems and carbon tax regimes.
     
  • Assist in compliance. At this point, companies have considerable discretion in their methodologies for assessing the amounts and impacts of carbon pricing on their products and services. Greater government specificity regarding these methodologies, including their uses and disclosure, appears to be coming. For example, starting in 2020, companies under the jurisdiction of Canada's Greenhouse Gas Pollution Pricing Act must file annual compliance reports with both Environment and Climate Change Canada and the Canada Revenue Agency. Internal auditors would be useful contributors to these reports.

  • Understand GHC calculation criteria. Of particular note in relation to this story, Canada's compliance guidance includes several criteria regarding GHG calculations. Specifically, companies must perform these calculations in accordance with a reliable and replicable methodology.

    This methodology should ensure that net emissions are capable of being measured or modeled in a reliable and repeatable manner that includes all relevant sources. Calculations should consider uncertainty to ensure quantified or estimated emissions are accurate and within scientifically established standards or acceptable statistical precision for the project or equipment type. Moreover, they should consider the conservativeness principle in quantifying GHG emissions to ensure they are neither under- or over-estimated.

  • Advise the organization about disclosure practices. Companies increasingly face pressure to be more transparent about their treatment of carbon pricing. A proactive approach seems advisable. There are many sources of good disclosure practices and guidance regarding carbon pricing, including CDP Worldwide's Carbon Pricing: CDP Disclosure Best Practice (PDF).
Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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