In response to the threats of climate change, several countries worldwide have declared and taken action towards achieving "Net Zero Emissions by 2050." The European Union's CBAM has already been implemented in October of this year, and the United States' CCA is set to be implemented in 2024. In Taiwan, President Tsai declared in 2021 that achieving Net Zero Emissions by 2050 is the country's goal. Subsequently, the government has passed various documents, including the "Taiwan 2050 Net Zero Emissions Pathway and Strategy Overview," "12 Key Strategic Action Plans," and the "Climate Change Adaptation Act," to work towards this ambitious goal. Achieving "2050 Net Zero Emissions" will be Taiwan's most significant transformation project to date.

1. Compliance markets refer to carbon credits within the context of emissions trading with a cap-and-trade system. Governments set reduction targets and allocate emission allowances (carbon credits) to regulated entities. These carbon credits can be traded as commodities. Due to the mandatory nature of emissions trading, carbon credits generated under this mechanism are considered mandatory carbon credits. These markets, due to regulatory differences, are typically not interconnected, and regulated entities cannot use carbon credits from one mandatory market to offset their emissions obligations in another, making it challenging to balance prices through market mechanisms.
2. Voluntary markets serve as complementary mechanisms to mandatory markets. In these markets, countries allow non-regulated entities to participate in emission reduction projects and earn carbon credits known as "reduction credits." These credits represent certified emissions reductions achieved through voluntary efforts. The market where these credits are traded is referred to as the voluntary carbon credit market. The main types of carbon credit mechanisms globally include the UN-operated CDM, independently managed systems like VCS, GS, ACR, CAR, and various national voluntary offset mechanisms.

How to account for carbon credit trading on financial statements? Let's begin by discussing voluntary carbon credits tradable on the Carbonluck.

Determining how to account for carbon credit transactions in financial statements is still evolving, as regulations are not yet fully established. Generally, it is considered that carbon credits, while intangible, have a discernible value and can be classified as "identifiable non-monetary assets" under International Financial Reporting Standards (IFRS). Unlike some intangible assets like patents, carbon credits do not have a fixed useful life, so they are not systematically amortized over a fixed period. However, if the fair value of carbon credits falls below their carrying amount, an impairment loss is recognized, allowing for fluctuations in their value to be appropriately reflected in financial statements.

Enterprises engage in various activities for emissions reduction, each with its own differences. Therefore, it is necessary to separately examine the nature and objectives of emission reduction activities to analyze them, so that accounting treatment can be appropriately handled and accurately reflected in financial statements. The following lists common types of carbon credit trading and provides a brief description of their accounting treatment:

• Voluntary Offset: When enterprises purchase carbon credits to fulfill their self-declared commitment to achieving net-zero emissions (e.g., as outlined in sustainability reports with specific emission reduction methods and goals), the cost of purchasing carbon credits is recognized as an intangible asset. Additionally, the enterprise records a liability provision in accounting for carbon emissions. When carbon credits are used to offset emissions, the intangible asset related to carbon credits and the liability provision are offset and canceled out.
• Voluntary Reduction Projects: The reduction quotas (carbon credits) obtained from voluntary reduction projects can be recognized as intangible assets. Since enterprises engaged in voluntary reduction projects have not publicly declared obligations for emission reductions and are not subject to government-imposed mandatory emission reductions, there is no need to create additional liability provisions.
• Government Regulatory Obligations: If a company purchases carbon credits to meet government-imposed emission reduction obligations, the cost of purchase is similarly recognized as an intangible asset. When government regulatory obligations arise, a liability provision is recorded, and upon the settlement of these obligations, the intangible asset representing the carbon credits is offset against the liability provision.

The above are just examples of various transaction types with a brief explanation of accounting treatment. The carbon credit market is a newly emerging industry with evolving transaction structures. It requires close monitoring of the latest developments in regulations and international trends to establish a systematic approach to accounting, ensuring relevant and accurate financial reporting.