Confronting the Carbon Challenge

Tax implications of the development of carbon markets


Should cap and trade legislation regain traction, it will raise a whole host of tax compliance and planning issues. How will emissions allowances be treated upon issuance, purchase, sale, or exchange? How will basis in the allowances be recovered? Are they inventory or a capital asset? Can they be hedged, by whom, and with what treatment? More difficult questions may arise from the creation of offsets, depending on who creates the offsets, where they are created, and for what purpose. A multitude of issues will arise from the global nature of carbon markets and the likelihood of transacting across various states.

As legislation becomes more focused and concrete, tax departments will need to be actively involved at a very early stage to meet their tax compliance needs and manage the tax impact of the carbon emissions activities.

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