What to know about accounting for environmental credits

Accounting Spotlight: Environmental accounting

As the popularity of environmental credits increases, so do the financial reporting concerns associated with them. This publication provides key considerations for companies regarding the accounting for such credits.

An increasing number of entities in different sectors and industries aim to reduce global greenhouse-gas emissions. While several are taking steps to reduce their own carbon emissions, these efforts may not be sufficient to achieve required or voluntary emission commitments.

Environmental credits can help entities accomplish their carbon emission reduction targets and goals. The popularity of such credits has grown; however, questions have emerged regarding the accounting and reporting for them since the treatment of environmental credits is not explicitly addressed in US GAAP.

Accounting and reporting considerations for environmental credits

What are environmental credits?

In the most basic sense, a carbon credit is a market-based or legal instrument that represents the ownership of one metric ton of carbon dioxide equivalent that can be held, sold, or retired to meet a mandatory emissions cap or a voluntary emissions reduction target.

Accounting practices under existing GAAP

Because the treatment of environmental credits is not explicitly addressed in US GAAP, entities have used different approaches, and questions have emerged about how to account and report for them. Below, we describe certain approaches that exist today in practice as well as observations regarding such approaches. Note that entities should carefully consider all relevant facts and circumstances when selecting an appropriate accounting model to use. They should then apply such model consistently and, if material, disclose their selection.

FASB project on environmental credits

In response to stakeholder feedback on the invitation to comment and the results of its outreach, the FASB decided in May 2022 to add a project to its technical agenda to address the recognition, measurement, presentation, and disclosure of environmental credits that are legally enforceable and tradable. The project is also expected to address the accounting for users and producers of environmental credits and participants operating in compliance and voluntary programs.

SEC’s proposed rule on climate-related disclosures

In March 2022, the SEC issued a proposed rule that would require registrants to disclose in their annual audited financial statements certain climate-related financial impacts and expenditure metrics as well as a discussion of such impacts on their financial estimates and assumptions.

Entities that use environmental credits, particularly carbon offsets or renewable energy certificates (RECs), in their plans to achieve climate-related goals or targets would have to disclose information about such use.

Registrants would also be required to disclose how much of their progress toward climate targets or goals has been attributable to these environmental credits. The disclosures would reflect the short- and long-term risks associated with such progress, including the risks that the availability or value of carbon offsets or RECs could be curtailed by regulations or changes in the market. See Deloitte’s March 29, 2022, Heads Up for a comprehensive discussion of the SEC’s proposed rule.

Learn more about key accounting considerations for environmental credits

Read the full Accounting Spotlight for a comprehensive discussion of accounting and reporting considerations related to environmental credits.

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