Accounting for Carbon Credits: New FASB Guidance on Environmental Credits and Credit Obligations
In recent years, environmental sustainability has moved from the periphery to the center of corporate and nonprofit strategy. With increasing public, investor, and regulatory pressure to reduce emissions and improve transparency, many organizations are buying, selling, generating, or using environmental credits (commonly known as carbon credits). Yet until now, there has been no consistent accounting guidance on how to recognize, measure, and disclose these credits—or the obligations they offset—under U.S. GAAP.
That is about to change.
The Financial Accounting Standards Board (FASB) has released a proposed Accounting Standards Update (ASU) titled Environmental Credits and Environmental Credit Obligations (Topic 818). This ASU marks a pivotal step in creating a standardized framework for how entities should report their involvement in environmental credit markets.
In this article, we’ll cover what the proposed standard entails, why it matters, and how it could affect your organization.
The Big Picture: Why Now?
Until now, U.S. accounting rules have been inconsistent on how to handle environmental credits. This has led to a patchwork of practices, with organizations applying different rules from the FASB codification—inventory, intangibles, contingencies—depending on how they interpreted the nature of the credit.
The result? Confusion, inconsistency, and difficulty in comparing financial statements across organizations engaged in carbon credit markets.
To address this, the FASB added the topic to its technical agenda in May 2022 and issued an exposure draft in December 2024. Stakeholders had until April 15, 2025, to submit feedback. A final standard is expected soon, with no major changes anticipated from the current draft.
Who Will Be Affected?
The proposed ASU will apply to entities that fit any of the following criteria:
- Buys or receives transferable environmental credits, whether for compliance or voluntary purposes
- Uses those credits to meet environmental credit obligations (ECOs) tied to regulatory programs
- Generates credits through verified environmental projects (e.g., reforestation, renewable energy)
- Trades or sells credits as part of a business model
In short: if your organization interacts with carbon credits in any significant way, this standard applies to you.
Understanding Environmental Credits and Obligations
What Are Environmental Credits?
An environmental (or carbon) credit is a tradable instrument representing the right to emit a certain quantity of greenhouse gases—typically, 1 metric ton of CO₂. These credits are generated by projects that remove or reduce emissions and are used by other organizations to offset their own emissions.
Credits are traded in two ways:
- Voluntary markets – where companies voluntarily pursue goals such as net-zero
- Compliance markets – where regulations cap emissions and credits are required for compliance
What Are Environmental Credit Obligations (ECOs)?
An ECO is a legally enforceable liability that arises from regulatory compliance programs. For example, if a state mandates emissions caps, an organization may need to acquire credits to legally cover its emissions. These obligations do not include voluntary targets (e.g., a company choosing to be carbon neutral by 2030).
Key Accounting Treatments
Environmental Credits (Assets)
- Recognition: When it’s probable the credit will be used or sold, it is recognized as an asset at cost.
- Measurement: Initially at cost
- Voluntary credits must be tested for impairment at the end of each reporting period.
- Compliance credits are not tested for impairment.
- Presentation: Credits must be presented separately as an asset on the balance sheet—not netted with liabilities.
Disclosures for Carbon Credits
Organizations must disclose:
- A breakdown of significant holdings
- Cash paid for credits during the reporting period
- Any revenues or gains/losses from selling credits
- Impairment losses (for voluntary credits)
- Qualitative info on how credits are obtained, used, and accounted for
Environmental Credit Obligations (Liabilities)
- Recognition: When the emissions occur (i.e., when the obligation arises)
- Measurement:
- Funded portion: Measured using the cost of held credits expected to be used
- Unfunded portion: Measured at the fair value of additional credits needed to settle the obligation
- Derecognition: Once the entity has remitted credits to a regulator, the obligation is removed from the books.
Disclosures for ECOs
Entities must disclose:
- Significant ECOs
- Funded vs. unfunded portions
- Information on regulatory programs involved and the activities that triggered the obligation
Transition and Effective Date
- Effective date is still to be finalized
- Early adoption will be permitted
- Transition method: Retrospective cumulative adjustment to beginning retained earnings (for-profits) or net assets (nonprofits)
- Entities will need to recognize and measure all credits and obligations on the balance sheet at the date of initial application
Why This Matters
Whether you’re a mission-driven nonprofit planting trees, a large corporation trading offsets, or a startup working in clean tech, this proposed standard matters.
- It promotes transparency and comparability.
- It brings consistency to financial reporting in ESG-related areas.
- It helps stakeholders understand the true cost of emissions.
- It aligns financial accounting with the growing impact of climate-related initiatives.
Final Thoughts
As someone who specializes in nonprofit audits and follows ESG accounting developments closely, I believe this proposed standard is a timely and much-needed step forward. It reflects the reality that carbon markets are no longer trendy; they are integral to business strategy, compliance, and public trust.
Organizations should start assessing their current practices now, especially if they’re active in carbon markets or plan to be. Understanding the implications of this ASU will help you stay ahead of the curve and ready for a more sustainable future.
