Paul Munter served as chief accountant at the Securities and Exchange Commission (SEC) and is a member of the Greenhouse Gas Protocol Independent Standards Board.
Mika Morse most recently served as the chair’s climate policy counsel at the SEC. She is now co-lead of the Climate Liabilities and Assets Initiative (CLAI) and CEO of Goldfinch Strategies.
Many people may have missed it. In the middle of a noisy year for climate policy, the Financial Accounting Standards Board (FASB) completed re-deliberations on a first-ever US standard for environmental credits – carbon offsets, renewable-energy certificates (RECs), and similar instruments – and directed its staff to ballot a final Accounting Standards Update (ASU).
The text is being drafted now; effective dates are expected to start with fiscal years beginning after 15 December 2027 for public companies, with early adoption permitted.
On its face, this looks tidy: one model, fewer gray areas. Companies get clarity; investors get comparability.
Given that many US companies haven’t been publicly disclosing credit purchases – because they aren’t financially material yet – and that US compliance programs are still small by global standards, you might think that the new requirements won’t move markets.
We think that conclusion is premature.
What just happened (in plain English)
Under FASB’s model, an environmental credit is recognised as an asset only if it’s probable you will either (a) use it to settle a regulatory obligation, or (b) sell it.
Credits intended for voluntary use (to “offset” emissions) are expensed when acquired, and nonrefundable deposits for future credits are expensed unless it’s probable those future credits will be held for compliance or sale.
For assets, “compliance” credits stay at cost without remeasurement; “noncompliance” credits are subject to impairment, with an optional fair-value election for a class of eligible noncompliance credits acquired in exchange transactions.
FASB scaled back several more granular disclosures from the proposal which were intended to help investors better understand management’s acquisition and use of credits.
These new requirements will change accounting practice for many companies because common practice has been for many preparers to analogise to intangibles or inventory accounting guidance allowing the credits to remain on the balance sheet until retirement or sale – approaches that avoid a day-one hit to earnings and preserve optionality.
Why this is bigger than an accounting footnote
It changes buyer incentives. When voluntary-use credits must be expensed upfront, optional buyers could become reluctant buyers.
Pre-buying and warehousing credits – often essential to help finance new carbon-removal and high-quality carbon-reduction projects – becomes harder to defend in P&L terms. That can thin liquidity and slow private capital flowing to projects that need early infusions of capital.
“For companies that have articulated long-term climate commitments, investors have a clear interest in understanding how those commitments will be met – including the role of environmental credits”
It also requires immediate determination of “intent”. The standard ties accounting to management’s intent at acquisition. Companies that buy more than they need to keep strategic options open (use later or sell) will face pressure to sort each purchase into “asset” or “expense” buckets at day one.
It affects offtake financing. Deposits and prepayments for future credits – a common tool to underwrite supply – are expensed unless the subsequently-acquired credits are probable of use for compliance or sale. That dampens the appeal of offtakes precisely when high-integrity supply needs scale financing.
The investor-protection lens
The concern is not just about balance-sheet mechanics. It’s about what investors ultimately see and how markets develop.
Even if environmental credits are not widely disclosed today, the economic incentives created by accounting choices shape investor-relevant outcomes – what projects get financed, whether companies can efficiently procure high-quality removals and how credibly decarbonisation plans are executed.
Materiality judgments should be grounded in the perspective of the reasonable investor, not management’s perspective.
For companies that have articulated long-term climate commitments, investors have a clear interest in understanding how those commitments will be met – including the role of environmental credits.
That suggests disclosures may be more relevant in the future than some companies assume. And here, professional skepticism matters: auditors will need to be prepared to challenge management’s assertions about materiality and intent to ensure those judgments reflect not only quantitative thresholds but also qualitative factors relevant to investors.
Viewed through that lens, a model that requires all voluntary-use purchases into immediate expense risks discouraging the long-term planning and economically rational behaviours that investors expect from credible decarbonisation strategies.
Where we go from here
The US has acted first. Now the spotlight may shift to the International Accounting Standards Board (IASB), which has not yet taken on a project for environmental credits. If it does, it will be entering a more globally interconnected market than the one FASB addressed.
The lesson from the US is not that clarity is unimportant – consistency in accounting policy has real value. The lesson is that accounting choices can reshape markets, even when they look like technical fixes.
By tying recognition to intent at purchase and expensing many voluntary-use credits immediately, FASB may have unintentionally created headwinds for the very markets some policymakers are trying to foster.
If the IASB approaches this with an eye to how accounting standards influence capital flows and market development as well as what information is decision-useful for investors, it can avoid creating the same frictions.
At a moment when governments are seeking to integrate voluntary and compliance systems, global investors will be watching. The IASB has an opportunity to build a framework that reflects economic markets and provides decision-useful information that supports the growth of coherent international carbon markets.
