Accounting and Reporting Considerations for Environmental Credits
Background
An increasing number of entities in different sectors and
industries aim to reduce global greenhouse-gas (GHG) emissions. While many 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 U.S. GAAP. The
FASB therefore added to its agenda a project (see discussion below) on this
topic in May 2022. The SEC also included disclosure requirements related to
environmental credits in its March 2022 proposed rule (see discussion below) on
climate-related disclosures.
This Accounting Spotlight examines environmental credits and certain
current U.S. accounting practices, regulatory developments, and other accounting
issues associated with them.
What Are Environmental Credits?
Within this publication, the term “environmental credits”
encompasses products such as carbon credits (both allowances and offsets) as
well as renewable energy certificates (RECs) and other climate- or
emission-related credits.
In the most basic sense, a carbon credit is a market-based or
legal instrument (or both) that represents the ownership of one metric ton of
carbon dioxide equivalent (MTCO2e) that can be held, sold, or retired to meet a
mandatory emissions cap or a voluntary emissions reduction target. Carbon
credits are primarily distinguished on the basis of whether they are allowances
or offsets.
Allowances (also known as “permits”) are initially issued by
regulatory agencies in carbon compliance programs (e.g., cap-and-trade programs
or emissions trading schemes). One allowance gives the holder the legal right to
emit one MTCO2e. Typically, a carbon compliance program establishes a total
volume of emissions permitted by all of its regulated entities in a given year
and a corresponding volume of allowances. Regulating agencies then allocate
(free of charge) or auction off allowances to the regulated entities. If an
entity wishes to emit more or less MTCO2e, it can purchase allowances from, or
sell them to, other entities. These allowances are often also referred to as
“carbon credits” since each allowance represents a tradable MTCO2e.
Offsets are generated from projects in which the objective is to
produce and sell verified carbon credits for every MTCO2e reduced, avoided, or
removed from the atmosphere by the projects. Carbon credits from these projects
are ultimately used by the final entity that purchases and retires the credits
to “offset” its emissions, so they are often called “carbon offsets.” “Voluntary
carbon offsets” are used to help meet an entity’s voluntary emissions reduction
targets to compensate for emissions that it has not yet been able to abate. Many
carbon compliance programs allow regulated entities to use credits generated
from approved offset projects to compensate for a portion of their emissions (in
addition to using allowances or permits); these are often called “compliance
offsets.”
In addition to carbon credits, numerous other “credits” exist.
One of the more common examples is a REC, which is issued when one megawatt-hour
(MWh) of electricity is generated and delivered to the electricity grid from a
renewable energy resource. See further discussion of RECs in the next section.
The Role of Environmental Credits
Along with investing in carbon abatement projects that directly
reduce their emissions (e.g., energy efficiency upgrades, electric vehicle
fleets), entities are showing increased interest in purchasing carbon credits
generated by projects outside their operations and value chain to offset their
unabated emissions. Such projects may involve renewable energy initiatives in
developing countries, improved forest management and reforestation, lower-carbon
agriculture or grazing practices, direct air capture and sequestration, and many
other efforts.
RECs can also play an important role for entities seeking to
reduce their carbon footprint. Owners of renewable energy sources may be
entitled to receive RECs. The number of RECs awarded is typically linked to a
power production formula. By purchasing RECs, buyers help finance and promote
renewable energy generation and, in return, are allowed to use the RECs to
report lower Scope 21 emissions from purchased electricity.
Acquiring Environmental Credits — Trending Transactions
While there are many ways entities can obtain environmental credits, three of the
more common methods are discussed below.
Carbon Markets
Global markets for carbon offsets are growing rapidly to
enable the generation, acquisition, trade, and tracking of environmental
credits. These markets predominantly provide (1) voluntary environmental
credits that have been certified by leading standards such as Verra’s
Verified Carbon Standard (VCS) Program or (2) credits for carbon compliance
offset programs that are operated by the relevant regulatory agency. In
addition, the markets act as a mechanism through which entities can actively
trade and convert their environmental credits to cash.
Key types of participants in these ecosystems include:
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Regulatory agencies or nonprofit or for-profit organizations that set certification standards and methods as well as manage the registries to track environmental credit generation, ownership, and credit status (active or retired). The top voluntary standards and registries include Verra, the Climate Action Reserve, the American Carbon Registry, and Gold Standard. Each carbon compliance program that allows offsets specifies a set of rules regarding acceptable project methods; certification requirements; and credit registration, trading, or retirement processes.
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Project owners and developers that secure or provide financing, or implement and generate environmental credits, for initial sale. There is a growing number of very large project development firms.
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Buyers and sellers of environmental credits, which could include entities that need such credits to meet their emissions reduction goals, clean energy or fuel requirements, or mandated emissions limits. Note that a buyer of environmental credits can have various intended uses for its environmental credits. For example, an entity may plan to:
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Hold environmental credits and remit or retire them to the relevant agency in subsequent years.
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Immediately retire the credits to the relevant agency.
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Trade its environmental credits.
Further, it is possible for the entity’s intended uses to change during the period over which it holds them. -
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A complex web of brokers and marketplace platforms to match buyers and sellers or arrange spot trades, financing, or offtake agreements.
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An emerging array of fund managers and financial intermediaries that are creating investment vehicles or secondary markets for environmental credits.
PPAs and VPPAs
A power purchase agreement (PPA) is a contract between two
parties: the developer of a renewable energy project and a buyer. Under a
PPA, the developer will typically receive a fixed price for each MWh of
renewable energy produced and the buyer will receive the associated RECs
over time as the project produces and sells electricity. The recipient of
the RECs (the buyer) will be able to use them to reduce its gross Scope 2
emissions from purchased electricity. In a PPA contract, physical energy
must also be delivered to the buyer.
By contrast, in a virtual PPA (VPPA), the buyer does not take physical
delivery of the power produced by the renewable energy source; instead, the
power component of the transaction is financially settled while the buyer
receives all, or a predetermined amount, of the generated RECs for each year
of the contract term for an agreed-upon price.
Directly From the Regulator
A regulator issues several categories of environmental credits, including
RECs. Cap-and-trade programs may also be established in which, for example,
(1) total annual GHG emissions from regulated entities in the program are
capped and (2) the cap (i.e., emissions limit) is reduced over time. Each
year, a volume of allowances or permits equivalent to that year’s cap are
auctioned or allocated (for free) to the regulated entities. As noted
previously, each allowance gives its owner the right to emit one MTCO2e. The
entity can then trade allowances until it has the volume needed to match its
emissions for the year.
Accounting Practices Under Existing GAAP
As previously noted, the treatment of environmental credits is
not explicitly addressed in U.S. GAAP; consequently, entities have used
different approaches, and questions have emerged about how to account and report
for them. The sections below 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.
Environmental Credits as Assets
When accounting for environmental credits, entities should determine whether
such credits represent assets.
Chapter 4 of FASB Concepts Statement 82 defines an asset, in part, as “a present right of an entity to an
economic benefit.” It also describes an economic benefit as “the capacity to
provide services or benefits to the entities that use them” and notes that
“[g]enerally, in a business entity, that economic benefit eventually results
in potential net cash inflows to the entity. . . . The relationship between
the economic benefit of an entity’s assets and net cash inflows to that
entity can be indirect.” Typically, an entity’s ability to sell, transfer,
or exchange an environmental credit provides evidence that the right to do
so presently exists, the entity controls access to that right, and the right
applies to an economic benefit.
Connecting the Dots
Entities must consider all relevant facts and circumstances when assessing whether their acquired or created environmental credits meet the definition of an asset. For instance, we believe that enhanced marketing, public claims regarding environmental activities, and the potential reduction of the entity’s net emissions do not, by themselves, represent an economic benefit as described in Chapter 4 of Concepts Statement 8; therefore, costs
incurred solely from obtaining these benefits would not qualify as
assets.
Although still relatively new, environmental credit markets are
continuing to grow regionally, nationally, and internationally. We
do not believe that to qualify as an asset, an environmental credit
necessarily needs to be actively traded on an exchange. However, we
believe that the ability to place the environmental credit on an
exchange where it can be bought and sold, resulting in net cash
inflows, supports a conclusion that such credit meets the definition
of an asset.
Entities will need to carefully evaluate the nature of costs incurred
in connection with environmental objectives to determine whether
such costs meet the GAAP requirements to be capitalized and recorded
as an asset.
Classification as Either Inventory or an Intangible Asset
The methods used in practice for accounting for environmental credits stem
predominately from the accounting for emissions allowances. In informal and
industry-related discussions that took place a number of years ago, the FASB
and SEC have indicated that two methods of accounting for emission
allowances are acceptable: (1) an inventory model by analogy to ASC 3303 and (2) an intangible asset model by analogy to ASC 350.
An entity’s use of an accounting model will also vary on the basis of its
role within the market.
Connecting the Dots
In practice, entities generally select an accounting model on the
basis of the intended use for the environmental credits. For
instance, when an entity plans to actively trade its environmental
credits, it often accounts for them under an inventory model.
Entities need to consider the facts and circumstances of the
underlying arrangements and their business objectives related to
environmental credits to determine which accounting model is more
appropriate to apply.
Entities also need to consider the treatment of such credits in the
income statement and statement of cash flows. For example, we would
generally expect that environmental credits accounted for as
inventory would be expensed as a cost of goods sold when “used” or
traded. Further, under an inventory model, we would usually expect
the activity related to environmental credits to be reflected as
cash flows from operations within the statement of cash flows.
If an entity uses the inventory model, it also needs to consider the cost
capitalization process. ASC 330-10-30-1 states:
The primary basis of accounting for inventories is cost, which has
been defined generally as the price paid or consideration given to
acquire an asset. As applied to inventories, cost means in principle
the sum of the applicable expenditures and charges directly or
indirectly incurred in bringing an article to its existing condition
and location. It is understood to mean acquisition and production
cost, and its determination involves many considerations.
Buyers of environmental credits need to use judgment to determine which costs
associated with obtaining the credits should be capitalized.
Amortization Under an Intangible Asset Model
While entities that participate in compliance and voluntary programs may use
an intangible asset model to account for environmental credits, some may not
strictly apply the recognition and measurement guidance under that model.
For instance, entities that use an intangible asset model may or may not
record subsequent amortization for the environmental credits.
Connecting the Dots
Environmental credits can be finite-lived (e.g.,
RECs typically have a useful life of 18 months) or infinite-lived
(e.g., carbon offsets have a “vintage year” that represents the year
in which the emissions were offset; however, they do not have an
expiration date). Strictly speaking, under an intangible asset
model, an amortization expense is required for finite-lived assets.
However, some have observed that environmental credits are
nonwasting assets. That is, if an environmental credit represents
the removal of one MTCO2e, regardless of the credit’s age or market
value, an entity can use it to offset one MTCO2e to satisfy
voluntary or compliance goals. Accordingly, entities will need to
evaluate whether amortization of certain environmental credits is
appropriate and, if so, the amortization method to use.
Note that we have observed that a number of entities
do not record amortization for finite-lived environmental credits.
We believe that such an approach is acceptable in certain
circumstances.
Impairment Considerations
While some entities may subject environmental credits to the appropriate
impairment or lower-of-cost-or-market evaluation, others may believe that an
evaluation of impairment is not necessary. Entities in the latter group may
believe that their approach is justified because the intended benefits of
the environmental credits do not diminish until the credits are consumed
(e.g., used to offset emissions). Therefore, these entities may believe that
it is appropriate to expense the full cost of their environmental credits
upon use (e.g., retirement with the relevant regulatory agency or registry).
However, other entities believe that the fact that buyers are willing to pay
different amounts for different types of credits indicates that the credits’
value is not based solely on the ability to offset a fixed quantity of
emissions. Such entities note that characteristics such as, but not limited
to, the type of project from which the credit was generated, the location of
the project, the vintage year of the credit, and the registry verifying the
credit may affect the value of credits, both at the time of acquisition and
subsequently.
Connecting the Dots
We believe that under both the inventory and intangible asset models,
entities should subject environmental credits to the applicable
impairment method. The recognition of impairment adjustments under
these models is intended to reflect changes in the utility and
expected recoverability of the underlying asset.
In a manner similar to the concerns about
amortization, some may believe that there are challenges associated
with implementing an impairment model. These challenges stem from an
entity’s intended use for environmental credits and the credits’
“nonwasting” characteristic. For example, if an entity intends to
retire its environmental credits, some may argue that impairment
write-downs may not appropriately reflect the utility of the asset
because, regardless of market value declines, an environmental
credit can be used to offset one MTCO2e. However, as previously
noted, an entity’s intent related to its environmental credits may
change over time.
The decision to record an asset for an environmental credit is, as discussed above, based on the guidance in Chapter 4 of Concepts Statement 8 and specifically on the potential for generating net
cash inflows. Entities should consider projected cash inflows,
market values, and other factors, as applicable, when determining an
appropriate impairment method.
In preparing an impairment analysis, entities should
consider whether the environmental credits are part of a buffer
pool. In general terms, a buffer pool is composed of a percentage or
fixed number of environmental credits that are held in a “reserve.”
Such a reserve can give the buyer/holder assurance that any loss or
damage to the project that produces the credits (e.g., because of a
fire related to a forestation project) will not destroy the credits’
value because the losses will be “covered” by retiring credits in
the buffer pool. The number of environmental credits put aside as
“buffer credits,” if any, is often determined by the project risk or
a set percentage required by the certification body or registry. If
a loss or damage event occurs, the existence of buffer credits may
eliminate or reduce the actual loss for the holder of the
environmental credits and, therefore, impairment might not be
immediately necessary or may be mitigated.
Entities should monitor such indicators, when
available, to apply the appropriate impairment model. In addition,
market intelligence reports may also represent a useful data point
for assessing macroeconomic factors that may affect the fair value
of environmental credits in certain markets, geographies, or project
types.
Entities should consider all relevant data and
characteristics, when available, in determining the appropriate
impairment model.
Producers of Environmental Credits
Generally, in a manner similar to that of a user, a producer applies either
the inventory or intangible asset model when accounting for environmental
credits; however, there is diversity in practice. In some circumstances,
environmental credits can be an output from a producer’s operations to
generate clean energy or produce sustainable goods. Producers that elect to
account for environmental credits under an inventory model sometimes
allocate a portion of production costs to the environmental credits. Other
producers conclude that no incremental costs are incurred for generating
such environmental credits and, thus, do not allocate any costs to them.
Connecting the Dots
ASC 330 defines the cost of inventory as “expenditures and charges
directly or indirectly incurred in bringing an article to its
existing condition and location.” Producers that elect to account
for environmental credits under an intangible asset model generally
expense all associated production costs as incurred because they
consider the environmental credits to be internally developed
intangible assets. In determining which, if any, costs to allocate
and capitalize, entities need to consider the accounting model they
selected for environmental credits, the nature of the costs incurred
related to the creation of the credits, and their own specific facts
and circumstances.
Liabilities for Environmental Credits
Some entities participating in a compliance program only record a liability
associated with their emissions if the actual emissions for a given period
exceed the environmental credits an entity holds (i.e., an entity would need
to acquire more environmental credits to satisfy its obligation). However,
some compliance program participants may use a model in which a liability is
recorded on the basis of an entity’s total emissions. Under such a model,
the “gross” liability associated with an entity’s carbon emissions is based
on the cost of acquiring the required allowances and an asset is recorded
for the environmental credits held by the entity on the basis of the
acquisition cost of any allowances purchased.
Investment in Carbon Credit Projects
Entities frequently enter into agreements with carbon-offset project
developers before a project is fully developed or has generated verified
carbon offsets available for purchase on a registry. In such scenarios, the
investing entity often provides an up-front cash payment to a carbon credit
developer and, as a return for the payment, obtains the right to receive and
resell a defined portion of the future carbon credits generated yearly by
the project. When such credits are issued, the entity can then resell the
carbon credits received to other third parties looking to offset their
emissions or buy carbon credits for other purposes. The investing entity may
also share a portion (determined by the contract) of the consideration it
receives with the project developer, and any difference between the total
consideration received and the amount shared with the project developer is
often retained by those entities and will reduce the up-front payment
balance that the project establisher “owes” to the investing entity. In
these types of arrangements, the project developer is often not required to
deliver a minimum number of carbon credits; however, if, by the end of the
contract term, there are not enough carbon credits generated and resold by
the entity to fully offset the up-front payment balance, the remaining
portion of the up-front payment is returned to the investing entity without
interest. There are different variations for these types of arrangements,
and terms and conditions can differ on a case-by-case basis.
Connecting the Dots
When entering into an agreement involving a carbon-offset project,
the investing entity needs to carefully evaluate the facts and
circumstances of the arrangement and consider the accounting
implications — such as how any up-front payment should be accounted
for, whether there is a financial instrument, whether there is a
derivative, what are the consolidation implications, whether revenue
guidance would apply and, if so, whether the revenue should be
recorded gross or net.
Revenue — ASC 606 Versus ASC 610
Because there is currently no accounting model that specifically applies to
environmental credits, entities that sell such credits may have different
approaches to classifying the sales. Some entities may classify the proceeds
obtained from the sale of environmental credits as revenue, while others may
not.
Connecting the Dots
ASC 606 applies to all contracts with customers as defined by the
standard, except those that are within the scope of other topics in
the FASB Codification. Entities should evaluate whether the sale of
an environmental credit is to a customer to determine whether the
transaction should be accounted for as revenue under ASC 606 or as a
sale of a nonfinancial asset under ASC 610-20. In ASC 606, a
customer is defined as a “party that has contracted with an entity
to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration.” Therefore, an
entity that enters into a transaction to sell an environmental
credit will need to determine whether it is doing so as part of its
ordinary activities and, if so, required to record such transaction
as revenue. An important part of the analysis will be how the entity
initially recorded the asset and why it chose the applicable model,
as described further below. For example, an entity may anticipate a
growing demand for carbon offsets and stockpile credits for
potential profits. Because the entity intends to sell the credits in
the future as part of its ordinary activities, it elects to record
them under the inventory model; therefore, the sale of such credits
is likely to be within the scope of ASC 606 and should be recorded
as revenue. By contrast, if an entity does not intend to resell
credits for profit and instead elects to record the credits as
intangible assets, the sale of such credits may not be in the
ordinary course of business and may not meet the criteria to be
recorded as revenue.
Principal-Versus-Agent Consideration
An entity may engage with third parties, such as
brokers, to assist the execution of transactions to acquire
environmental credits or to provide a matchmaking service between buyers
and sellers. In such situations, the entity facilitating the sale of the
credits must consider whether it is acting as a principal or an agent
with respect to the underlying credit being transferred. For
environmental credit transactions involving multiple parties, an entity
should evaluate the factors in ASC 606-10-55-36 through 55-40 in the
same manner as it would evaluate other contracts with customers. Because
environmental credit brokers (1) often do not take legal title or
control of the underlying environmental credit before transferring it to
the buyer and (2) facilitate purchases on the basis of the buyer’s
instructions, many such entities that facilitate the sale and purchase
of credits are acting as agents in the transaction rather than as
principals. However, an entity facilitating the sale or purchase (or
both) of environmental credits should evaluate the nature and terms of
the specific arrangement to determine whether it has the “ability to
direct the use of, and obtain substantially all of the remaining
benefits from,” the credit, in accordance with ASC 606-10-25-25. For
example, an entity may be a principal if it has arrangements with
carbon-offset projects or developers to purchase a minimum number of
credits that can be used to fulfill agreements with any buyer or an
entity may be a principal in the arrangement if the buyer requires the
entity to procure a sufficient number of environmental credits to offset
a percentage of a buyer’s emissions, and the entity has the discretion
to choose from which source or project to obtain those credits and is
primarily responsible for fulfilling the credits with the buyer.
Note that the determination of whether an entity is
acting as principal or agent depends on the specific facts and
circumstance and requires judgement in consideration of the guidance in
ASC 606-10-55-36 through 55-40.
Environmentally Friendly Products and Services
Entities may enter into revenue arrangements for
environmentally friendly or bundled products and services. These
arrangements may involve the transfer of a “green” or “clean” good or
service and can come in a variety of forms, such as a claim that the
product or service is carbon neutral, or involve the purchase, transfer,
or retirement of a credit to offset the emissions generated during the
lifecycle of the good or service. In some instances, the seller may have
already purchased environmental credits and offer potential customers
the opportunity to retire such credits on their behalf or to transfer
the credits to customers along with the transfer of other goods or
services. In other instances, the seller may purchase environmental
credits in connection with transactions.
A product or service for which the related carbon
emissions have already been offset by the seller may be identical to the
“dirty” version of that product or service, and the only distinction may
be that its climate impact was offset by the seller. In the absence of
accounting guidance for environmental credits (let alone for
environmental credits bundled with other products and services),
entities have raised questions about the appropriate accounting model
for these types of transactions.
Connecting the Dots
When entering into agreements involving
environmentally friendly products and services, entities should
determine whether they are (1) buying or selling a separate
asset in addition to the underlying good or service or (2)
buying or selling a single good or service, perhaps at a higher
cost in light of environmentally friendly activities. In
addition, sellers of environmentally friendly bundled products
or services should determine whether they have performance
obligations for promises to their customers as part of their
environmental strategies. If so, the entities should assess such
performance obligations to determine whether they are distinct
from other performance obligations in the contract. Performance
obligations related to environmentally friendly activities may
present questions regarding the timing of revenue recognition,
regardless of whether such performance obligations are distinct
from other performance obligations in the contract.
Timing of Expense
Some entities immediately retire environmental credits upon purchase and
therefore do not record such credits as assets. Other entities may announce
their intention to use or offset their environmental credits for
sustainability reporting purposes but not formally retire them, giving rise
to questions regarding the appropriate time at which they should expense
assets recorded for environmental credits.
Connecting the Dots
Generally, an entity derecognizes an environmental credit once that
credit is officially retired with the applicable agency or registry
and used to offset the entity’s current emissions to demonstrate
compliance with mandatory or internally set goals.
Although an entity may publicly announce its
intention to use an environmental credit, the credit is not
considered officially “retired” until a request is submitted to the
applicable agency or registry and subsequently marked as retired and
restricted from further trading. Further, since an entity’s intent
related to its environmental credits can change over time, until an
environmental credit is irrevocably retired, it still represents a
legal right that can be transferred.
We believe that the guidance in ASC 606 that describes the
circumstances in which an asset has been transferred may be helpful
in an entity’s evaluation of when to derecognize an environmental
credit.
FASB Project on Environmental Credits
While the FASB has considered addressing the accounting for environmental credits
on several occasions beginning in 2003, it has yet to finalize a project on this
topic.
In June 2021, the Board issued an invitation to comment (ITC) to seek broad
stakeholder feedback on its future standard-setting agenda, particularly
pertaining to emerging areas of financial reporting. In the invitation to
comment, the FASB specifically requested input on the accounting requirements
for transactions related to environmental, social, and governance (ESG) matters
and whether they were unclear or needed improvement. Respondents commented on
the accounting for environmental credits and highlighted concerns related to the
lack of specific authoritative guidance on the accounting and disclosure
requirements for environmental credit programs. Overall, the responding
stakeholders expressed concerns about the expanded use of environmental credits
under both compliance and voluntary programs and noted that the FASB should
prioritize improving clarity related to the appropriate accounting for
environmental credits to prevent further diversity in practice, particularly as
the focus on ESG-related matters increases.
In addition to issuing the ITC, the Board performed outreach to better understand
how various entities currently account for environmental credits. Through this
outreach, the Board observed significant diversity in practice among users and
producers of environmental credits as well among entities operating in voluntary
and compliance programs.
In response to stakeholder feedback on the ITC 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. Board members noted that
financial statement consistency will benefit users and that activity within the
environmental credit market will only continue to increase, making this an
opportune time for standard setting.
The FASB staff expressed a desire to explore other potential
models that would be more representative of the unique nature of environmental
credits and the underlying economics of transactions involving them. Such models
could include fair value accounting or the creation of a new accounting model
that may reside outside of existing GAAP.
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. Further, registrants would have to disclose
Scope 1 and Scope 2 GHG emissions irrespective of the impact of offsets; their
climate risk management processes, targets, and goals; and their governance and
oversight of climate-related risks. Registrants (other than smaller reporting
companies) would also need to disclose Scope 3 GHG emissions if (1) they are
material or (2) the registrants have established a reduction target or goal that
includes Scope 3 GHG emissions.
Entities that use environmental credits, particularly carbon offsets or RECs, in
their plan to achieve climate-related goals or targets would have to disclose
information about such use. In the proposed rule, the SEC defines a carbon
offset as “an emissions reduction or removal of greenhouse gases in a manner
calculated and traced for the purpose of offsetting an entity’s GHG emissions.”
Registrants would also be required to disclose how much of their
progress toward climate targets or goals has been attributable to environmental
credits, the source and cost of such credits, a description of the related
underlying projects, and any registry or other authentication of the
environmental credits. The disclosures would reflect the short-term 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.
Contacts
If you have questions about the
accounting and reporting requirements for environmental credits, please contact
any of the following Deloitte professionals:
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Eric Knachel
Partner
Deloitte &
Touche LLP
+1 203 761
3625
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Zachary Poncik
Senior Manager
Deloitte &
Touche LLP
+1 713 982
4104
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Katherine Donzella
Manager
Deloitte &
Touche LLP
+1 773 364
0279
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Footnotes
1
See the EPA’s Web site for a discussion of Scope 1, 2, and
3 inventory guidance.
2
Chapter 4, Elements of Financial Statements, of FASB Concepts
Statement No. 8, Conceptual Framework for Financial
Reporting.
3
For titles of FASB Accounting Standards Codification (ASC)
references, see Deloitte’s “Titles of Topics and Subtopics
in the FASB Accounting Standards
Codification.”