FASB Issues Guidance on the Accounting for Environmental Credit Programs (May 19, 2026)

FASB Issues Guidance on the Accounting for Environmental Credit Programs

Overview

On May 19, 2026, the FASB issued ASU 2026-02 1, which establishes accounting requirements for environmental credits and environmental credit obligations (ECOs).

The ASU introduces a comprehensive model that establishes recognition, measurement, presentation, and disclosure requirements for (1) environmental credits and, when applicable, (2) compliance obligations that may be settled by using environmental credits. The current guidance in U.S. GAAP does not explicitly address how to account for these items.

The guidance in the ASU is expected to affect many different types of companies, particularly those with operations subject to environmental regulations and those that acquire environmental credits to achieve internal targets related to carbon footprint initiatives. An entity’s accounting for environmental credits under the standard differs on the basis of its expected use of the credits. Determinations of whether the credit will be used for compliance, exchange, or voluntary purposes affect the recognition and subsequent measurement of the credits. Under the ASU, an entity must disclose its intended use of the credits as well as the financial statement impact of any changes in its intent. The ASU also prescribes the accounting for ECOs and their measurement on the basis of the environmental credits the entity intends to use to settle such obligations.

The key provisions of the ASU are discussed below. In addition, the decision trees in the appendixes of this Heads Up reflect the guidance on environmental credits and ECOs and may be used to determine the appropriate accounting under the ASU. Moreover, the ASU contains examples illustrating application of the guidance.

Scope

Environmental Credit Assets

For an environmental credit to be within the ASU’s scope, it must:

Be enforceable.
Be, or previously have been, separately transferable in an exchange transaction. If the credit is no longer separately transferable in an exchange transaction, an entity must be able to use the credit to satisfy an ECO.
Lack physical substance and not meet the definition of a financial asset under U.S. GAAP.
Be represented as preventing, controlling, reducing, or removing emissions or other pollution.
Not be an income tax credit “that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.”

In addition, credits may:

Take many forms (e.g., credits, certificates, allowances, and offsets).
Include those obtained from related parties.
Be acquired, granted by a regulatory agency (including those in return for performance), internally generated, or received in a nonreciprocal transfer.

On the basis of the above criteria, we would expect the following to be a nonexhaustive list of examples of items subject to the ASU:

Carbon offsets.
Emission allowances.
Renewable energy certificates.
Renewable identification numbers.

Entities should carefully assess whether items that resemble those within the scope of the ASU nonetheless meet the definition of an environmental credit. For example, transferable tax credits related to clean energy may share attributes with in-scope credits, but they are outside the ASU’s scope if they are income tax credits “that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.” Likewise, credits tied to restoring protected wetlands, habitats, or streams are outside the ASU’s scope because they are not represented as preventing, controlling, reducing, or removing emissions or other pollution.

Environmental Credit Obligations

The ASU also applies to ECOs, which are obligations that arise from “existing or enacted laws, statutes, or ordinances represented to prevent, control, reduce, or remove emissions or other pollution that may be settled with environmental credits.” Obligations that are within the scope of ASC 410-302 are not ECOs.

Connecting the Dots

An entity’s commitment to achieving certain climate goals or targets does not, in itself, meet the definition of an ECO. In a manner consistent with the principles in paragraph E43 of FASB Concepts Statement 8, Chapter 4, when an entity obtains and uses credits solely as a result of self-imposed goals or targets, a liability may not exist, since an “obligation of an entity to itself cannot be a liability.” Thus, depending on the facts and circumstances, a voluntary program (e.g., one in which an entity makes a public statement about its commitment to achieving a climate goal that is not part of a required compliance program) will generally not result in the need to record a liability because there is no external obligation (e.g., contractual or legal).

Recognition

Asset Recognition

Only credits that it is probable the company will use to settle an ECO, transfer to another party in an exchange transaction, or use in a nonreciprocal transfer (i.e., not retire for voluntary purposes) are eligible for asset recognition. This probability assessment is collective; accordingly, if the sum of the probabilities of each of the recognizable intentions exceeds the probability threshold, the asset qualifies for capitalization. After determining that the environmental credit qualifies for recognition, an entity must classify the credit as a compliance credit or a noncompliance credit by determining whether it is probable that the credit will be used to settle an ECO. If so, the credit is classified as a compliance credit. If not, the credit is a noncompliance credit.

Example 1

Entity E is an oil and gas company subject to regulatory compliance obligations in several of the jurisdictions in which it operates. As part of one such program, E is required to remit credits to its regulator on the basis of its activities. Entity E internally generates credits and has access to markets for the credits it needs to settle its compliance obligation. Although E can generally meet its compliance obligations with internally generated credits, if forecasted demand for its nonblended product exceeds expectations, E may need additional credits to settle the obligations resulting from its increased activities. Therefore, E purchases credits on the open market early in the compliance period and will sell the credits if its program requirements are satisfied. The market, however, for these credits is sometimes unable to absorb the volume of sales offered near the end of a compliance period. In the event that E is not able to sell the credits, it will retire them and claim progress toward its public sustainability goals.

In February 20X6, E purchases 1,000 environmental credits for $10 per credit. Entity E believes that there is a 40 percent likelihood that it will use the credits to satisfy its regulatory compliance obligation, a 40 percent likelihood that the credits will be sold, and a 20 percent likelihood that the credits will be retired. Entity E concludes that it meets the criteria for asset recognition because it is probable that the credit will be used for either compliance or noncompliance purposes (40 percent expected for compliance + 40 percent expected for sale = 80 percent cumulative probability). Therefore, E recognizes the environmental credits at cost. Entity E classifies the environmental credits as noncompliance credits because, although the 80 percent cumulative probability supports asset recognition, it is not probable that the environmental credits will be used for compliance (40 percent expected for compliance).

The ASU also requires that an expense be recognized for “a nonrefundable deposit made to obtain an environmental credit for which it is not probable that the entity will use the environmental credit:

To settle an environmental credit obligation
To transfer in an exchange transaction
In a nonreciprocal transfer.”

This guidance on nonrefundable deposits made to obtain environmental credits is consistent with the guidance on direct expensing of voluntary credits and reflects the FASB’s view that a credit acquired for voluntary purposes is akin to an asset that a company chooses to abandon. The company will not realize future value from the deposit or the related asset and therefore should not capitalize the associated cost on the balance sheet.

ECO Recognition

In a manner consistent with the definition of a liability, an ECO should be recognized when events (e.g., emissions) that occur on or before a reporting date result in an ECO.

The timing of the recognition of an ECO depends on the underlying environmental credit program. For example, the liability associated with a program that requires an entity to remit environmental credits to satisfy an obligation on the basis of the entity’s activities (e.g., all emissions related to the entity’s operations must be remedied by submitting cash or credits to the regulator) should be accrued as the activities are performed. Other programs may not require a remedy in the form of cash or credits until a baseline amount of emissions has been exceeded. In this case, no ECO is recognized until the emission threshold has been exceeded. The ECO should be assessed as of the reporting date, irrespective of the settlement date or whether a compliance period is aligned with the reporting date or ends on a future date. In other words, a company’s operations resulting in the obligation — and not the date on which the company will satisfy the ECO by remitting credits (which often trails the compliance period by a few months) — will generally give rise to an ECO.

Example 2

A state government enacts a law (effective as of January 1, 20X6) that requires all entities that operate within the government’s jurisdiction to remit cash or environmental credits on the basis of the volume of electricity consumed from the state grid for all of an entity’s operations. Entities that elect to remit environmental credits will be required to remit one environmental credit for each megawatt-hour (MWh) consumed during the compliance period. The current compliance period runs from January 1, 20X6, to December 31, 20X6.

Entity J operates within the state and considers the effect of the enacted law on its business. On the basis of its annual revenue and operations within the state, J determines that it is subject to the new regulatory program and, because the obligation can be settled with environmental credits, J concludes that an ECO exists. Entity J prepares its March 31, 20X6, quarterly financial statements and determines that it has consumed 600 MWh during the first three months of the compliance period. Therefore, J recognizes a liability for 600 environmental credits. See Example 4 for an illustration of the measurement of an ECO liability.

Measurement

Initial and Subsequent Measurement of the Environmental Credit Asset

Under the ASU, environmental credit assets generally are initially measured at cost in accordance with ASC 818-20-30-3. There are, however, two exceptions. First, ASC 818-20-30-1 states that “[a]n environmental credit that is internally generated by an entity or received through a grant from a regulator or its designee(s) shall be initially measured at the transaction costs incurred, if any.” From a practical standpoint, we believe that this provision will result in the measurement of many granted or internally generated credits at the costs incurred to register or certify the credits, if any. Second, ASC 818-20-30-2 states that other credits “obtained in a transaction initially measured in accordance with another Topic shall follow the requirements of that other Topic.”

The ASU stipulates that the subsequent measurement of environmental credits depends on an entity’s intended use of the credits. When it is probable that environmental credits will be used to settle an ECO (i.e., compliance environmental credits), the credits are not subject to impairment testing and are generally not subsequently remeasured (unless an entity elected noncompliance credits as a fair value measurement accounting policy and subsequently reclassified those credits to compliance credits). Impairment testing is not deemed relevant for these credits since their cost bases contribute directly to the measurement of the ECO they will ultimately be used to settle (see discussion of “linked” ECO measurement below). All other environmental credits recognized as assets (i.e., noncompliance environmental credits) are tested for impairment as of each reporting date.

As of each reporting date, entities must reassess whether environmental credits can continue to be recognized as assets. Environmental credits that no longer meet the recognition criteria are derecognized through earnings. Environmental credits that were never recognized as assets or were previously derecognized cannot subsequently be recognized as assets. In other words, if an entity previously expensed an environmental credit that it had planned to use for voluntary purposes, but the entity now plans to use that environmental credit to satisfy an ECO, it is not permitted to recognize an asset for that environmental credit because it was previously expensed. Similarly, an entity cannot consider those previously derecognized (or never recognized) environmental credits when measuring an ECO, even if the entity now plans to use such credits to satisfy an ECO. If an environmental credit is reclassified from a compliance environmental credit to a noncompliance environmental credit or vice versa, the holder must perform impairment testing before applying the subsequent-measurement guidance related to the new classification of the environmental credit.

Under the ASU, similar environmental credits that are recognized as assets must be subsequently measured by using an average-cost; first-in, first-out; or specific identification method. The method used would be performed separately for compliance environmental credits and noncompliance environmental credits.

A fair value election is also available for certain noncompliance environmental credits. Eligible noncompliance credits are those obtained through (1) an exchange transaction, (2) a nonreciprocal transfer that is not a grant from a regulator, or (3) a business combination. The fair value measurement accounting policy election is made for a class of environmental credits rather than on a credit-by-credit basis. The ASU does not define “class” but indicates that the determination of class is entity-specific and should be based on reasonable judgments. The fair value measurement accounting policy election is irrevocable. That is, those credits for which the election is made will continue to be remeasured at fair value even if the entity subsequently expects to use them to settle an ECO and therefore reclassifies them as compliance credits.

Example 3

Assume the same facts as in Example 1. The environmental credits purchased by Entity E in February 20X6 are initially measured at $10,000 and classified as noncompliance credits.

On March 31, 20X6, E applies the asset recognition reassessment requirements and determines that it still expects to sell the credits and therefore that the credits remain classified as noncompliance credits. Entity E tests the credits for impairment but determines that they are not impaired since the fair value of an environmental credit on March 31, 20X6, is $14.

On June 30, 20X6, E applies the asset recognition reassessment requirements and determines that it will need to use the credits purchased in February 20X6 to settle its ECO. Entity E therefore reclassifies the credits as compliance credits and tests the credits for impairment in connection with the reclassification. On this date, the fair value of an environmental credit is $14, so E does not recognize an impairment. From this point forward, the credits would not be subject to impairment testing unless they are reclassified.

Initial and Subsequent Measurement of the ECO

Under the ASU, the measurement of the ECO is “linked” to the cost basis of the assets that will be used to settle the obligation. Measurement of this liability depends on (1) the entity’s intended manner of satisfying the obligation, (2) whether the entity has credits on hand to satisfy the obligation, (3) whether the entity has fixed-volume and fixed-price contracts to procure credits that can be used to satisfy the obligation or is entitled (i.e., has an unconditional right) to receive credits from a regulator, and (4) the market for the required environmental credits as of the balance sheet date. The measurement can be further disaggregated as follows:

Funded obligation — The funded obligation refers to the portion of an ECO for which an entity has credits on hand that will be used to settle the ECO. Under the ASU, the ECO is measured at the cost basis of these credits in a manner consistent with costing methods used to measure the compliance environmental credit asset. Accordingly, the measurement of the liability and the asset are linked. The funded ECO is measured after the recognition and measurement (including reassessment of the credit on the basis of a change in intent, if applicable) of the environmental credit asset to ensure that the entity has appropriately identified the credits on hand that it intends to use to settle the liability.
Unfunded obligation — The unfunded obligation refers to the remaining portion of the ECO:
- Cash settlement — If an entity has the intent and ability to remit cash to satisfy an ECO, it measures the ECO on the basis of the cash settlement amount.
- Firm commitment to procure credits — If an entity has “an unconditional purchase commitment for a fixed quantity of environmental credits at a fixed price” or has an unconditional right to receive credits from a regulator, it measures the ECO in accordance with the cost basis of the credits to be obtained under the contract or grant (“which may differ from the fixed price per the contract” or might be zero in the case of credits granted by a regulator).
- Remaining unfunded obligation — An entity records the remaining unfunded obligation at the fair value, as of the balance sheet date, of the credits that will be necessary to settle the ECO in accordance with the guidance in ASC 820.

Connecting the Dots

When an entity receives, for example, credits with a cost basis of zero from a regulator, it measures the corresponding ECO at the same amount, assuming those credits will be used to satisfy the ECO. Similarly, if an entity has an unconditional right to receive credits from a regulator in the future that can be used to satisfy an ECO (in a manner consistent with a firm commitment with a third party to procure credits), the entity also considers these credits when measuring the related liability.

These measurement principles should be applied as of each interim and annual balance sheet date. The difference between the current-period ECO measurement and previous-period measurement is recorded in earnings, or as part of another asset accounted for in accordance with another Codification topic, in a manner consistent with the entity’s initial recognition of the ECO liability.

Example 4

Assume the same facts as in Example 2.

On January 1, 20X6, as part of the regulatory program, Entity J is granted 500 state electricity credits on the basis of its registration in the state. The state electricity credits meet the definition of environmental credits. Entity J did not incur any transaction costs to receive the granted credits and therefore measures them at $0. Further, J does not have any firm purchase commitments to procure credits and does not intend to settle the ECO with cash.

On March 31, 20X6, J determines the measurement of its 600-credit ECO. In accordance with ASC 818-30-30-2, J links the measurement of the funded portion of the ECO to the credits it intends to use to settle it and measures the funded portion of the ECO at $0 (500 × $0). Entity J determines that the fair value of an environmental credit is $5 per credit as of March 31, 20X6, and therefore measures the unfunded portion of the ECO at $500 (100 × $5).

Derecognition

Under the ASU, environmental credits are derecognized in accordance with ASC 610-20 unless a scope exception applies. For example, the sale of an environmental credit in a contract with a customer is derecognized when control is transferred in accordance with ASC 606.

An entity applies ASC 405-20 to the derecognition of an ECO. ECOs are generally derecognized when the obligation to the regulatory authority is satisfied through a transfer of credits, cash, or both. Any gains or losses associated with the derecognition are presented in the same income statement line as the initial and subsequent measurement of the ECO.

Presentation

Balance Sheet Impacts

Under the ASU, an ECO and the corresponding environmental credit asset are reported on the balance sheet on a gross basis (i.e., the compliance obligation cannot be presented net of the associated credits). Further, the classification of both the ECO and environmental credit asset is based on the timing of expected remittance of the asset to satisfy the ECO. The Board noted that if it is “reasonably expected to be settled within one year,” the ECO and environmental credit assets to be used to satisfy the obligation are classified as current liabilities and current assets, respectively. All other ECO liabilities are classified as noncurrent.

In a manner consistent with the principles discussed above, environmental credits reasonably expected to be sold or traded within one year (or within the business’s operating cycle, if longer) are classified as current assets. All other environmental credit assets are classified as noncurrent assets.

Connecting the Dots

We have received questions about the difference between a linked measurement approach to determining the measurement of an ECO and a net balance sheet presentation of the ECO. These are distinct concepts that an entity applies when measuring and presenting an ECO. Measurement of the ECO will be linked to the cost basis of the credits on hand that an entity intends to use to satisfy the ECO. When the cost basis is zero, linked measurement will result in measurement of an ECO at zero. However, this is not the case when the credits to be used have a nonzero cost basis. Separately, an entity is required to present on its balance sheet environmental credits and ECO liabilities on a gross basis, regardless of whether an ECO is measured by using the cost basis of the credits on hand. Furthermore, in a manner consistent with the principles discussed by certain Board members when developing the ASU, the right-of-offset requirements described in ASC 210-20-45-1 are not met in the assessment of these items for balance sheet netting.

Disclosure

The ASU requires entities to provide a number of disclosures about assets and liabilities, including the following:

How the environmental credits were obtained (e.g., “acquired, granted, internally generated, or received in a nonreciprocal transfer”).
The intended use of the credits (selling or trading, settling ECOs, nonreciprocal transfers, or for voluntary purposes) and the current and noncurrent portion of compliance environmental credits and noncompliance environmental credits, along with the line item or items on the balance sheet that include those amounts.
The entity’s method for subsequently measuring environmental credits recognized as assets (first-in, first-out; average cost; or specific identification).
Applicable fair value disclosures required by ASC 820 for any fair value measurements.
A description of the activities or events that result in ECO liabilities under regulatory compliance programs.
The nature and timing of settlement provisions.
The accounting policies used to account for ECOs.
How the unfunded portion of an ECO liability is measured.
Significant estimates and judgments used in accounting for the entity’s environmental credits and credit obligation liabilities.

An entity also needs to disclose (1) the total expense recognized for ECO liabilities during the reporting period and the line item in the income statement that includes that amount; (2) the total costs capitalized during the reporting period that are associated with an ECO liability and included in the carrying amount of another asset in accordance with another Codification topic, as well as a description of the other asset; and (3) the income statement effect related to environmental credits for which the entity changed its use or intended use.

Connecting the Dots

The ASU includes consequential amendments to the guidance in ASC 220-40 on disaggregation of income statement expenses. Under these amendments, the tabular disclosure required by ASC 220-40-50-6 must include the ASC 818 disclosures for total expense recognized for environmental credits not initially recognized as an asset or subsequently derecognized, total impairment expense recognized during the reporting period for environmental credits, and total expense recognized for ECO liabilities.

Interaction With ASC 815

Under the ASU, environmental credits and ECOs that are accounted for in accordance with ASC 818 are outside the scope of ASC 815-10 on derivatives and hedging. However, “a freestanding contract to obtain or sell an environmental credit in the future may be subject to derivative accounting under the requirements” of ASC 815.

Interaction With ASC 805

The recognition principles in ASC 818 do not apply to environmental credits acquired in a business combination. ASC 805-20-25-15B clarifies that “[a]n acquirer shall recognize an environmental credit acquired in a business combination as an asset, regardless of whether it is probable that the acquirer will use that environmental credit to settle an environmental credit obligation, transfer the environmental credit in an exchange transaction, or use the environmental credit in a nonreciprocal transfer.” For example, an environmental credit obtained in a business combination that an entity intends to use for voluntary purposes is recognized as an environmental credit asset in purchase accounting, while the same credit purchased for the same purpose in an asset acquisition is immediately expensed.

After recognition in accordance with ASC 805, an environmental credit is subject to the asset recognition reassessment requirements in ASC 818-20-40-2 and the subsequent-measurement guidance in ASC 818-20-35-3 through 35-5.

The result of this interaction is that entities will recognize environmental credits acquired in a business combination at their acquisition-date fair value and then, as of the next reporting date, assess the intended use of the credit. If the credit is expected to be retired, expense recognition is required in accordance with ASC 818-20-40-2.

The ASU also amends ASC 805 to specify that in evaluating whether to recognize an ECO liability in a business combination, an entity should “determine whether environmental credits would be due assuming that the acquisition date is the end of the regulatory compliance period.” Further, ASC 805-20-30-2 specifies that if an acquirer recognizes an ECO in connection with a business combination, the credit should be measured in accordance with ASC 818.

Effective Date and Transition

For public companies, the ASU will become effective for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. For nonpublic business entities, the ASU will become effective for annual reporting periods beginning after December 15, 2028, and interim reporting periods within those annual reporting periods.

Early adoption is permitted. If an entity adopts the ASU in an interim reporting period, it must adopt the guidance as of the beginning of the annual reporting period that includes that interim reporting period.

The guidance is applied retrospectively by making a cumulative-effect adjustment to the opening balance of retained earnings. The ASU’s transition guidance can be summarized as follows:

Environmental credits that qualify for asset recognition under ASC 818-20-25-1 are recognized and measured as follows:
- Compliance credits — By “[u]sing the entity’s carrying amount [of that environmental credit] existing at the date of initial application.”
- Noncompliance credits — “At the lower of the entity’s carrying amount of the environmental credits existing at the date of initial application and the fair value of the environmental credits at the date of initial application.”
- Environmental credits that were internally generated by the entity or received through a grant from a regulator or its designee(s) — Either according to its intended use (the two bullets above) or an entity-wide election may be made to measure the credits at the transaction costs incurred in accordance with ASC 818-20-30-1.
- Eligible class of noncompliance credits — At fair value on the basis of a class-wide policy election.
For all other environmental credits, the carrying amount should be derecognized as of the date of initial application unless those credits are capitalized as part of another asset accounted for in accordance with another Codification topic.
ECOs are recognized and measured in accordance with the guidance in ASC 818-30.
The ASC 805 updates related to environmental credits must be applied prospectively.

Appendix A — Decision Tree: Environmental Credit Assets

Appendix B — Decision Tree: Environmental Credit Obligations

Contacts

	James Barker Audit & Assurance Partner Deloitte & Touche LLP +1 203 761 3550 jabarker@deloitte.com		Chris Chiriatti Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 761 3039 cchiriatti@deloitte.com
	Katy Rossino Audit & Assurance Partner Deloitte & Touche LLP +1 617 437 2411 krossino@deloitte.com		John Rzonca Audit & Assurance Senior Manager Deloitte & Touche LLP +1 212 436 6047 jrzonca@deloitte.com
	Michael Riso Audit & Assurance Manager Deloitte & Touche LLP +1 813 769 6190 miriso@deloitte.com

Footnotes

FASB Accounting Standards Update (ASU) No. 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818).

For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

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