Environmental credits, such as carbon offsets, renewable-energy certificates (RECs), and cap-and-trade allowances, play a critical role in how companies meet compliance obligations and demonstrate progress toward voluntary sustainability goals. Previously there has been no clear U.S. accounting standard for recording these credits in financial statements; Generally Accepted Accounting Principles (GAAP) lacked specific guidance regarding environmental credits. This has created inconsistency and confusion across industries, making it difficult for stakeholders to evaluate risks and climate strategies accurately.
The Financial Accounting Standards Board (FASB) has now voted to set the first U.S. accounting requirements for environmental credits, referred to as FASB Topic 818. This decision will directly affect companies across industries, reshaping how credits are recognized, measured, and disclosed. For organizations that already juggle complex regulatory reporting, this adds another layer of compliance, and preparation is key.
Who Is Affected by the New FASB Standard on Environmental Credits
The rule applies to all public and private companies reporting under U.S. GAAP. Any business that purchases, generates, or holds environmental credits, whether for compliance or voluntary purposes, will be required to follow the new standard. Industries most likely to feel the impact include manufacturing, energy, transportation, and utilities, though the rule has broad relevance as more companies incorporate offsets and RECs into their ESG strategies.
What the New Standard Requires
The new standard establishes a single accounting model for all types of environmental credits. Key requirements include:
- Ledger Recognition: Credits must be recorded when they are likely to be used to settle an environmental obligation or sold.
- Measurement: Credits are measured at cost and managed to prevent double-counting.
- Impairment: If credits are not expected to be used, they must be tested for impairment and documented as needed.
- Disclosure: Companies must disclose changes in how credits are used (for example, shifting from compliance to resale) and explain the financial impact. They must also report expenses tied to credits on the income statement.
When Does the New FASB Standard on Environmental Credits Take Effect?
Implementation of this standard will be phased over a two-year period:
- Public companies: Effective for fiscal years beginning after December 15, 2027 (reporting year 2028).
- Private companies: Effective one year later, for fiscal years beginning after December 15, 2028 (reporting year 2029).
Companies have the option to adopt this guidance prior to the rule going into effect.
Why It Matters
The ESG stakes are high for companies. Environmental credits often represent significant investments and are closely tied to compliance with emissions regulations and corporate climate targets. Without standardized accounting, reporting practices have varied widely. Some companies treated credits as expenses, others as intangible assets, and disclosures were inconsistent. Greenwashing via poorly documented environmental credits caused distrust amongst investors and the public.
The new rule aims to eliminate this inconsistency and improve transparency and comparability across industries. This also means companies must adjust their policies, strengthen their tracking systems, and prepare for more scrutiny in financial reporting. Those that fail to adapt risk future audit and compliance gaps and reduced investor confidence.
How Companies Can Prepare
Companies should begin planning now to ensure a smooth transition:
- Inventory Credits: Document current holdings and expected future purchases of offsets, RECs, and allowances.
- Evaluate Current Practices: Compare existing accounting methods to the new requirements and identify gaps.
- Update Policies and Controls: Align internal accounting policies and compliance procedures with the new standard.
- Strengthen Recordkeeping: Ensure systems can track recognition, impairment testing, and disclosure requirements.
- Coordinate Across Teams: Bring together finance, sustainability, and compliance support to prepare for implementation.
Tetra Tech’s Support Options
The new FASB 818 standard marks a turning point in how environmental credits are managed and reported in the U.S. While it creates much-needed consistency, it also places new demands on companies already navigating complex environmental regulations.
At Tetra Tech, we help organizations bridge the gap between sustainability commitments and regulatory reporting. Our experts can guide you through assessing credit inventories, updating policies, and building the robust systems needed for transparent, compliant reporting.
Contact us today at [email protected] to learn how we can support your company in preparing for this landmark environmental credit disclosure standard.
