FASB Issues New Guidance on Environmental Credits and Related Obligations

The FASB issued ASU 2026-02, Environmental Credits and Environmental Credit Obligations, creating a new accounting model under ASC 818 for certain environmental credits and regulatory obligations that can be settled with those credits. The new guidance is intended to bring more consistency to the accounting for carbon offsets, renewable energy credits, emissions allowances, and similar instruments as their use becomes more common.

Overview of the New ASC 818 Guidance

ASU 2026-02 establishes new accounting requirements for two related areas:

• Environmental credits (ECs) — transferable rights such as credits, certificates, allowances, or offsets that are represented as preventing, controlling, reducing, or removing emissions or other pollution.

• Environmental credit obligations (ECOs) — enforceable regulatory compliance obligations arising from existing or enacted laws, statutes, or ordinances that may be settled with environmental credits.

Environmental credits and environmental credit obligations within ASC 818 are outside the scope of ASC 815, Derivatives and Hedging.

Who and What Is in Scope?

The new guidance applies to entities that:

• Buy or receive transferable environmental credits and either transfer them, use them to settle ECOs, or use them for voluntary environmental initiatives;

• Generate environmental credits; or

• Have enforceable regulatory compliance obligations that may be settled with environmental credits.

An environmental credit generally must be an enforceable right that lacks physical substance, is not a financial asset, is represented as reducing or addressing emissions or pollution, and is or previously was separately transferable in an exchange transaction.

Certain items are excluded. For example, income tax credits that may be used to settle an income tax liability are not environmental credits under ASC 818. In addition, obligations within ASC 410-30, Asset Retirement and Environmental Obligations—Environmental Obligations, and voluntary emissions-reduction commitments, such as net-zero or carbon-neutral initiatives, are not ECOs under the new guidance.

Accounting for Environmental Credits

Recognition

An environmental credit is recognized as an asset when it is likely that the credit will be:

• Used to settle an environmental credit obligation;

• Transferred in an exchange transaction; or

• Used in a nonreciprocal transfer.

Costs to obtain other credits—such as credits acquired solely for a voluntary net-zero initiative—generally are expensed as incurred if the recognition criteria are not met.

Classification

Once an environmental credit qualifies for recognition, it must be classified as either:

• Compliance credit — a credit likely to be used to settle an ECO; or

• Noncompliance credit — a recognized environmental credit that is not classified as a compliance credit.

Measurement

Environmental credits are generally measured using a cost-based approach. Credits that are internally generated or received through a regulator grant are initially measured at the transaction costs incurred to obtain them. If no transaction costs are incurred, the credit is still recognized as an asset, but at zero.

After initial recognition, entities must reassess at each reporting date whether it remains likely that the credit will be used to settle an ECO, transferred, or used in a nonreciprocal transfer. If that likelihood no longer exists, the asset is derecognized. Credits previously derecognized—or never recognized—cannot later be recognized, even if facts change.

For subsequent measurement, entities may use average cost, FIFO, or specific identification. Compliance credits are not subsequently remeasured, while noncompliance credits must be tested for impairment at each reporting date, with an impairment loss recognized when carrying value exceeds fair value.  ASC 818 permits an accounting policy election to measure certain classes of noncompliance environmental credits at fair value, with changes in fair value recognized in earnings.

Disclosures

Entities will need to provide annual disclosures about environmental credits, including:

• How credits were obtained and how the entity intends to use them;

• Accounting policies applied;

• Significant estimates and judgments;

• Current and noncurrent amounts of compliance and noncompliance credits, if not separately presented;

• Expenses related to voluntary environmental credits;

• Impairment expense; and

• Changes in use or intended use and the related earnings effect, if any.

Accounting for Environmental Credit Obligations

Recognition

An environmental credit obligation liability is recognized when events occurring on or before the reporting date result in an enforceable regulatory compliance obligation that may be settled with environmental credits.

Measurement

The ECO liability is measured in two parts:

Component	Measurement approach
Funded portion	Measured using the carrying amount of compliance credits the entity holds and expects to use to settle the obligation.
Unfunded portion	Generally measured using the fair value of the credits needed to settle that portion, unless the entity expects to settle in cash or through an unconditional purchase commitment or right to receive credits.

For the funded portion, entities use the same costing method applied to their compliance credits. The funded measurement does not include noncompliance credits, credits never recognized as assets, or credits previously derecognized under ASC 818.

The liability is derecognized when the entity remits the necessary credits to the regulator.

Disclosures

Annual disclosures for ECOs include:

• Activities or events that give rise to ECO liabilities;

• The nature and timing of settlement provisions;

• Accounting policies used;

• How the unfunded portion of the liability was measured;

• Significant estimates and judgments;

• Current and noncurrent amounts of funded and unfunded ECO liabilities, if not separately presented;

• Total expenses related to ECO liabilities; and

• Costs associated with ECO liabilities capitalized into other assets.

Effective Dates and Transition

The amendments are effective as follows:

Entity type	Effective date
Public business entities	Annual periods beginning after December 15, 2027, including interim periods within those annual periods
All other entities	Annual periods beginning after December 15, 2028, including interim periods within those annual periods

Early adoption is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance, and if adopted in an interim period, adoption is as of the beginning of an annual reporting period that includes that interim period. Entities must apply the guidance retrospectively through a cumulative-effect adjustment to opening retained earnings, or another appropriate component of equity or net assets, as of the beginning of the annual period of adoption.

At adoption, entities should assess existing rights and obligations to determine whether they meet the definitions of environmental credits or ECOs. Initial application includes specific rules for recognizing and measuring EC assets, including different treatment for compliance and noncompliance credits, and for recognizing and measuring ECO liabilities under the new model.

Practical Action Items for Clients

Although the effective dates are several years away, companies that participate in environmental credit markets or are subject to emissions-related regulation should begin preparing now.

Practical next steps include:

1. Inventory existing credits and obligations
   Identify carbon offsets, renewable energy credits, emissions allowances, certificates, and similar instruments currently held, generated, purchased, sold, or used.
2. Evaluate scope and classification
   Determine which items meet the ASC 818 definition of an environmental credit and whether recognized credits are likely to be compliance or noncompliance credits.
3. Assess regulatory programs
   Review applicable environmental laws and regulations to identify enforceable compliance obligations that may be settled with environmental credits.
4. Review systems and data needs
   Ensure systems can track credit quantities, costs, intended use, transfers, retirements, impairment indicators, and funded versus unfunded ECO liabilities.
5. Develop accounting policies
   Consider costing methods, impairment processes, fair value measurement procedures, and internal controls over estimates and judgments.
6. Plan for expanded disclosures
   Begin gathering the qualitative and quantitative information that will be required in annual financial statement disclosures.
7. Consider transition impacts
   Evaluate how the cumulative-effect adjustment may affect opening equity or net assets at adoption, particularly if credits were previously capitalized or expensed under existing policies.

Key Takeaway

ASU 2026-02 creates a dedicated accounting framework for environmental credits and related regulatory obligations. The new guidance may affect recognition, measurement, impairment, liability accounting, and disclosures for companies active in environmental credit markets or subject to environmental compliance programs. Early planning can help reduce implementation challenges and improve readiness for the new ASC 818 requirements.