Businesses are using environmental credits such as carbon allowances and offsets and renewable energy certificates to help them meet their greenhouse gas reduction targets, but the accounting rules around such credits are murky at best.
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"You're seeing a lot of companies now having voluntary goals or targets around emissions reductions, whether it's net zero or carbon neutral," said Eric Knachel, a senior consultation partner at Deloitte and lead author of the report, in an interview with Accounting Today. "Companies may have voluntary goals and targets about how they're going to reduce their emissions. Oftentimes, they're unable to achieve those goals using today's technology. As a result, companies have to look at buying environmental credits as a means to achieve those goals."
It takes time to build a new manufacturing plant and replace old equipment, so there's increasing demand for environmental credits as a way to achieve climate-related goals in the timeframe announced by a company. However, the scarce availability of actual emission reductions means these credits have become more valuable to companies that want to be able to claim they're helping the planet.
They're also proving to be a boon in Africa, where environmental projects are up and running. Last November, the African country of Gabon announced the largest sale ever of carbon offset credits, according to The
Accounting for all these credits will be a big job for accountants, and actually verifying them is another matter.
"The fact that you have these voluntary goals, and the fact that the technology isn't necessarily there in order to achieve those goals today, results in companies having to buy environmental credits, and that is creating a significant increase in the demand and is resulting in a lot more transactions in this space," said Knachel.
The players include buyers, sellers and developers of environmental credits, as well as promoters who throw in the credits as a way to offset the carbon emissions their products actually create.
"You've got someone on the buy side, someone on the sell side, and then you've got suppliers which actually develop their credit," said Knachel. "And then we're seeing some transactions where someone will sell their product or service and they'll bundle it with an environmental credit. For example, if you purchase an airline ticket, sometimes the airline gives you an option of purchasing an environmental credit or doing something to compensate for the emissions that are being incurred. But other companies will simply say if you buy our device or equipment or service, we'll include an environmental credit. The reason they do that is so the buyer, when they pick up the emissions from the product that they're buying, they have an environmental credit that comes with it that effectively offsets the emissions that they're picking up when they buy."
This may all sound questionable to people who are concerned about the accelerating pace of climate change and the weather emergencies that seem to occur with increasing frequency across the world. Nevertheless, accountants will need to keep track of all the credits being sold and traded, and it's no surprise that FASB is under pressure to provide guidance in an area that it has traditionally avoided, non-financial reporting, and added the project to its agenda last spring.
"When they looked at this they said there's no accounting guidance that is directly on point in terms of what you should do," said Knachel. "They did some outreach and saw that there's diversity in practice. There's an increase in the volume of activities and the significance of the activities, meaning materiality, and it's expected to continue. That's what led them to take on this project."
Meanwhile, the SEC has been working on its own
Whether or not the credits are based on legitimate emissions offsets or carbon reductions will be a question for developers, sellers and buyers to answer, but the appropriate accounting treatment will still need to be found.
"At this point, those standards are still draft, but as they're currently worded, those deal more with disclosures around environmental risks," said Knachel. "They don't really address the challenges for environmental credits. At the end of the day, the FASB hasn't come out with new guidance, and the SEC hasn't come out with any sort of rule at this point. What a company really needs to be thinking about right now is their overarching business strategy for how they're going to use environmental credits. Then, once they understand that business strategy, they should then evaluate what's the accounting model that's going to be most appropriate for their organization."
