Accounting for Carbon: How New Rules Could Affect Markets

➡️ Accounting choices aren’t neutral—they set incentives that influence how carbon markets grow and function.

By Paul Munter and Mika Morse - Link to the article on Responsible Investor

Most people missed it. In the middle of a noisy year for climate policy, the Financial Accounting Standards Board quietly completed redeliberations on a first-ever U.S. standard for environmental credits—carbon offsets, renewable-energy certificates (RECs), and similar instruments—and directed staff to ballot a final Accounting Standards Update (ASU). The text is being drafted now; effective dates are expected to start with fiscal years beginning after December 15, 2027 for public companies, with early adoption permitted.

On its face, this looks tidy: one model, fewer gray areas. Companies get clarity; investors get comparability. Given that many U.S. companies haven’t been publicly disclosing credit purchases—because they aren’t financially material yet—and that U.S. compliance programs are still small by global standards, you could conclude this won’t move markets.

We think that conclusion is wrong.

What just happened (in plain English)

Under FASB’s model, an environmental credit is recognized as an asset only if it’s probable you will either (a) use it to settle a regulatory obligation, or (b) sell it. Credits intended for voluntary use (to “offset” emissions) are expensed when acquired, and nonrefundable deposits for future credits are expensed unless they’re probable for compliance or sale. For assets, “compliance” credits stay at cost without remeasurement; “noncompliance” credits are subject to impairment, with an optional fair-value election for a class of eligible noncompliance credits acquired in exchange transactions. FASB rejected a portfolio approach to subsequent measurement and scaled back several granular disclosures from the proposal.

This is a significant departure from common U.S. practice, where many preparers have analogized to intangibles or inventory to carry credits until retirement or sale—approaches that avoid a day-one hit to earnings and preserve optionality.

Why this is bigger than an accounting footnote

It changes buyer incentives. When voluntary-use credits must be expensed upfront, optional buyers become reluctant buyers. Pre-buying and warehousing credits—often essential to help finance new carbon-removal and high-quality reduction projects—becomes harder to defend in P&L terms. That can thin liquidity and slow private capital flowing to projects that need early demand.

It forces premature “intent.” The standard ties accounting to management’s intent at acquisition. Companies that buy more than they need to keep strategic options open (use later or sell) will face pressure to sort each purchase into “asset” or “expense” buckets at day one—without the portfolio flexibility many advocated in comments.

It affects offtake financing. Deposits and prepayments for future credits—a common tool to underwrite supply—are expensed unless they’re probable for compliance or sale. That dampens the appeal of offtakes precisely when high-integrity supply needs scale financing.

The investor-protection lens

The concern is not just about balance-sheet mechanics. It’s about what investors ultimately see and how markets develop. Even if environmental credits are not widely disclosed today, the economic incentives created by accounting choices shape investor-relevant outcomes—what projects get financed, whether companies can efficiently procure high-quality removals, and how credibly decarbonization plans are executed.

Materiality judgments should be grounded in the perspective of the reasonable investor, not management’s convenience. For companies that have articulated long-term climate commitments, investors have a clear interest in understanding how those commitments will be met—including the role of environmental credits. That suggests disclosures may be more relevant than some companies assume. And here, professional skepticism matters: auditors need to challenge management’s assertions about materiality and ensure those judgments reflect not only quantitative thresholds but also qualitative materiality to investors.

Viewed through that lens, a model that forces all voluntary-use purchases into immediate expense, while limiting portfolio flexibility, risks discouraging the long-term planning and economically rational behaviors that investors expect from credible decarbonization strategies.

Why now—and why it surprised people

The timing is striking. FASB moved forward on environmental credits during an intense, polarized moment for U.S. climate policy—territory many would assume a cautious standard setter might avoid. Yet the Board completed redeliberations and instructed staff to ballot the final ASU in August 2025, with effectiveness in 2028 for most public companies. Coverage was modest, and several proposed disclosures were pared back after preparer pushback, which may have muted attention.

Where we go from here

The U.S. has acted first. Now the spotlight shifts to the International Accounting Standards Board (IASB), which has not yet taken on a project for environmental credits. When it does, it will be entering a more globally interconnected market than the one FASB addressed.

The lesson from the U.S. is not that clarity is unimportant—consistency has real value. The lesson is that accounting choices can reshape markets, even when they look like technical fixes. By tying recognition to intent at purchase and expensing many voluntary-use credits immediately, FASB may have unintentionally created headwinds for the very markets policymakers are trying to foster.

If the IASB approaches this with an eye to how accounting rules influence capital flows and market development, it can avoid locking in the same frictions. At a moment when governments are seeking to integrate voluntary and compliance systems, global investors will be watching. The IASB has an opportunity to build a framework that reflects economic reality and supports the growth of coherent international carbon markets—without repeating the pitfalls of the U.S. model.

Authors:
Paul Munter served as the SEC’s Chief Accountant and is a member of the Greenhouse Gas Protocol Independent Standards Board. Mika Morse is co-lead of the Climate Liabilities & Assets Initiative (CLAI) and CEO of Goldfinch Strategies.