Major US Companies Challenge FASB's Proposed Standard for Environmental Credits

Several major U.S. companies, including Constellation Energy, General Motors, and Ford, have raised concerns about the FASB's proposed accounting standard for environmental credits, citing potential impacts on financial reporting, income statement volatility, and challenges in fair value determination.

The proposal seeks to clarify and standardize accounting for environmental credits, which companies use to comply with regulations or voluntarily lessen their environmental impact. However, the changes could cause major operational and financial difficulties, especially in valuing these credits and obligations in markets with limited trading activity, according to April 15, 2025, comment letters.

"...compliance programs exist that do not have a cash settlement option which will result in the proposed accounting model to be inoperable in situations where an entity is in a deficit position as of a reporting date and no credits are available to purchase and no credits are forecasted to become available to purchase within the compliance window," General Motors (GM) wrote.

Concerns Over Valuation and Disclosure Rules

GM's concerns surround the difficulty in valuing environmental credit obligations that aren't funded. They believe the proposed rule, which assumes the reporting date is the end of the compliance period, doesn't accurately reflect how companies manage these credits. Similarly, Ford Motor Company warned that not accounting for future actions to mitigate liabilities could lead to misleading financial statements. Ford emphasized that accounting rules should show ongoing progress towards meeting obligations. And Constellation Energy, the nation's largest producer of emissions-free energy, argued that the proposed detailed disclosure requirements might not be helpful to investors and could encourage earnings manipulation. They suggested focusing on significant changes rather than exhaustive details in interim reports, as many companies might not see major changes from the previous year.

"We note that many entities with environmental credit activity may not have significant or material changes from the prior annual period," Constellation Energy said. "Thus, in many instances, the interim requirements could introduce additional cost and burden on preparers with minimal, if any, potential benefit to users of the financial statements."

Others such as Seaboard Corporation and Anew Climate LLC, also urged the FASB to reconsider proposed rules, noting that accounting models need to accurately reflect the economic realities of environmental credits and obligations. The current proposal could discourage market participation and investment in environmental initiatives, ultimately hindering efforts to achieve sustainability goals, they argue.

"We believe disallowing non-obligated parties to count environmental credits as assets may have a negative impact on the voluntary energy market by de-incentivizing market participation," Seaboard Corp. wrote. "As proposed, the ASU would disadvantage investment in new environmental projects, as environmental credits generated would have no Day 1 value."

Growing Market; Little Rules

The letters come at a time when the voluntary carbon market is rapidly growing, with over $16.3 billion in funding in 2024 alone, indicating its evolution into a recognized asset class, according to published data. This growth is attracting institutional investors and becoming essential for companies aiming to meet or exceed climate commitments. However, there is currently no specific authoritative guidance in U.S. GAAP for the accounting of environmental credits (assets) or environmental credit obligations (liabilities).

As a result the FASB developed Proposed Accounting Standards Update (ASU) No. 2024-ED910, Environmental Credits and Environmental Credit Obligations (Topic 818) last year, to provide a comprehensive accounting standard for reporting environmental credits-i.e. tradable certificates representing the right to emit a certain amount of greenhouse gases or other pollutants. The board received 35 comment letters by the April 15 deadline from various companies, organizations, accounting groups, and other entities.

The proposal would apply to all types of environmental credits, including emissions allowances, renewable energy certificates, and carbon offsets, used in regulatory programs like cap-and-trade systems, renewable portfolio standards, and voluntary carbon markets. The proposal would impact entities that generate, buy, or sell environmental credits, requiring them to recognize and measure these credits consistently, "enhancing transparency and comparability in financial reporting."

Proposals Fate? Uncertain

The proposal's fate is uncertain, with its potential adoption as GAAP hanging in the balance, as the feedback from comment letters has been varied and inconsistent, reflecting diverse perspectives from different companies and organizations that responded

The Edison Electric Institute (EEI) and American Gas Association (AGA), for instance, support the proposal, but expressed concerns about the intent-based model for asset recognition, citing potential inconsistencies. Their member companies use various environmental credits, including emission allowances, renewable energy credits, carbon offsets, and others, to meet statutory and voluntary program requirements, they said in letters to the FASB.

Further, American Fuel & Petrochemical Manufacturers recommended net presentation of environmental credit assets and obligations on balance sheets, as they believe gross presentation could be misleading to investors. In contrast, the FASB proposal requires separate presentation of these items to provide transparency into an entity's rights and obligations.

Major accounting firms have also weighed in on the proposal. While they generally support the FASB's efforts to provide clarity and consistency, they also raised concerns about certain aspects of the proposal and offered suggestions for improvement.

KPMG, for example, suggested removing the transferability criterion from the definition of environmental credits, arguing that it may exclude credits used solely to settle regulatory obligations.

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