This paper updates and extends the analysis set out in ISDA’s October 2023 paper on accounting for carbon credits. While preserving the original focus on the accounting treatment of voluntary carbon credits (VCCs) and compliance carbon credits (CCCs), it expands the analysis to address emerging issues and reflect important developments in accounting standard setting.

At present, there are no specific accounting standards under International Financial Reporting Standards (IFRS®) dedicated to carbon credits, but existing requirements across various standards provide relevant guidance. Under US Generally Accepted Accounting Principles (US GAAP), the Financial Accounting Standards Board (FASB) recently issued an Accounting Standards Update dedicated to environmental credits and environmental credit obligations (ECOs). This whitepaper addresses key accounting questions under existing guidance for both CCCs and VCCs.

The paper covers accounting considerations for entities that expect to use carbon credits to offset their own emissions, those that will trade these instruments in a secondary market and those that intend to do a combination of both. The paper addresses issues relevant to the application of both IFRS accounting standards and US GAAP, although IFRS accounting standards is the primary focus.

Recent standard setting by the FASB and guidance from the International Accounting Standards Board (IASB) are not fully aligned. ISDA encourages both boards to work together where possible to develop consistent accounting standards for carbon credits under IFRS accounting standards and US GAAP. ISDA recognizes that differences in the boards’ definitions of a liability and the potential scope of the IASB’s possible future project on pollutant pricing mechanisms may limit these opportunities.

As discussed in this paper, IFRS accounting standards require consideration of both legal and constructive obligations, including whether emissions or other past events have created a present obligation and whether an entity’s actions have created a valid expectation that it will fulfil a public commitment. By contrast, Accounting Standards Codification 818 focuses on enforceable ECOs arising from regulatory compliance programs. These differences may limit convergence for VCC arrangements or public offsetting commitments and for regulated compliance schemes.

In December 2022, ISDA published the 2022 ISDA Verified Carbon Credit Transactions Definitions and related template confirmations for spot, forward and options contracts to support the trading of VCCs. In parallel, ISDA explored the key legal issues associated with the voluntary carbon market and recommended steps to create greater legal certainty in two whitepapers, published in December 2021 and November 2022.

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