Accounting for carbon credits bought and held

Why is accounting for carbon credits unclear under IFRS?

Carbon credits do not fit neatly into any standard: they have no physical substance, are not financial assets, and may be held to sell, to retire, or to fulfil customer contracts. IFRIC 3 on emission rights was withdrawn in 2005, and in January 2025 the IASB deferred its project on pollutant pricing mechanisms to its next agenda consultation. Companies therefore choose a policy based on the business purpose of each purchase and apply it consistently. See emissions allowances and climate-related tax incentives and deferred tax.

How are carbon credits accounted for under IFRS?

• Held for sale in the ordinary course of business, by traders or developers: inventory under IAS 2, at the lower of cost and net realisable value, or at fair value less costs to sell for commodity broker-traders.
• Held for the company's own future retirement: usually an intangible asset under IAS 38, at cost, with the revaluation model available only if there is an active market; tested for impairment under IAS 36; derecognised and expensed when retired.
• Retired immediately on purchase: expensed, because the benefit is consumed at once.
• Bought as part of another product or service, such as carbon-neutral delivery: part of that cost, not a separate asset.

Some credits held for own use may instead meet the definition of inventory if they are consumed in producing goods or services, which needs assessment. See IAS 38 intangibles.

Accounting for carbon credits in practice: a buyer's first year

A company buys 20,000 carbon credits at US$ 15 each, US$ 300,000, to retire over two years against its emissions. It retires 8,000 in year one. At the year-end, the market price for similar credits has fallen to US$ 10.

Under IFRS, the credits are an intangible asset at cost, and the 8,000 retired are expensed. The 12,000 still held generate no cash inflows, so their recoverable amount is fair value less costs of disposal, and the company recognises an impairment of US$ 60,000. Under US GAAP after adopting ASU 2026-02, the whole US$ 300,000 would be expensed on purchase, because retiring the credits voluntarily does not meet the asset recognition threshold. The company's sustainability report shows the 8,000 credits retired separately from its emissions. See carbon credits in reporting.

What about forward contracts and project investments?

A contract to buy credits in the future is a contract over a non-financial item. If it can be settled net, for example because credits are readily convertible to cash, it is within IFRS 9 as a derivative unless it is held for the company's own expected use, the own-use exemption. Prepayments to projects for future credits are usually prepayment assets until the credits are delivered, assessed for recoverability. Equity or loans in project developers follow IFRS 9 or the consolidation and equity method standards. A public commitment to retire credits for emissions already made can create a provision. See climate commitments and provisions.

What does ASU 2026-02 change under US GAAP?

ASU 2026-02, issued in May 2026, creates Topic 818 for environmental credits and obligations. A credit is recognised as an asset only if it is probable that it will be used to settle an environmental credit obligation, sold or transferred; otherwise its cost is expensed. Compliance credits are carried at cost; other credits held for sale at cost less impairment, or at fair value under an irrevocable election by class. Compliance obligations are measured at the carrying amount of credits held for them plus the fair value of any shortfall, presented gross. It applies to public business entities for annual periods beginning after 15 December 2027 and to others a year later, with early adoption permitted, through a cumulative-effect adjustment to opening retained earnings. See emissions and ZEV credits, which Topic 818 also covers.

How do sellers and developers account for credits?

A developer that generates credits as part of its business accounts for the costs of generating them, and credits held for sale, as inventory, and recognises revenue under IFRS 15 when control of the credits passes to the customer, usually on transfer in the registry. Brokers acting as agents recognise only their commission; see principal or agent. Sales of credits that are not part of ordinary activities are gains, not revenue. See IFRS 15 revenue.

What should be disclosed?

The accounting policy and the judgements behind it, the carbon credits held and their carrying amounts, amounts expensed and impaired, and commitments to buy credits. The quantities should be consistent with those reported under IFRS S2 and ESRS E1, which ask how far the company relies on credits, and with any public claims. See net zero targets and California AB 1305.

This guide is general information. It is not tax or legal advice for your situation.