Climate commitments and provisions

When do climate commitments create a provision?

IAS 37 requires a provision when a company has a present obligation, legal or constructive, as a result of a past event, an outflow of resources is probable, and the amount can be estimated reliably. A constructive obligation arises when a company's published policies or specific statements create a valid expectation in others that it will discharge certain responsibilities. A climate commitment can meet that description, but the obligation must also arise from a past event: something that has already happened, independent of the company's future actions. Spending to cut future emissions does not pass that test, because the company could avoid it by changing its future operations, however unlikely that is. See IAS 37 provisions explained.

What did the IFRS Interpretations Committee decide?

The Committee considered a manufacturer that publicly committed to cut its annual emissions by at least 60% within about nine years and to offset its remaining emissions from then on by buying and retiring carbon credits. It concluded that whether the statement creates a constructive obligation depends on the facts and requires judgement, but that it does not by itself create a present obligation: the costs of cutting emissions and of future offsetting relate to future operations. A present obligation to offset arises only as the emissions the company has committed to offset occur, and a provision is then recognised if the amount can be measured reliably. The cost is an expense unless another standard allows it to be included in the cost of an asset. The Committee found the existing requirements adequate and added no standard-setting project, finalising the decision in March 2024 with publication in April 2024.

Climate commitments in practice: a manufacturer's year-end

A packaging manufacturer reviews four climate-related items at 31 December 2026, in EUR thousand.

The company holds 70,000 free allowances at nil and 30,000 purchased at EUR 68 each. Under the widely used net liability approach, its ETS provision is the carrying amount of the allowances it holds for 2026 emissions, EUR 2,040 thousand, plus the 20,000-tonne shortfall at the year-end price of EUR 75, EUR 1,500 thousand. The clean-up is a constructive obligation from past contamination, because the company publishes and honours a policy of remediating contamination it causes. The net zero pledge creates no provision in 2026. In 2030, if the commitment is a constructive obligation, the company will accrue the cost of credits as it emits: on its planned 60,000 tonnes of residual emissions at an assumed EUR 20 a credit, about EUR 1.2 million that year. See emissions allowances and carbon credits in reporting.

Which climate-related provisions do arise?

• Emissions allowances for emissions already made, under the EU ETS and similar schemes.
• Levies and carbon taxes, recognised when the activity that triggers payment occurs, under IFRIC 21.
• Environmental clean-up required by law or by a constructive obligation from past damage.
• Decommissioning and restoration, which may grow or come forward if assets are retired early. See decommissioning costs.
• Onerous contracts, such as long-term supply or offtake contracts made unprofitable by carbon costs. See onerous contracts.
• Climate litigation, usually a contingent liability disclosed rather than provided for, unless an outflow becomes probable.

How else do climate commitments affect the accounts?

A commitment that creates no provision can still change other numbers. Plans to replace equipment early shorten useful lives and can trigger impairment tests; expected carbon costs feed into value in use; and the commitments, the related judgements and the sources of estimation uncertainty should be disclosed where material. Assumptions in the financial statements should be consistent with the company's transition plan and sustainability report. See climate and useful lives and climate risk in the financial statements.

Will the IAS 37 rules change?

The IASB published an exposure draft, Provisions: Targeted Improvements, in November 2024. It proposes clarifying the present obligation test, including for levies triggered by thresholds, with the withdrawal of IFRIC 21, and requiring a discount rate that excludes the company's own credit risk. The Board was still redeliberating the proposals in September 2026, and no effective date had been set. The changes could affect the timing of levy provisions, but are not expected to change the conclusion that cutting future emissions is a future cost. See contingent liabilities.

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