Accounting for Environmental Credits: What Utilities Need to Know About ASC 818

For decades, utilities have accounted for environmental credits—renewable energy certificates, emissions allowances, renewable identification numbers—by analogy to other standards, primarily Topic 330 (Inventory) and Topic 450 (Contingencies). There was no authoritative GAAP guidance dedicated to the subject. That changes with FASB Accounting Standards Update 2026-02, which establishes Topic 818, Environmental Credits and Environmental Credit Obligations , as the first comprehensive framework for recognizing, measuring, presenting, and disclosing environmental credits under U.S. GAAP.

For utility finance professionals, the new standard matters now even though it is not yet effective. Utilities are among the most active participants in environmental credit markets—purchasing renewable energy certificates to satisfy renewable portfolio standards, managing emissions allowances under cap-and-trade programs, and increasingly acquiring voluntary carbon offsets to meet clean energy commitments. Understanding how ASU 2026-02 will change the accounting for these activities is essential preparation for a compliant and efficient adoption.

What ASU 2026-02 Covers

Topic 818 applies to any entity that generates, purchases, or receives environmental credits, or that has a regulatory compliance obligation that may be settled with environmental credits. For utilities, the most common types of environmental credits subject to the new standard include:

• Renewable energy certificates (RECs) originating from state renewable portfolio standards
• Emissions allowances from domestic cap-and-trade programs such as RGGI and California’s AB 32 program
• Renewable identification numbers (RINs) from the federal Renewable Fuel Standard
• Voluntary carbon offsets used to meet net-zero or carbon-neutral commitments

The standard draws a critical distinction between two categories of environmental credits that drives the accounting in different directions: compliance environmental credits —those an entity is probable of using to settle a regulatory obligation—and noncompliance environmental credits —all others, including credits held for trading or to satisfy voluntary initiatives.

Recognition: When Does an Environmental Credit Become an Asset?

Under ASU 2026-02, an entity must recognize an environmental credit as an asset when it is probable that the credit will be used to settle a compliance obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer. This is a probability-based recognition threshold that will require utilities to assess the intended use of environmental credits at the time of acquisition and at each reporting date.

Environmental credits acquired to satisfy voluntary net-zero or carbon-neutral initiatives—where there is no enforceable regulatory compliance obligation—are treated differently: the cost of acquiring those credits is expensed when incurred rather than recognized as an asset. This is a significant change from current practice, where many utilities have been capitalizing voluntary environmental credits as intangible assets.

Environmental credit obligations —the liability side of the equation—must be recognized when events occurring on or before the reporting date result in a compliance obligation. The standard requires that an entity assume the reporting date is the end of the compliance period, regardless of whether the compliance period actually ends on that date. This means utilities may need to accrue environmental credit obligations more frequently than under current practice.

Measurement: A Two-Track Approach

Topic 818 establishes different subsequent measurement requirements for compliance and noncompliance environmental credits:

Compliance Environmental Credits

Credits that a utility is probable of using to settle a regulatory obligation are subsequently measured at cost and are not tested for impairment at each reporting date. The rationale is that these credits have a defined use—settling a known obligation—and fair value fluctuations are not relevant to their accounting as long as the compliance use remains probable.

Noncompliance Environmental Credits

All other environmental credits are subsequently measured at cost less impairment . Impairment testing is required at each reporting date, and impairment expense must be recognized when carrying value exceeds fair value. Unlike some impairment frameworks, subsequent reversal of a previously recognized impairment loss is prohibited under Topic 818. Additionally, entities may elect to measure eligible classes of noncompliance environmental credits at fair value through earnings —a policy election that may simplify accounting for utilities that actively trade environmental credits.

Environmental Credit Obligations: The Liability Side

Topic 818 establishes a specific measurement framework for the liability that arises when a utility is subject to a regulatory compliance program. The obligation is measured using a two-part approach:

• Funded portion: The carrying amount of compliance environmental credits the entity holds and expects to use to settle the obligation. Because these assets and liabilities are measured at cost, the funded portion of the obligation is effectively matched to the cost of the credits held to settle it.
• Unfunded portion: If a utility holds insufficient compliance credits at the reporting date, the unfunded shortfall is measured at the fair value of the credits needed to settle it. This creates an asymmetry in the measurement framework: the funded portion uses cost while the unfunded portion uses fair value—a design that reflects the economic reality of needing to acquire additional credits at market prices.

The obligation is derecognized when the utility remits the required credits to the regulator at the end of the compliance period. Utilities that manage large REC or allowance portfolios will need to build systems that can track the funded and unfunded portions of obligations at each reporting date.

What Changes Most for Utilities

Several aspects of Topic 818 represent meaningful changes from current practice for many utilities:

Voluntary credits are expensed, not capitalized. Utilities that have been recording voluntary carbon offsets or voluntary RECs as intangible assets will need to change their accounting at adoption. Under Topic 818, voluntary environmental credits are expensed when acquired unless they will be used to settle a compliance obligation.

Impairment is required for noncompliance credits. Environmental credits held for trading or future sale must be tested for impairment at each reporting date. Utilities with large inventories of noncompliance credits—for example, RECs held speculatively or for future sale—will face new impairment assessment requirements.

Balance sheet presentation is more specific. Topic 818 requires compliance environmental credit assets to be presented separately from environmental credit obligation liabilities on the balance sheet. Netting of compliance assets and compliance liabilities is not permitted. This will affect presentation for utilities that currently net these items.

For a deeper look at how regulatory accounting frameworks interact with these types of environmental obligations, see our articles on GASB 62 / ASC 980: Future Recoverable Costs , Regulatory Accounting Advantages Under GASB 62 and ASC 980 , and Conservative Accounting Best Practices for Your Financials and Ratepayers .

Effective Dates and Transition

Topic 818 is effective for public business entities for annual periods beginning after December 15, 2027, with interim periods included. For all other entities—including electric cooperatives and investor-owned utilities that follow FASB standards—the effective date is annual periods beginning after December 15, 2028. Early adoption is permitted as of the beginning of an annual reporting period.

Transition requires a retrospective approach via cumulative-effect adjustment to opening retained earnings (or the equivalent equity component) at the beginning of the adoption period. Prior periods are not recast. At adoption, entities must assess all existing environmental credits against the new recognition criteria and remeasure accordingly.

Utilities should begin their assessment now by inventorying all environmental credits currently on the books, classifying each as compliance or noncompliance under the new framework, identifying voluntary credits currently capitalized that will require derecognition at adoption, and modeling the balance sheet impact of presenting compliance assets and obligations separately. For co-ops and utilities participating in active REC markets or cap-and-trade programs, the accounting system changes required for Topic 818 compliance may be substantial and take time to implement. Starting early is the right approach.

For background on how CIAC and other utility-specific transactions are accounted for, see our article on How Do You Account for CIAC — Contributions in Aid of Construction .

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