Net zero strategy |
Direct financial statement impacts |
Technology Technology that exists today will provide a partial solution to the net zero equation for some companies. Companies may undertake capital projects to improve the efficiency, cost, and effectiveness of their operations and reduce emissions. Examples include electrification (replacing technologies that run from fossil fuels such as natural gas with those that use electricity) or making changes to buildings and infrastructure (e.g., green certifying buildings or adding a solar roof to the building or parking lot). Companies are also engaged in research to develop and improve technology to both reduce emissions or to absorb emissions that are not able to be reduced. For example, carbon capture and storage is a way of removing carbon emissions from the atmosphere by capturing the carbon dioxide produced by power generation or industrial activity, transporting it to a storage site, and then storing it deep underground. |
• Companies that invest in technology need to determine whether or not to capitalize the improvement. An expenditure that adds to the productive capacity or improves the efficiency of an existing facility should be considered a capital item. Costs occurring in the preliminary stage of a capital project should be expensed. • Companies involved in researching new technologies need to determine whether research and development (R&D) costs should be capitalized or should be expensed as incurred. Only costs for R&D activities that have an alternative future use should be capitalized. Costs such as research into new technologies and design or modification of possible alternative technologies would typically be expensed. • Companies should also consider whether government incentives were provided to encourage technological investments, and if so, whether government grant accounting applies. |
Net zero strategy |
Direct financial statement impacts |
Renewable energy Investment in renewable energy sources (e.g., wind, solar, hydro) is booming, and numerous non-traditional investors are entering this space. A renewable energy credit, or REC, is created for each megawatt hour of electricity that is generated from a renewable energy resource. A REC provides evidence that power has been generated by a qualifying renewable resource and is typically certified by a state or other agency, is separable from the underlying power, and may be purchased or sold. While some companies may choose to directly invest in renewable projects and retain the RECs created by the project, others are obtaining RECs directly from power generators or moving to facilities with “greener” energy supplies. Typically, only the REC holder can “claim” the lower emissions resulting from using a renewable generating source, allowing them to offset power generated from other sources for purposes of any net zero commitments. |
• Companies that invest in renewable energy projects need to consider the structure of the investment and whether it would result in consolidation of the issuing entity or require another method of accounting (e.g., equity method, fair value, measurement alternative). In addition, investors in these projects need to consider the accounting for any tax credits and, if the equity method of accounting is required, whether the hypothetical liquidation at book value method (HLBV) should apply. • Companies purchasing RECs through green power purchase agreements will need to consider whether lease or derivative accounting applies to the purchase agreement or if consolidation is required. There may also be tax considerations. • There is currently no specific US GAAP covering the accounting for RECs; however, we believe a company may account for a REC as (1) inventory (if held for use or sale) or (2) an intangible asset (if held for use). The approach selected should be applied consistently, be reasonable based on the intended use, and be properly disclosed. A voluntary change in accounting approach would be treated as a change in accounting principle, and the company would need to demonstrate that the alternative accounting principle is preferable. • Companies such as utilities that are required to obtain RECs to meet state targets for green power should expense the cost of purchased RECs when they are submitted to meet the compliance obligation. • Companies that are obtaining RECs to voluntarily reduce emissions also need to consider when a REC is “used” and therefore, retired (i.e., removed from the books). General practice is that the REC should be retired (with the state or other applicable agency) and expensed when the company applies it to its net zero goals (i.e., when the REC is voluntarily surrendered to the state or other applicable agency). The REC would not be amortized over a period of time. |
Net zero strategy |
Direct financial statement impacts |
Carbon offset programs A carbon offset allows a company to invest in projects to offset or “reduce” the greenhouse gas emissions it produces. Companies typically purchase these to offset their emissions that cannot be eliminated. Carbon offsets are intended to represent an actual reduction of one ton of carbon dioxide or greenhouse gas (GHG). Carbon offsets can be generated from programs such as reforestation, farm management, methane abatement, and carbon capture. There are numerous carbon offset programs and various forms of verification in the carbon offset market. Verification of offset programs is an evolving area and questions have been raised about whether the verification is truly substantive (e.g., are the offsets incremental to the emissions that would have been reduced absent the offset project). To avoid inadvertent greenwashing, companies that are considering investing in offset projects or purchasing carbon offsets should understand the underlying source of the carbon reduction, the likelihood of reduction absent the project (i.e., is it incremental to business as usual), and the criteria used to determine the amount of offsets generated. Also, it is important to ensure that the methods used to calculate the reduction in emissions are rigorous and accurate. |
• Companies that directly purchase or invest in the assets used in an offset program (e.g., planting trees for reforestation, methane gas capture at a landfill) should consider whether to capitalize the offset-generating asset as property, plant, and equipment or as inventory. • There is currently no specific US GAAP covering the accounting for carbon offsets. However, we believe that companies that purchase carbon offsets may classify a carbon offset as (1) inventory (if held for use or sale) or (2) an intangible asset (if held for use). The approach selected should be applied consistently, be reasonable based on the intended use, and be properly disclosed. A voluntary change in accounting approach would be treated as a change in accounting principle, and the company would need to demonstrate that the alternative accounting principle is preferable. • Another consideration is when a carbon offset is “used” and therefore, retired (i.e., removed from the books). General practice is that the carbon offset should be retired (with the state or other applicable agency) and expensed when the company applies it to its net zero goals (i.e., when the offset is surrendered to the state or other applicable agency to demonstrate compliance or when the company voluntarily surrenders it if compliance is not required). The offset would not be amortized over a period of time. |
Bio-energy with carbon capture and storage (BECCS) | Process of extracting bioenergy from biomass and capturing and storing the carbon, thereby removing it from the atmosphere |
Biomass energy | Energy found in plants |
Carbon capture / carbon sequestration | Process of extracting carbon and storing it, thus preventing it from being emitted in the atmosphere |
Carbon negative | Removing more carbon dioxide from the atmosphere than is emitted |
Carbon neutral | Achieving net zero carbon dioxide emissions by balancing carbon dioxide emissions with removal or elimination of carbon dioxide emissions altogether |
Carbon offset projects | Projects that allow companies to invest in environmental projects to make up for emissions of greenhouse gases |
Carbon credit | Tradable instrument that conveys a right to emit a unit of pollution |
Carbon pricing | Captures the external costs of greenhouse gas emissions |
Carbon sink | A forest, ocean, or other natural environment that has the ability to absorb carbon dioxide from the atmosphere |
Carbon tax | Government-imposed fee on any company that burns fossil fuels (coal, oil, and natural gas) |
Certification | A Renewable Energy Credit is an instrument that certifies the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable energy resource |
Decarbonization | Phasing out carbon dioxide emissions from the use of fossil fuels |
Deforestation | Clearing a wide area of trees |
Electrification | The process of replacing technologies that use fossil fuels with those that use electricity as a source of energy |
Emission allowance | Tradable instrument that conveys a right to emit a unit of pollution |
Greenhouse gas | Primarily water vapor, carbon dioxide, methane, nitrous oxide, and ozone, these gasses absorb and emit radiant energy within the thermal infrared range, causing warming of the atmosphere. |
Green power | Power derived from renewable energy sources and technologies that provide the highest environmental benefit—e.g., solar, wind, geothermal, biogas, biomass, and hydroelectric |
Green taxonomy | Classification system that identifies the activities or investments that deliver on environmental objectives, which can help investors identify opportunities for investments that comply with sustainability criteria |
Greenwashing | Creating the impression, sometimes inadvertently, that the company is doing more to protect the environment than it is |
Nuclear energy | Energy derived from nuclear reactions |
Renewable energy | Energy that is derived from a renewable resource - examples include hydro, wind, geothermal, solar, and biomass energy |
Renewable energy credit (REC) | One REC is equal to one megawatt hour of electricity generated from a renewable energy source |
Scope 1 emissions | Direct emissions from the activities of an organization or activities under their control |
Scope 2 emissions | Indirect emissions from purchased electricity, steam, heating, and cooling consumed by an organization |
Scope 3 emissions | Emissions resulting from activities from assets not owned or controlled by an organization but occur within its value chain - includes all sources not within Scope 1 or Scope 2 |
Verification | The process of evaluating calculations of the actual amount of greenhouse gas emissions avoided or sequestered through implementation of a carbon offset project |