New report sheds light on Canadian firms’ use of voluntary carbon credits, implications for financial accounting
October 31, 2023
Carbon offsets are a hot topic at the COP29 climate conference underway in Baku, Azerbaijan. Negotiators are working to implement Article 6 of the Paris Agreement to create effective guidance for a market that has significant potential to spur investment in climate solutions but has been hindered by concerns over low-quality credits, double counting, and overstated greenhouse gas emissions reductions.
Canadians may be asking, who is buying carbon offsets? And why? And what kinds of projects are they supporting? Find the answers with a new research report, titled “Global & Canadian Use of Voluntary Carbon Credits and the Related Financial Accounting and Disclosure Considerations.” Download the report here.
This study is the second in a three-part series from the Institute for Sustainable Finance at Smith School of Business, Queen’s University, CPA Canada and the International Federation of Accountants (IFAC). It analyzes the use of voluntary carbon credits by corporate buyers, focusing on Canadian practices and global comparisons. It also reviews the related financial accounting and sustainability disclosure implications of using carbon credits toward decarbonization targets.
“Our latest report on voluntary carbon markets highlights the importance of high-quality carbon credits in driving real climate action,” said Taryn Abate Director, Research & Thought Leadership at CPA Canada. “By examining the use of voluntary carbon credits in Canada and globally, and diving into project types, locations, and reporting requirements, this report equips organizations with the knowledge they need to navigate these markets effectively. This series provides a solid foundation to explore the role CPAs can play in fostering transparency and accountability within the voluntary carbon market ecosystem.”
"As carbon markets mature, high-quality reporting on voluntary carbon credits is essential for transparency and accountability,” said Stathis Gould, Director, IFAC. “This new report provides valuable insights into how Canadian and global companies are using and reporting on these credits, highlighting the need for consistency in financial accounting practices and decision useful disclosures. This work can help IFAC members and professional accountants to guide organizations toward meaningful decarbonization, building public trust in the carbon markets, and demonstrating the profession’s leadership in the transition to a low-carbon economy."
“The Canadian companies we analyzed seem to be thoughtful in leveraging voluntary carbon credits originated near where they operate to offset their emissions,” said Yingzhi Tang, ISF Senior Research Associate. “But carbon credits should not replace emissions abatement and better disclosures can help market observers understand the role of carbon credits in the company’s overall decarbonization strategy.”
Key findings regarding the use of voluntary carbon credits:
• 51 of the 58 largest public companies in Canada have set GHG emission reduction targets. Only 13 disclosed project-level details about the carbon credits they purchased towards meeting their targets between 2020 and 2022.
• Among the 13 Canadian corporate buyers disclosing, financial services (0.53 million credits) and software (0.29 million credits) sectors accounted for 95 per cent of the total disclosed carbon credit purchases between 2020 and 2022. In comparison, the global purchases were led by fossil fuels, manufacturing, services and transportation.
• Regarding the carbon credit types, over 80 per cent are emission reduction and impermanent removal, compared to around 16 per cent of mixed credits and less than 0.5 per cent of long-duration removal. Tree planting is an example of an impermanent removal project.
• Canadian corporate buyers have a strong “home bias” when sourcing projects. Half of the credits are generated in North America and 38.7% in Canada. In contrast, globally, most purchased credits originate from developing countries.
Financial accounting considerations and sustainability-related disclosures
• While there are no specific International Financial Reporting Standards (IFRS) related to carbon credits, considerations for purchasers of voluntary carbon credits are focused on identifying if the carbon credit is considered an asset. If recognized as an asset, they can be further classified as either inventories or intangible assets on the balance sheet. If not recognized as an asset, the cost of acquiring the credits will be recognized as an expense.
• Globally, there are a variety of sustainability disclosure standards and frameworks ranging from voluntary to mandatory. In most cases, companies must report their gross GHG emission targets, excluding carbon credits. Interoperability between sustainability reporting standards and frameworks is a key issue for companies that may be subject to reporting in compliance with multiple standards.
Understanding Voluntary Carbon Markets Series
Part 1: The first part in this series provided a crucial resource for existing and potential market participants, including businesses, capital providers, accountants and the broader public, on the state of VCMs and their future development: Download the full report: "Understanding Voluntary Carbon Markets, Part 1: Key considerations for professional accountants and purchasers on the carbon credit life cycle."
Coming up next
Part 3: Based on the understanding of VCMs gained in this series and substantiated through a variety of interviews with corporate buyers, project developers, verification and validation bodies, and other intermediaries, the final report will provide ecosystem views on quality credits and the future of VCMs. It will also explore the role of professional accountants in enhancing the integrity of VCMs.
About the Institute for Sustainable Finance
The Institute for Sustainable Finance was launched in 2019 as the first-ever cross-cutting and collaborative hub in Canada that fuses academia, the private sector, and government with the singular focus of increasing Canada’s sustainable finance capacity. The institute's mission is to align mainstream financial markets with Canada’s transition to a prosperous sustainable economy.
About CPA Canada
Chartered Professional Accountants of Canada (CPA Canada) works collaboratively with the provincial, territorial and Bermudian CPA bodies, as it represents the Canadian accounting profession, both nationally and internationally. This collaboration allows the Canadian profession to champion best practices that benefit business and society, as well as prepare its members for an ever-evolving operating environment featuring unprecedented change. Representing more than 220,000 members, CPA Canada is one of the largest national accounting bodies worldwide. cpacanada.ca
About IFAC
IFAC, by connecting and uniting its members, makes the accountancy profession truly global.
IFAC member organizations are champions of integrity and professional quality, and proudly carry their membership as a badge of international recognition.
IFAC and its members work together to shape the future of the profession through learning, innovation, a collective voice, and commitment to the public interest.
Media contact
David Watson
Associate Director, Communications, Institute for Sustainable Finance
david.watson@queensu.ca
C: 613.796.3605
Media contact
David Watson
Associate Director, Communications, Institute for Sustainable Finance
david.watson@queensu.ca
C: 613.796.3605