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In 1996 the Kyoto Protocol established a global policy aimed at reducing green house gas (GHG) emissions. In response, slow steady steps are being taken to implement carbon emission limits. Markets are being established so that companies can exchange carbon allowances. Turning the environment, a public good, into private property presents many economic challenges.
India comes under the third category of signatories to UNFCCC. India signed and ratified the Protocol in August, 2002 and has emerged as a world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the past few years. According to Report on National Action Plan for operationalising Clean Development Mechanism(CDM) by Planning Commission, Govt. of India, the total CO2-equivalent emissions in 1990 were 10, 01, 352 Gg (Gigagrams), which was approximately 3% of global emissions. So, we need to understand the important aspects for the carbon credits and its accounting norms for future improvement in environment.
This paper has been containing following aspects:
What is carbon Credit? Globle Warming
Carbon Credits in India.
Accounting Norms On Carbon Credit In India
India Tops In Assigning Emission Reduction Task
This paper is useful to the researcher, Government, students and various institutions of
India for the future improvement in environment.
WHAT IS CARBON CREDIT?
A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide.
The Collins English Dictionary defines a carbon credit as "a certificate showing that agovernment or company has paid to have a certain amount of carbon dioxide removed from the environment".
The Environment Protection Authority of Victoria defines a carbon credit as "a generic term to assign a value to a reduction or offset of greenhouse gas emissions, usually equivalent to one tonne of carbon dioxide equivalent (CO2-e)".
Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit is equal to one metric tonne of carbon dioxide, or in some markets, carbon dioxide equivalent gases. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources.
The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.
There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbons off setters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. Buyers and sellers can also use an exchange platform to trade, such as the Carbon Trade Exchange, which is like a stock exchange for carbon credits. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously validated Clean Development Mechanism.
Kyoto Protocol is an agreement made under the United Nations Framework Convention on Climate Change (UNFCCC). The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on March 16, 1998, and closed on March 15, 1999. The agreement came into force on February 16, 2005, under which the industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). The aim is to lower overall emissions of six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs(Hydrofluro Carbon), and PFCs - calculated as an average over the five- year period of 2008-12. National targets range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increase of 8% for Australia and 10% for Iceland. The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries. Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower. The developed country would be given credits (Carbon Credits) for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project.
The Kyoto Protocol separates countries into two categories: developed countries, which are referred to as Annex I countries, and developing countries, referred to as non-Annex I countries. Annex I countries are required to reduce their greenhouse gas ("GHG") emissions by a collective average of 5% below the 1990 baseline by 2012. Non-Annex I countries have no GHG emission reduction obligations but may participate by implementing GHG reduction projects that can generate carbon credits which can then be sold to Annex I buyers to meet their requirements. Annex I countries can acquire the right to pollute beyond their assigned limits through three mechanisms: Clean Development Mechanism ("CDM"), Joint Implementation ("JI"), and Emissions Trading. CDM provides for Annex I Parties to implement projects that reduce emissions in non-Annex I countries in return for certified emission reductions ("CERs"). The CERs generated by such project activities can then be used by Annex I Parties to help meet their emissions targets under the Kyoto Protocol. CDM projects must be approved by a designated national authority (list available at http:// cdm.unfccc.int/DNA/index.html). Joint Implementation provides for an Annex I Party to implement an emission reducing project in another Annex I Party's territory and count the resulting Emission Reduction Unit ("ERU") towards its own requirements under Kyoto. All JI projects must have the approval of both Annex I Parties. Under Emissions Trading one Annex I polluting entity can trade with another Annex I polluting entity for their rights to pollute. Annex I countries can authorize businesses and other non-governmental entities to engage in Emissions Trading so long as the country has a national registry established to register emissions offsets and settle emissions trades. In order for the Annex I countries that have ratified the Kyoto Protocol to meet their requirements, many have individually instituted GHG emission caps for the emitters within their borders. Each emitter is then allowed to utilize CDM, JI, and Emissions Trading to meet the requirements of the cap imposed by its home country. Thus, purchases of CERs and ERUs may be made between businesses within the same Annex I country or between businesses from different Annex I countries. In order for countries or other entities to hold credits under Kyoto and transfer them to another party, registries must be in places that track the location and ownership of credits at all times. Most Annex I countries have implemented a national registry containing accounts within which Kyoto Units are held and may be traded from one account to another. The individual national registries, as connected through the international transaction log, form the backbone of the Kyoto carbon market. For example, the European Union Emission Trading Scheme ("EU-ETS") was formed to help EU states achieve compliance with their respective commitments under the Kyoto Protocol. Under the EU- ETS, a certain quantity of emissions is granted to EU companies in the form of EU Allowances. These EU Allowances can then be bought and sold by the companies. Since the EU Allowances are also Kyoto Units, however, transactions in EU Allowances are automatically recorded on the international transaction log in addition to the national registry of EU countries involved. Because the United States did not ratify the Kyoto Protocol, projects within the U.S. will not generate CERs or ERUs. U.S. entities can buy and sell Kyoto Units but are unable to create them. U.S. companies could presumably buy Kyoto Units to meet a voluntary standard, but because of the uneven playing field inherent when other parties in the market require Kyoto Units to meet a mandatory requirement, the price could be prohibitive.
CARBON CREDITS IN INDIA
India being a developing country has no emission targets to be followed. However, she can enter into CDM projects. As mentioned earlier, industries like cement, steel, power,textile, fertilizer etc emit green houses gases as an outcome of burning fossil fuels. Companies investing in Windmill, Bio-gas, Bio-diesel, and Co-generation are the ones that will generate Carbon Credits for selling to developed nations. Polluting industries, which are trying to reduce emissions and in turn earn carbon credits and make money include steel, power generation, cement, fertilizers, waste disposal units, plantation companies, sugar companies, chemical plants and municipal corporations.
Benefits For India
By, switching to Clean Development Mechanism Projects, India has a lot to gain from Carbon Credits:
a) It will gain in terms of advanced technological improvements and related foreign investments.
b) It will contribute to the underlying theme of green house gas reduction by adopting alternative sources of energy
c) Indian companies can make profits by selling the CERs to the developed countries to meet their emission targets.
ACCOUNTING NORMS ON CARBON CREDIT IN INDIA
Accounting guidelines on carbon credits will come into force from 1st July 2009. "The Council of the Institute of Chartered Accountants of India (ICAI) has scheduled a meeting between June 18-20 to approve the accounting guidelines on carbon credits,'' S Santhana Krishnan, chairman, Accounting Standards Board, ICAI, told TOI. Krishnan said that the guidelines will be made applicable to companies with effect from July 1.
This means, corporates will have to account for their issued carbon credits, as well as carbon credits which they may have sold in the current financial year, in the September quarter results.
For the current financial year, companies will have to account for carbon credits sold or issued to them by the United Nations Framework Convention on Climate Change (UNFCCC) from April 1 this year. The core group, which framed the draft guidance note on the accounting guidelines, has concluded that carbon credits are "intangible assets'' and they need to be treated as "inventory'' in the balance sheet till they are sold. TOI had reported this in its edition dated January 7, 2009.
Under UNFCCC's clean development mechanism (CDM), a developed country can take up a greenhouse gas (GHG) reduction project activity in a developing country where the cost of GHG reduction is usually much lower and the developed country would be given carbon credits for meeting its emission reduction targets.
The unit associated with CDM is certified emission reductions (CER) which are generally termed carbon credits where one CER is equal to one metric tonne of carbon dioxide equivalent.
"With large number of entities in India generating carbon credits and the carbon credits being a relatively new area, a need was felt to provide accounting guidance in this area,'' the guidance note states.
It provides guidance on matters of applying accounting principles relating to recognition, measurement and disclosures of CERs generated by the entity that has obtained the same under the CDM.
The note classifies CERs as `assets' of the generating entity. However, since issuance of CERs is subject to the verification process under the UNFCCC, CERs can be treated as contingent assets, only after it comes into existence, i.e. after the entity has been issued CERs by the UNFCCC. After this, CERs can be recognised in the financial statements.
"As the market for CERs is relatively new, the future economic benefits may not always be assured. Thus, an entity needs to make as assessment for the probable market for the CERs ensuring flow of economic benefits in the future, CERs should be recognised,'' the note states.
India has around 35 million annual CERs under way from registered projects, of which, a large pool remains unsold.
There is a great opportunity awaiting India in carbon trading which is estimated to go up to $100 billion by 2010. In the new regime, the country could emerge as one of the largest beneficiaries accounting for 25 per cent of the total world carbon trade, says a recent World Bank report. The countries like US, Germany, Japan and China are likely to be the biggest buyers of carbon credits which are beneficial for India to a great extent. The Indian market is extremely receptive to Clean development Mechanism (CDM). Having cornered more than half of the global total in tradable certified emission reduction (CERs), India's dominance in carbon trading under the clean development mechanism (CDM) of the UN Convention on Climate Change (UNFCCC) is beginning to influence business dynamics in the country. India Inc pocketed Rs 1,500 crores in the year 2005 just by selling carbon credits to developed-country clients. Various projects would create up to 306 million tradable CERs. Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million. Of the 391 projects sanctioned, the UNFCCC has registered 114 from India, the highest for any country. India's average annual CERs stand at 12.6% or 11.5 million. Hence, MSW dumping grounds can be a huge prospect for CDM projects in India. These types of projects would not only be beneficial for the Government bodies and stakeholders but also for general public.
1. Australian Greenhouse Office, "National Greenhouse Gas Inventory", Canberra ACT, March 2007.
2. "Climate Change 2007: Mitigation of Climate Change, Summary for Policymakers from IPCC Fourth Assessment Report". Working Group III, IPCC. 2007-05-04. pp. Item 25 and Table SPM.7, pp. 29-31.
3. "Climate change glossary". Carbon credit. Environment Protection Authority Victoria. 2008-09-02.
4. "Collins English Dictionary - Complete & Unabridged 10th Edition". Carbon credit. William Collins Sons & Co. Ltd/Harper Collins Publishers. 2009.
5. Planning Commission Report for operationalising Clean Development Mechanism (CDM), Govt. of India
6. UNFCCC CDM project database.
7. http://www.ipm.iastate.edu/ipm/icm/2004/1-26- 2004/cc.html
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Sharma, D. (2012). Accounting Norms and Carbon Credits in India. PHILICA.COM Article number 353.