Climate action has decisively transitioned from corporate social responsibility narratives to core boardroom strategy. In this shift, carbon credits have emerged as tradable and monetisable instruments, directly linking emission reduction efforts with measurable financial inflows. For professionals in finance, audit, and taxation, carbon credits are no longer an abstract ESG construct; they represent a distinct economic right or asset class that raises substantive questions of accounting recognition and measurement, valuation, documentation standards, contractual structuring, cross-border transactions, GST applicability, and income-tax characterization.
It is important to clearly distinguish between the two instruments often loosely referred to as “carbon credits.” A carbon credit or offset, in the crediting mechanism, represents verifiable evidence of one metric tonne of carbon dioxide equivalent (tCO₂e) reduced, avoided, or removed, issued under an approved methodology and recorded in a recognised registry. In contrast, a carbon allowance, typical of compliance or emissions trading systems, represents a regulatory permission to emit one metric tonne of tCO₂e, allocated or auctioned under a cap-and-trade or performance-benchmark framework. This conceptual distinction is critical, as it directly influences the accounting treatment, tax characterization, and regulatory obligations applicable to each instrument.
From Environmental Policy to Financial Asset
Climate change has decisively moved from the realm of environmental activism into the core of economic policy and corporate strategy. Among the instruments driving this transition, carbon credits have assumed particular significance, as they assign an explicit economic value to the reduction or avoidance of greenhouse gas emissions. What began as an environmental incentive has progressively evolved into a market-linked mechanism with tangible financial consequences for businesses and economies alike.
For professionals in finance and taxation, carbon credits are therefore not merely an environmental concept but a new class of monetisable rights. Their emergence raises complex and interlinked questions of accounting recognition, measurement and valuation, tax characterization, contractual structuring, and regulatory compliance. As corporate increasingly integrate sustainability objectives with financial performance, the involvement of accounting professionals—particularly Chartered Accountants—becomes both inevitable and indispensable.
In the Indian context, the policy landscape is undergoing a significant shift from a predominantly voluntary carbon market toward a structured, compliance-oriented framework. The Government of India has notified the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation law framework, which has been described by the Bureau of Energy Efficiency (BEE) as the foundation of India’s compliance carbon market. The scheme also sets out the institutional architecture for governance of the market, including oversight by the National Steering Committee for the Indian Carbon Market (NSCICM).
Further clarity has been provided through official communications, including a Press Information Bureau release dated 23 June 2025, which explicitly outlines India’s movement toward a rate-based emissions trading system (ETS), identifies initial sectoral coverage, and explains how the CCTS is intended to lay the groundwork for the Indian Carbon Market (ICM). Collectively, these developments confirm that the CCTS is not merely a policy statement but a foundational framework establishing a rate-based ETS architecture and an institutional mechanism that will shape the future of carbon markets in India.
Understanding Carbon Credits: What They Are (and What They Are Not)
A carbon credit generally represents one metric tonne of carbon dioxide (CO₂) or their equivalent greenhouse gas that has been reduced, avoided, or removed, and is issued under a recognised methodology and registry. Such a credit acquires economic value only after it is independently verified, formally issued, and rendered transferable in accordance with the rules of the relevant programme or registry. Broadly, carbon markets operate in two forms: compliance markets, which are cap- or target-driven and in which participation is mandated by law or regulation, and voluntary carbon markets, where entities purchase credits to meet ESG commitments, internal carbon pricing objectives, or “net-zero” and sustainability pledges. In the Indian context, policy signals and official communications indicate a clear movement toward a structured national carbon market, with the Carbon Credit Trading Scheme (CCTS) envisaging a rate-based emissions trading framework as the foundation for the Indian carbon market
Is a Carbon Credit “Encashable” in India?
Yes—carbon credits are commercially Encashable in India, but they are not encashable in the manner of a conventional financial instrument. In carbon transactions, documentation itself becomes the asset: the monetisable value of a carbon credit depends far less on sustainability narratives and far more on the integrity of the MRV (monitoring, reporting and verification) trail, registry issuance and serial numbers, evidence of clear title and valid transfer, and the contractual allocation of delivery, invalidity, and reversal risks. In practice, realisation occurs primarily through voluntary market sales, where Indian project developers sell verified credits to domestic or overseas buyers via recognised registries and negotiated contracts, and through the emerging compliance-oriented framework, with the Government having notified the Carbon Credit Trading Scheme (CCTS) to establish the institutional architecture of an Indian carbon market. A critical professional caution is that “encashable” does not mean “tax-free” or “documentation-light”; every monetisation event demands a robust evidentiary framework, including complete MRV records, issuance and registry documentation, proof of title and transfer, defensible pricing support, and compliance with FEMA and banking regulations for receipt and realisation of consideration.
Accounting Treatment of Carbon Credits (India-Focused)
Carbon credits do not lend themselves to a single, uniform accounting treatment because their economic substance varies with the manner of generation and the purpose for which they are held. Where credits are generated and held with an intention to sell or trade, they exhibit inventory-like characteristics. Where they are held to meet regulatory or contractual emission obligations, they resemble rights or allowances linked to compliance. In many cases, particularly where credits arise incidentally from a core manufacturing or infrastructure project, they are viewed as an entitlement ancillary to the main activity, with income recognised only upon sale. This lack of homogeneity explains the diversity of accounting practices observed globally.
In the Indian context, professional guidance exists in the form of the ICAI Guidance Note on Accounting for Self-generated Certified Emission Reductions (CERs), 2012, which treats such credits, when held for sale, on principles analogous to inventories. Internationally, the position has been less settled—IFRIC 3 was issued and subsequently withdrawn, and jurisdictions evolved differing practices—resulting in continuing diversity in recognition and measurement approaches. This background necessitates the exercise of professional judgment supported by transparent accounting policies.
Practical approach commonly followed (conservative and defensible)
At the generation or issuance stage, recognition typically arises when credits are issued or credited by the relevant registry and the entity has control together with a reliable basis of measurement, consistent with the ICAI’s inventory-oriented approach for self-generated CERs. In practice, many entities adopt a conservative stance because there is often no clear or separable “cost of acquisition” attributable to the credit itself, particularly where the underlying project assets have already been capitalised under normal accounting principles. This approach aligns with prevailing professional discussions and the intent of the ICAI guidance.
At the sale stage, income is recognised when the carbon credits are transferred and consideration becomes measurable and realisable, and when risks and rewards (or control) pass to the buyer in accordance with the contract and registry transfer mechanism. A typical accounting entry at this stage would involve debiting Bank or Receivable and crediting Carbon Credit Income or a similar income account.
From a presentation perspective, where carbon credit generation is incidental to the entity’s principal operations, the proceeds are commonly disclosed as “Other Income.” However, where generation and trading of credits form part of the entity’s ordinary activities, classification as “Revenue from operations” may be more appropriate, provided this is supported by a clearly articulated accounting policy.
Given the judgment involved, robust disclosures are essential. These should include the accounting policy adopted, particularly the recognition point and measurement basis; the nature of the credit program or registry under which the credits are issued; details of volumes generated and sold; and disclosure of significant judgments and key risks, such as price volatility, risk of invalidation or reversal, and delivery or performance risk. Such disclosures enhance transparency and improve the defensibility of the accounting treatment adopted.
Direct Taxation under the Income-tax Act
Historically, the tax treatment of carbon credit receipts in India was mired in controversy, with taxpayers contending that such receipts were capital in nature and therefore not taxable, while the tax department often sought to characterise them as business income, leading to prolonged litigation and inconsistent outcomes. This debate has largely been addressed through the introduction of section 115BBG by the Finance Act, 2017, which provides a specific and self-contained tax regime for income by way of transfer of carbon credits, along with a statutory definition of “carbon credit” for the purposes of the provision. With effect from 1 April 2018, the traditional capital-versus-revenue characterisation has been substantially narrowed for instruments that squarely fall within the ambit of section 115BBG. In practice, therefore, where a receipt qualifies as “income by way of transfer of carbon credits” under this section, the special provision assumes primacy over general principles; nevertheless, factual analysis remains critical, including examination of the exact nature of the instrument transferred, the registry and methodology under which it is issued, whether it satisfies the statutory definition of a carbon credit or represents a different environmental instrument, and how the transaction is described and documented contractually. Given the emergence of new instruments such as offsets, certificates, and domestic market credits under the CCTS framework, careful classification supported by precise documentation aligned with statutory definitions and scheme rules is essential to ensure tax certainty.
GST Implications (Practical Position)
In GST practice, carbon credits are generally analysed as intangible rights, and their transfer may constitute a supply—often examined as a supply of services depending on the transaction structure and contractual form. The GST characterisation does not follow a single uniform rule; rather, it turns on whether the instrument is viewed as an actionable claim or another class of intangible, and on the precise manner in which the transaction is structured. In practical terms, the GST outcome is influenced by factors such as whether the transaction is domestic or cross-border, the determination of place of supply and fulfilment of export conditions, the contractual description of the carbon credit and mechanics of title transfer, and the availability of supporting documentation required for zero-rating in case of exports. Given the absence of explicit, universally applicable clarifications on carbon credits under GST and the wide variation in transaction structures, the most defensible approach is a transaction-by-transaction analysis, supported by robust documentation and carefully evaluated tax positions capable of withstanding scrutiny and litigation.
Why this is a Serious Professional Opportunity for CAs
Carbon markets are giving rise to a distinct professional vertical in which assurance-quality documentation, financial discipline, and tax certainty are paramount. Chartered Accountants are uniquely positioned to lead this space by advising on transaction structuring and contract review, including ERPA frameworks, pricing mechanisms, delivery-failure clauses, title transfer and registry mechanics; by formulating robust accounting policies covering recognition points, inventory versus intangible classification, disclosures, and valuation or impairment approaches; by handling direct tax positions and disputes, particularly testing applicability of section 115BBG, preparing defensible documentation, and representing matters in assessment and appellate proceedings; by providing GST and cross-border advisory, including export classification, invoicing, LUT/bond compliance, ITC and refund claims, and place-of-supply analysis; by supporting MRV-linked assurance through controls over emissions data, audit trails, governance and internal control documentation; and by acting as the critical interface between ESG reporting and financial statements, ensuring that operational emissions data is credibly translated into compliant financial and regulatory disclosures. As India’s Carbon Credit Trading Scheme (CCTS) framework matures institutionally, the demand for such integrated expertise—combining measurement integrity, verification alignment, financial reporting rigour and tax defensibility—will only intensify.
Conclusion
Carbon credits in India are no longer a niche environmental concern; they have evolved into a recognised economic instrument supported by an emerging and increasingly formal regulatory architecture. The professional challenges are immediate and substantive—when and how should credits be recognised, what valuation principles apply, what documentation standards are defensible, how is income to be taxed under section 115BBG, and what is the correct GST treatment under the chosen transaction structure. For Chartered Accountants, this development represents far more than an incremental compliance requirement; it marks the opening of a frontier practice area. Professionals who invest early in building integrated capability—spanning contract analysis, accounting judgement, tax interpretation, and rigorous documentation—will be well placed to shape and lead the next phase of sustainability-linked finance, reporting, and assurance in India.
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