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 ton of carbon dioxide.
The Collins English Dictionary defines a carbon credit as “a certificate showing that a government 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)”.
One ton of CO2 equivalent = one carbon credit
Carbon Dioxide Equivalent (CO2e) refers to the amount of different greenhouse gases in terms of the amount of CO2. CO2e is measured by converting amount of Global Warming Potential of greenhouses gases other than CO2 to the equivalent of CO2’s Global Warming Potential of similar amount. Carbon dioxide equivalents are commonly expressed as million metric tons of carbon dioxide equivalents, abbreviated as MMTCDE.
MMTCDE = (million metric tons of a gas) * (GWP of the gas)
For example, the GWP for methane is 21 and for nitrous oxide 310. This means that emissions of 1 million metric tons of methane and nitrous oxide respectively are equivalent to emissions of 21 and 310 million metric tons of carbon dioxide.
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 ton 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.
2. THE OBJECT:
The object 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.
It is to steer companies and countries to lower their greenhouse gas emissions. Those that do not exhaust their cap are allowed to sell them in the market or to those companies in need of them. So, those who do not use up their entire permissible amount are rewarded by being allowed to sell their credits, while those who exceed their cap are penalized by having to pay for more credits.
3. SCENARIO OF CARBON CREDITS IN INDIA:
India being a developing country has no emission targets to be followed. In India industries like cement, steel, power, textile, fertilizer etc. emit greenhouses 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.
4. EARNING OPPORTUNITY 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 greenhouse 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.
5. INDIA’S ROLE IN WORLD CARBON TRADE:
Since India is a developing nation, it does not come under the ambit of the Kyoto Protocol. So, we can use our developing country status to let any Indian company, factory or farmer link up with the United Nations Framework Convention on Climate Change and determine the permissible ‘standard’ level of carbon emission for its specific field of activity. For the amount of low carbon emissions made by an Indian company, the developed nation earns carbon credits. Already, India’s contribution to carbon credits stands at $1 billion, out of a global trading of about $5 billion. India has generated about 30 million carbon credits and has a lineup of about 140 million to introduce into the global market. These comprise chemical units, plantation companies, municipal corporations and waste disposal units that Can easily sell their carbon credits for good amounts of money. This is possible because India has credits for emitting carbon below the permissible limits and so has enough Credit to offer defaulting countries. With this facility, India can trade its carbon credits for large loans, better social visibility and ecological facilities and lucrative incentives by multinationals in their home countries. Some of the Indian countries that have already jumped on to this bandwagon include Tata Steel, Gujarat Fluoro Chemicals, NTPC, etc. Out of the 391 projects sanctioned by the UNFCCC, 114 were registered from India the Highest ever for any country.
6. KYOTO PROTOCOL:
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. The aim is to lower overall emissions of six greenhouse gases- Carbon dioxide (CO2), Methane(CH4), Nitrousoxide (N2O), Hydro fluorocarbons(HFCs), Perfluorocarbons (PFCs), and Sulphur hexafluoride (SF6).
7. CLEAN DEVELOPMENT MECHANISM (CDM):
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.
8. GLOBAL SCENARIO:
With the progress of mankind there has been an increasing adverse effect on the global environment due to hazardous emissions including carbon. This has caused know of as global warming. To address this issue of global warming, the United Nations Framework Convention on Climate change (UNFCCC) was adopted in 1992, with the objective of limiting the concentration of greenhouse gases in the atmosphere.
Subsequently, to supplement the convention, the Kyoto Protocol came into force in February 2005, which sets limits to the maximum amount of emission of GHGs by the countries. This protocol has created a mechanism under which more than 189 countries have agreed to reduce greenhouse gas emissions globally. Carbon market is the brain child of the Kyoto Protocol for controlling greenhouse gas emissions. This market is mainly regulated by Clean Development Mechanism (CDM), which allows carbon credit earnings and carbon trading between countries and companies, establishing carbon credit exchange in the business world.
As the first commitment period of the Kyoto Protocol in 2012 is completing nearly, it is important to take stock of global scenario of the carbon business and its achievement level (ITARC, 2012). According to Kyoto Protocol, countries with binding emission reduction targets (which are represented by AnnexI countries) in order to meet the assigned reduction targets are issued allowances (carbon credits) equal to the amount of emissions allowed. An allowance or carbon credit represents one metric tonne of carbon credit equivalent. To meet the emission reduction target, binding countries ask their local businesses and entities to purchase carbon credits from the developing countries (non Annex I countries) who are not bound by the amount of GHG emissions. At present, European Union is the major purchaser of carbon credit and Asia dominates the seller market led by China.
The volume of carbon markets mainly depend on the national emission reduction target of GHG gases of the developed countries. National targets range from 8% reductions for EU, 6% for Japan and 10% for Iceland. Market analysts estimate that should the industrialized nations adopt an aggressive emission reduction target of 50% or more by midcentury, and should they meet half of their emission reduction commitments through the purchase of project based emission reductions from developing countries such as India & China, the carbon market could grow to $100 billion sales annually.
In 2005, after the Kyoto Protocol was in force, the carbon markets were worth $10 billion which enhanced to $30 billion in the year 2006. In 2008, there were more than 800 projects registered worldwide to participate in the carbon trading mechanism.
9. ELIGIBILITY REQUIREMENTS:
According to the United Nations, to participate in the mechanisms, Annex I Parties (Developed Countries) must meet, among others, the following eligibility requirements:
Carbon credit is an umbrella term for a certificate or permit that allows an organization or a country to manufacture a fixed amount of carbon emissions which can bartered if the full fixed allowance is not fully used. Though Carbon Credit is definitely a very lucrative proposition for both the buying and selling countries, it is the environment which pays the heaviest price, as the GHG emitting countries cause environmental degradation by polluting it. We live in a world where a balance has to be maintained but in the present situation we are disrupting the balance and the future generations will have to pay a heavy price as they will live in an unhealthy environment. Hence strict laws should be imposed to limit the buying and selling Carbon Credits. Scientists must use their time, money, and all available resources in order to find substitutes for the carbon emitting fuels currently being used so that the environment does not suffer any damage at all. They could use sustainable development programs via renewable or zero carbon emission fuel. Countries need to be the change which they want to see in this world. Having cornered more than half of the global total in tradable certified emission reduction (CERs), India’s dominance in carbon trading under the CDM of the UNFCCC is beginning to influence business dynamics in the country.
12. ROLE OF PROFESSIONAL :
Since the turn of the century accounting professional organisations have been involved in a number of debates about climate change, catalysed initially by technical discussions about the treatment of European carbon credits in financial accounts. These bodies are positioning themselves as leading on climate change, for example, through launching professional training courses, funding research, and initiating corporate workshops and seminars. The paper examines the role of the accountancy profession in governing the new carbon economy. We review climate change related activities undertaken by accountancy professional bodies through drawing on primary empirical material, including interviews with accountants, accountancy standard setters and professional bodies. A mix of theories about the role of calculation, measurement and expertise in governance are used to help explain and understand the situation, including ideas about accountancy and society, epistemic communities, and government.
> CONTRIBUTED BY
Mrs. Jaya Sharma-Singhania (Left)
Mr. Raj Purshottam Pokar (Second Left)
M/s. Jaya Sharma & Associates, Practicing Company Secretary Firm, Mumbai