INTRODUCTION:

Carbon credits are a tradable permit scheme. It is a simple, non-compulsory way to counteract the greenhouse gasses that contribute to climate change and global warming. Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. The Carbon Credit is this new currency and each carbon credit represents one tonne of carbon dioxide either removed from the atmosphere or saved from being emitted. Carbon credits are also called emission permit. Carbon credit is in the Environment and pollution control subject. Carbon credits are certificates awarded to countries that are successful in reducing emissions of greenhouse gases. Carbon credits are generated as the result of an additional carbon project. Carbon credits can be created in many ways but there are two broad types: 1. Sequestration (capturing or retaining carbon dioxide from the atmosphere) such as afforestation and reforestation activities. 2. Carbon Dioxide Saving Projects such as use of renewable energies These credits need to be authentic, scientifically based and Verification is essential. Carbon credit trading is an innovative method of controlling emissions using the free market.

NEED FOR CARBON CREDITS:

Over millions of years, our planet has managed to regulate concentrations of greenhouse gases through sources (emitters) and sinks (reservoirs). Carbon (in the form of CO2 and methane) is emitted by volcanoes, by rotting vegetation, by burning of fossil fuels and other organic matter. But CO2 is absorbed, by trees, forests or by some natural phenomenon like photosynthesis and also oceans to some extent. In modern times the burning of fossil fuels like coal, oil and natural gas in which carbon has been stored for millions of years combined with accelerated land clearance has led to exceptional levels of greenhouse gas emissions. Vegetation, largely forest, is already absorbing about one-third of human-induced emissions, planting more forests could increase absorption. Carbon sinks cant keep up, and concentrations of greenhouse gases in the atmosphere have risen dramatically leading to an enhanced greenhouse effect which will result in very rapid warming of the worlds climate.

EXISTENCE OF CARBON CREDITS:

The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control. Carbon credits were one of the outcomes of the Kyoto Protocol, an international agreement between 169 countries. The Kyoto Protocol created legally binding emission targets for developing nations. To meet these targets, nations must limit C02 emissions. It was enforced from Feb05. The very phase Kyoto Protocol has become synonymous with the idea of saving the planet from the global meltdown. This can be accomplished by either reducing emissions or by absorbing emissions through processes such as tree-planting and sequestration.

GENERATION OF CARBON CREDITS:

Many types of activities can generate carbon offsets. Renewable energy such as wind farms, or installations of solar, small hydro, geothermal, and biomass energy can all create carbon offsets by displacing fossil fuels. Other types of offsets available for sale on the market include those resulting from energy efficiency projects, methane capture from landfills or livestock, destruction of potent greenhouse gases such as halocarbons, and carbon sequestration projects (such as reforestation) that absorb carbon dioxide from the atmosphere.

VALUE OF CARBON CREDITS:

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air such as carbon emitted by burning of fossil fuels. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labour. Carbon credits are measured in tonnes of carbon dioxide. 1 credit = 1 tonne of CO2. Each carbon credit represents one metric ton of C02 either removed from the atmosphere or saved from being emitted. The carbon credit market creates a monetary value for carbon credits and allows the credits to be traded. For each tonne of carbon dioxide that is saved or sequestered carbon credit producers may sell one carbon credit.

TRADING OF CARBON CREDITS:

Buying carbon credits is not a charitable donation, but a retail action. Trade in carbon credits has the potential to make forestry more profitable and to sustain the environment at the same time. One of the primary solutions for climate change being thought by global warming alarmists is the purchase and sale of carbon credits. For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions.
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KYOTO PROTOCOL:
In the year 1997 World Earth Summit held at Kyoto, Japan. The objective of the Kyoto climate change conference was to establish a legally binding international agreement, whereby all the participating nations commit themselves to tackling the issue of global warming and greenhouse gas emissions. As of 14 January 2009, a total of 183 countries have ratified the agreement.

PRINCIPLES OF KYOTO PROTOCOL

Commitments to reduce greenhouse gases that are legally binding for annex I countries, as well as general commitments for all member countries Implementation to meet the Protocol objectives, Minimizing impacts on developing countries by establishing an adaptation fund for climate change; Accounting, reporting and review to ensure the integrity of the Protocol; Compliance by establishing a compliance committee to enforce compliance with the commitments under the Protocol.

REQUIREMENTS AS PER PROTOCOL

First phase target - Annexure I countries to reduce emission between 2008 & 2012 to 5.2% below the 1990 level. Second phase target is yet to be ascertained. As of now annexure II countries are not required to reduce their emission for now.

CARBON EMISSION RIGHTS (CER) OR CARBON CREDITS

It is in the form of Certificate, just like Stock, which is given by the CDM (Clean Development Mechanism) Executive Board. A CDM Executive Board is a board comprising of 10 members who supervise the operation of CDM. Every project is registered with the CDM Executive board. The Designated Operational Entity (DOE) periodically checks whether emission reduction has actually taken place or not. Only after verification by DOE, CERs are delivered. These certificates can be traded at designated markets called as Climate Exchange.

ADDITIONALITY AND ITS IMPORTANCE:

This section includes a list of references, related reading or external links, but its sources remain unclear because it lacks inline citations. Please improve this article by introducing more precise citations. (August 2008) It is also important for any carbon credit (offset) to prove a concept called additionality. The concept of additionality addresses the question of whether the project would have happened anyway, even in the absence of revenue from carbon credits. Only carbon credits from projects that are "additional to" the business-as-usual scenario represent a net environmental benefit. Carbon projects that yield strong financial returns even in the absence of revenue from carbon credits; or that are compelled by regulations; or that represent common practice in an industry are usually not considered additional, although a full determination of additionality requires specialist review. It is generally agreed that voluntary carbon offset projects must also prove additionality in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). According the World Resources Institute/World Business Council for
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Sustainable Development (WRI/WBCSD): "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for projectbased GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions, undermining the emissions target of the GHG program. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."

CRITICISMS:
The Kyoto mechanism is the only internationally agreed mechanism for regulating carbon credit activities, and, crucially, includes checks for additionality and overall effectiveness. Its supporting organisation, the UNFCCC, is the only organisation with a global mandate on the overall effectiveness of emission control systems, although enforcement of decisions relies on national co-operation. The Kyoto trading period only applies for five years between 2008 and 2012. The first phase of the EU ETS system started before then, and is expected to continue in a third phase afterwards, and may co-ordinate with whatever is internationally agreed at but there is general uncertainty as to what will be agreed in PostKyoto Protocol negotiations on greenhouse gas emissions. As business investment often operates over decades, this adds risk and uncertainty to their plans. As several countries responsible for a large proportion of global emissions (notably USA, Australia, China) have avoided mandatory caps, this also means that businesses in capped countries may perceive themselves to be working at a competitive disadvantage against those in uncapped countries as they are now paying for their carbon costs directly.
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A key concept behind the cap and trade system is that national quotas should be chosen to represent genuine and meaningful reductions in national output of emissions. Not only does this ensure that overall emissions are reduced but also that the costs of emissions trading are carried fairly across all parties to the trading system. However, governments of capped countries may seek to unilaterally weaken their commitments, as evidenced by the 2006 and 2007 National Allocation Plans for several countries in the EU ETS, which were submitted late and then were initially rejected by the European Commission for being too lax.

INDIA POTENTIAL IN CARBON TRADING

Indias is 2nd largest seller of Carbon credits. Manufactures of Electric scooters also have huge potential in earning Carbon Credits. Reliance power expects to earn Rs.4000 crores from Carbon trading from Sasan power project in MP over next 10 years.

CARBON CREDIT TRADERS IN INDIA

Andhyodaya Green Energy Grasim Industries Ltd. Indo Gulf Fertilizers Indus Technical & Financial Consultants Ltd Madhya Pradesh Rural Livelihoods Project Rajasthan Renewable Energy Corporation Reliance Energy Ltd. Tata Motors Limited Tata Steel Limited Bajaj Finserv Limited Dhariwal Industries Ltd Tata Power Company Limited BlueStar Energy Services Inc.
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How buying carbon credits can reduce emissions:

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets. By way of example, consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas emissions in a year. Its government then enacts a law that limits the emissions that the business can produce. So the factory is given a quota of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess. After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery. Instead may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will offset emissions by planting a number of trees for every carbon credit you buy from them under an approved CDM project. So although the factory continues to emit gases, it would pay another group to go out and plant trees which will draw back 20,000 tonnes of carbon dioxide from the atmosphere each year.

CREDIT VERSUS TAXES:

Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon taxes. A criticism of tax-raising schemes is that they are frequently not hypothecated, and so some or all of the taxation raised by a government may be applied inefficiently or not used to benefit the environment. By treating emissions as a market commodity it becomes easier for business to understand and manage their activities, while economists and traders can attempt to predict future pricing using well understood market theories. Thus the main advantages of a tradable carbon credit over a carbon tax are:

The price is more likely to be perceived as fair by those paying it, as

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the cost of carbon is set by the market, and not by politicians. Investors in credits have more control over their own costs.

 The

flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine sustainable carbon reduction schemes, through its internationally-agreed validation process.

ACCOUNTING OF CARBON CREDIT

As of now, there is no separate Indian accounting standards to measure income and expenditure from carbon reducing projects. Guidance note on accounting for Certified Emission Reductions is under consideration of ICAI. Issues involved: Accounting for Expenditure on Projects Accounting for Self generated Credits Recognition of Carbon credits Disclosure requirement AS-26 Intangible Assets which are : Identifiable assets Without physical existence Held for production or rental use or administrative purpose. Assets should be recognized as an Intangible Asset. If: It is available for use/sale. intention to use/sale. ability to use/sale. AS-2 Valuation of Inventories: INVENTORY Assets Held for Sale in ordinary course. VALUATION Cost of Purchase Expenses incurred for bringing inventories at their present location and condition. AS-9 REVENUE RECOGNISITION: Transfer of Property and all risks and rewards. No Uncertainty regarding realization of consideration.

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TAXATION OF CARBON CREDITS

CER credits satisfy definition of Capital Asset. CERs are Capital Assets for the purpose taxation under Income Tax Act, 1932 & tax liability should be admitted under the head Capital Gain. Cost of Acquisition of CER credits acquired from other parties for the purposes of trading is actual cost of acquisition. While Cost of self generated CER credits, Cost of Acquisition will be NIL.

KEY PLAYERS:
Bank of America
is a leader in carbon reduction strategies. The bank recently launched a $20 billion, 10year initiative to finance emission-reduction projects, invest in green technology, and facilitate carbon-credit trading. is among the most well-known companies to implement an internal cap-and-trade system. The company assigned its 150 units an emissions quota and allowed them to buy and sell carbon credits among themselves.

BP

The European Union Emission Trading Scheme

is the mandatory cap and trade program for the EU.

(EU ETS)

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 The

(CCX) is a U.S. carbon-trading scheme in which companies make a voluntary but legally binding commitment to meet emissions targets

Chicago

Climate

Exchange

CONCLUSION:
There is a great opportunity awaiting India in carbon trading which is estimated to go up to $200 billion by 2015. In the new regime, the country could emerge as one of the largest beneficiaries accounting for 25 percent of the 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), Indias 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 Rs3500 crores in the year 2011 just by selling carbon credits to developed-country clients. Various projects would create up to 450 million tradable CERs. Analysts claim if more companies absorb clean technology, total CERs with India could touch 735 million. Of the 356 projects sanctioned, the UNFCCC has registered 117 from India, the highest for any country. Indias average annual CERs stand at 12.6%. 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 stake holders but also for general public.

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