27th December, 2011

Tuesday

CARBON CREDITS

Prepared and Presented by:

Mr. Kailash S.
Ms. Shruti M.
Mr. Anupam Mittal
Ms. Darshika Singhal
Ms. Heena Nagrani
Mr. Punit Harkut
Ms. Meghana Agrawal
Mr. Hardik Varyani
Mr. Varun Aggarwal
Mr. Pratik Salgia

Climate Change
Rapid Industrial Growth
Increased energy consumption
Increased CO2 and other GHG
emissions
Global Warming due to
increased concentration of GHG

Increasing sea
level

Changes in wind
and precipitation

Changes in
crop yields

Green House Gases

Greenhouse gases are those that can absorb and
emit infrared radiation. The most abundant GHGs
are :
Water vapor

Carbon dioxide
Methane
Nitrous Oxide
Ozone

Kyoto Protocol

It was adopted in Kyoto, Japan, on 11th December 1997 and

entered into force on 16 February 2005.
Objective:
Stabilisation of greenhouse gas concentrations in the
atmosphere at a level that would prevent air pollution
interference with the climate system.

Kyoto Protocol (Contd..)

A legally binding International Agreement made under the United

Nations Framework Convention on Climate Change (UNFCCC).
Recognizing that developed countries are principally responsible
for the current high levels of GHG emissions in the atmosphere
as a result of more than 150 years of industrial activity, the
Protocol places a heavier burden on developed nations under the
principle of common but differentiated responsibilities.
191 Countries has ratified the Protocol.

United Nations Framework

Convention on Climate Change
UNFCCCs aim is to reduce atmospheric
concentrations of greenhouse gases with the goal of
"preventing dangerous anthropogenic interference
with Earth's climate system."
Parties to UNFCCC are classified as:
Annex I countries industrialized countries and
economies in transition
Annex II countries developed countries which pay for
costs of developing countries
Non Annex I countries - Developing countries

United Nations Framework

Convention on Climate Change
UNFCCC serves three purposes:

it avoids restrictions on their development, because emissions are strongly linked to industrial capacity
they can sell emissions credits to nations whose operators have difficulty meeting their emissions
targets
they get money and technologies for low-carbon investments from Annex II

Annex 1 (developed countries) agreed to reduce their GHGs by 5.2% below 1990
levels in 1st commitment period 2008 2012.

Each Annex I country is required to submit an Annual Report of inventories of all

anthropogenic greenhouse gas emissions from sources and removals from sinks
under UNFCCC and the Kyoto Protocol.
India signed and ratified the Protocol in Aug02, and maintains that the major
responsibility of curbing emission rests with the developed countries, which have
accumulated emissions over a long period of time.

Kyoto Mechanism

Under the Treaty, countries must meet their targets primarily through
national measures. However, the Kyoto Protocol offers them an
additional means of meeting their targets by way of three marketbased mechanics.

The mechanisms help stimulate green investment and help Parties meet
their emission targets in a cost-effective way.

The Kyoto mechanisms are:

Clean Development Mechanism.
Emissions trading known as the carbon market"
Joint implementation (JI).

Clean Development Mechanism

(CDM)
The CDM allows emission-reduction projects in
developing countries to earn certified emission
reduction (CER) credits, each equivalent to one
tonne of CO2. These CERs can be traded and sold,
and used by industrialized countries to a meet a
part of their emission reduction targets under the
Kyoto Protocol.

CDM Process
Project Cycle
Project Design: Project Participant
National Approval: Designated National Authority
Validation: Designated Operational Entity
Registration: Executive Board
Monitoring: Project Participant
Verification: Designated Operational Entity
CER Issuance: Executive Board

CDM Projects Types:

Energy Efficiency Projects
Transport Projects
Methane Recovery Projects
Industrial Process Changes
Cogeneration
Agricultural Sector

Benefits of CDM:
Sustainable Development
Poverty reduction
Access to energy efficient lighting and cooking
Improvement of air quality and living conditions
Reduction of costs
Generation of jobs and skills

Emission Trading

Acceptance of targets for limiting or reducing emissions

Assigned amounts
Assigned Amount Units (AAUs)
Allows countries to sell their excess capacity
A new commodity
Carbon is now tracked and traded like any other
commodity
Carbon market
The commitment period reserve

Joint Implementation
Allows a country with an emission reduction
commitment to earn emission reduction units
(ERUs) from an emission-reduction or emission
removal project
Offers Parties a flexible and cost-efficient mean
Host Party benefits from foreign investment and
technology transfer

Joint Implementation (Contd..)

Eligibility and approval:
A JI Project must provide a reduction in emissions
Must have approval of Host Party
Participants have to be authorized to participate by a
Party involved in the project

Joint Implementation (Contd..)

Procedures:
Track 1 Procedure:
Host Party meets all of the eligibility requirements;
Verify emission reductions from a JI project;
Issue the appropriate quantity of ERUs.

Track 2 Procedure:
Host Party doesnt meets all, but only a limited set of the eligibility
requirements;
Verification has to be done through the verification procedure under
the Joint Implementation Supervisory Committee (JISC).
an independent entity accredited by the JISC decides whether the
relevant requirements have been met before issue and transfer ERUs.

Cancun Conference
The UN conference on climate change in Copenhagen
in 2009 was replaced by the Cancun Conference in
2010
It restored some market confidence in UNFCCCs
process
It was decided to keep the average global temperature
below 2 degrees Celsius in comparison to the
preindustrial levels
They are further reviewing the possibility of moving to
1.5 degrees Celsius as a new target

Cancun Conference (Contd..)

This conference has resulted in a number of other
positive outcomes for carbon markets and climate
finance
There has been a decision to establish the Green
Climate Fund
The Kyoto Mechanisms shall continue with
improvements

Cancun Conference (Contd..)

Apart from CDM there shall be an inclusion of
(REDD+) mechanism which is
Reduced Deforestation mechanism
Developed and developing country pledges are 60%
of what is needed by 2020 to place the world onto a
trajectory keeping the world temperatures lesser

Carbon Credit
Carbon credits are elements used to aid in regulation of the
amount of gases that are being released into the air
The extent to which a company emits less carbon, it shall get
credits
1 Carbon Credit = 1 tonne of CO2 or its equivalent GHGs
which is an entitled certificate by UNFCCC

Carbon Trading
A carbon trading allows the development of a
market through which Green House Gasses
(GHGs) can be traded between participants in the
form of Certified Emission Reductions (CERs).

Carbon Trading An Example:

Such accumulated credits are also bought and sold in
international market
Emissions permitted to countries, but not used can be sold to
countries that are over their targets
Suppose XYZ Inc., operates in a country which is covered in
Annexure- I country, emits 10L tonnes of CO2 per year. But
law enacted by such country limits the emission up to 8L
tonnes per year by XYZ Inc.
XYZ Inc. is required to either reduce its emissions to 8L
tonnes or purchase carbon credits to offset the excess.

Types of Carbon Trading

Types of Carbon Trading

(contd..)
Carbon Cap-Trade Program:
Here we decide an upper threshold limit for a business or
an industry
Emission is permitted only till such limit
If there is any unutilized limit, it can be sold to those
countries who have crossed their limits

Types of Carbon Trading

(contd..)
Carbon Offsetting :
Offset credits are purchased by developed nations for
eco-friendly technologies to avoid or substitute
reduction in their own emission
Objective is to invest in green technologies and harness
alternatives forms of energy in the developing nations

Accounting Aspects
CERs are Assets.
Recognition of CERs as an Asset.

Period upto CERs are issued to

generating entity.

CERs actually issued to entity.

Treated as Contingent Asset.

As Assets.

Accounting Aspects (contd..)

Recognition in Financial Statements

Future Economics Benefits

will flow to entity

Asset has a Cost or

Value

CER should be accounted as per AS-2 and not as per AS-26.

Measurement of CERs (least of
the below two).

Cost

Net Realisable Value

Taxation Aspects
Depreciation on CDM Devices:
Energy saving devices, renewal energy devices.

Air pollution control devices, solid waste control

equipments.

Taxation Aspects (Contd..)

Expectations from Government:
Income from other sources
Special (Minimum) rate
Tax holidays
MAT exemption VCF

Advantages of Carbon Trading

Reduction in Green House Gas Emission
Source of revenue for developing nations
Supports a free market system
Impetus for alternative sources of energy or green
technology

Disadvantages of Carbon
Trading
Right To Pollute
Lack of Centralized system or global framework
No effective Carbon reduction in the atmosphere

Carbon Network

Parties Involved in Carbon

Trading

Project entity

Supplier

Sponsor

Buyer

Lender

Insurer

Equity provider

Rating agencies

Constructor

Operator

Experts
Host government

Key Risks and Uncertainities

The key risks & uncertainties associated with carbon
trading markets are:
The extent to which the Kyoto Protocol guidelines are
implemented & followed
The attitude of US which is the biggest polluter and had
refused to sign the treaty
The final rules and decisions relating to an emissions trading
market

Outlook for India

Outlook for India

India and China are the biggest sellers and Europe is going to be the
biggest buyers of carbon credits.

India is one of the countries that have CREDITS for emitting less carbon.
India and China have surplus credit to offer to countries which have a
deficit.

India has generated carbon credits worth 30 million $ and has roughly
another 140 million $ to push in the world market.

Waste disposal units , plantation companies ,chemical plants and

municipal corporations can sell the carbon credit and make money.

Outlook for India

However, under UNFCCC the polluters cannot buy 100 per
cent of the carbon credits they are required to reduce. Say,
out of 100 per cent they have to induce 75 per cent locally by
various means in their own country. They can buy only 25
per cent of carbon credits from developing countries.

Outlook for India

On 23/5/2011 World bank has signed an agreement with
Himachal Pradesh government for what is to be the worlds
largest and Indias first CDM project.
Under this the bank will buy carbon credit from the new
forests developed on degraded lands under a watershed
management programme.
Besides being the 1st pilot project for India, it would also be
the Worlds 1st carbon credit project that is linked to an
ongoing watershed management programme.
The broad objective of the bio-carbon CDM project is to curb
greenhouse gases by expanding forestry plantations.

Outlook for India

Spread over 11 watershed divisions in 177 gram panchayats

across 10 districts under the mid-Himalayan watershed
development programme, the CDM agreement is estimated
to fetch a carbon revenue of at least Rs 20 crore for the first
crediting period of 20 years.
Under this agreement ,the benefit accruing to the community
and the private landholders will be about Rs.2500/ hectare ,
which depends on growth of trees and other factors.

Outlook for India

Delhi Metro has been certified by the United Nations as the
first metro rail-based system in the world to get carbon
credits for contributing to the fight against climate change by
help reducing pollution levels in the city by 6.3 lakh tons
every year.
The organization has also earned carbon credit worth Rs. 47
crores annually for the next 7 years.
With nearly 20 lakh people taking the new age transport
system everyday, the metro has helped reduce pollution and
emission of green house gases as it is a completely non
polluting and environment friendly system.

Outlook for India

No other Metro in the world could get the Carbon Credit for the
above because of the very stringent requirement of the United
Nations Body to provide conclusive documentary proof of
reduction in emissions.
Delhi metro has helped remove more than 91000 vehicles
from the roads of Delhi.
Every passenger who chooses to travel by metro instead of
car/bus contributes in reduction of emissions to the extent of
approximately 100 grams of carbon dioxide for every trip of 10
kms and therefore, becomes a party to reduce global warming.

Outlook for India

Finally I would like to conclude by saying that carbon credits is
helping to remove all the blackness in the Indian economy.
Indian companies are in the fore front in green practices and
are benefiting the most in the world.
It is one of the high growth areas for Indian CAs who are
amongst the 1st in the world for preparing the accounting
mechanism for carbon credit.
Also it has opened new areas for auditing like environment
audit, green energy audit, etc.
A green environment will thus lead to a green sensex.

GO GREEN