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CARBON CREDITS

EFFECTS OF GLOBAL WARMING

“GLOBAL WARMING”

Season shifting, Changing landscapes, Rising sea levels, Floods & Droughts, Storms and other

Epidemics

RESULTS

IN

Over the last many years climatologists, geologists and variousresearchers have given us warnings on climate changes.

GLOBAL WARMING IS

RESULT OF “GREEN HOUSE GASES”

(GHG’s)

MAJOR GREEN HOUSE GASES

• Carbon Dioxide (CO2)

• Methane (CH4)

• Nitrous Oxide (N20)

• Hydrofluorocarbons (HFCs)

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

1] Commitments to reduce greenhouse gases that are legally binding for annex I countries, as well as general commitments for all member countries

2] Implementation to meet the Protocol objectives,3] Minimizing impacts on developing countries by establishing

an adaptation fund for climate change;4] Accounting, reporting and review to ensure the integrity of

the Protocol;5] Compliance by establishing a compliance committee to

enforce compliance with the commitments under the Protocol.

KYOTO PROTOCOL

Countries are divided into

Annexure I countries

Annexure II countries

(Developed) (Developing)

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 CREDIT CONCEPT

1 Carbon Credit = 1 Ton of CO2

(or its equivalent in greenhouse gases)

removed from the atmosphere.

* Note that Measure of Carbon credit is Certified Emission Reduction.(CER)

PROJECTS THAT QUALIFY FOR CARBON CREDIT

• Energy Efficiency

• Renewable Energy

• Biogas flaring on farms

• Reforestations, etc.

CARBON EMISSION RIGHTS (CER) OR

CARBON CREDITS

It is in the form of Certificate, just like Stock, It is in the form of Certificate, just like Stock, which is given by the CDM (Clean Development which is given by the CDM (Clean Development Mechanism) Executive Board.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, CER’s are delivered.

These certificates can be traded at designated markets called as Climate Exchange.

TRADING OF CARBON CREDITS

DevelopingCountries

Developed Countries

Inflow of FOREX

Sale of Carbon Credits

ILLUSTRATION OF CARBON TRADING

BUYER

• A business that owns a factory putting out 100,000 tones of greenhouse gas emissions in a year. It is in the Annexure- I country, that enacts a law to limit the emissions that the business can produce. Say 80,000 tonnes per year.

• The factory is required to either reduce its emissions to 80,000 tonnes or purchase carbon credits to offset the excess.

SELLER

• A company which makes investments in the projects in the developing countries like Power generation plant using Wind power instead of Fossil fuel.

• Another company which already invests in the new Low-emission project and has surplus of Carbon Credits.

ADVANTAGES.

For Polluting companies from developed countries

No need to investment in the New expensive projects instead they buy Carbon credits.

For Non-polluting companies from developing countries

They can sell the Carbon credits and earn profits.

ADVANTAGES.

• Pollution Control

• Remedy against Global Warming

• Foreign Exchange earnings • Development of Poor countries

ACCOUNTING OF CARBON CREDIT

• As of now, there are 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.

ACCOUNTING OF CARBON CREDIT

• Issues involved

1. Accounting for Expenditure on Projects

2. Accounting for Self generated Credits

3. Recognition of Carbon credits

4. Disclosure requirement

ACCOUNTING OF CARBON CREDIT

AS-26 Intangible Assets which are • Identifiable assets• Without physical existance• Held for production or rental use or administrative

purpose.Assets should be recognized as an Intangible Asset. If :1) It is available for use/sale.

2) intention to use/sale. 3) ability to use/sale.

ACCOUNTING OF CARBON CREDIT

• AS-2 Valuation of InventoriesINVENTORYAssetsHeld for Sale in ordinary course.VALUATIONCost of PurchaseExpenses incurred for bringing inventories at

their present location and condition.

ACCOUNTING FOR CARBON CREDIT

• AS-9 REVENUE RECOGNISITION1.Transfer of Property and all risks and

rewards.2.No Uncertainty regarding realization of

consideration.

COMPANY LAW

CER Sale is Other Income and not Turnover:

A combined reading of section 43A (Turnover) and Schedule VI of the Companies Act

Case Laws

• TATA Consultancy Services Ltd. Vs. State of Andhra Pradesh

• CER credits are considered goods, as they have all the attributes thereof.

TAXATION OF CARBON CREDITS

• CER credits satisfies 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.

INDIA’ POTENTIAL IN CARBON TRADING

• India’s 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.

SOURCES OF INFORMATION :

• ICAI Journal: April 2006 Edition

• ICAI Journal: October 2006 Edition

• Greatest source of Information ever invented : INTERNET

THANK YOU………. C O R P O R A T E S G R O U P