Transcript accounting of carbon credit

CARBON CREDITS
PRESENTED BY: CORPORATES
EFFECTS OF GLOBAL WARMING
Over the last many years climatologists, geologists and various
researchers have given us warnings on climate changes.
“GLOBAL WARMING”
R
E
S
U
L
T
S
IN
Season shifting, Changing landscapes, Rising sea
levels, Floods & Droughts, Storms and other
Epidemics
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
(Developed)
Annexure II
countries
(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,
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, CER’s are delivered.
 These certificates can be traded at designated
markets called as Climate Exchange.
TRADING OF CARBON CREDITS
Sale of Carbon Credits
Developing
Countries
Developed
Countries
Inflow of FOREX
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 Inventories
INVENTORY
Assets
Held for Sale in ordinary course.
VALUATION
Cost of Purchase
Expenses incurred for bringing inventories at
their present location and condition.
ACCOUNTING FOR CARBON CREDIT
• AS-9 REVENUE RECOGNISITION
1. 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……….
CORPORATES
GROUP