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Submitted By
ABHISHEK SINGHAL-P35111
ROSHAN SINGH-P35176
KANAK-P35139
KAUSHIK GHOSH-P35141
SAROJ KUMAR BEHERA-P35179
SUKRITI MEHTA-P35192
Table of Contents
1. INTRODUCTION.................................................................................................. 1
1.1 KYOTO PROTOCOL........................................................................................ 1
1.2 CARBON CREDITS......................................................................................... 2
1.3 KYOTO MECHANISM...................................................................................... 2
1.4 COMPLIANCE vs VOLUNTARY MARKETS.........................................................3
1.5 STANDARDS.................................................................................................. 3
1.5 EMISSION TRADING....................................................................................... 5
1.5.1 BUYERS.................................................................................................. 6
1.5.2 SELLERS................................................................................................. 6
2. CARBON CREDIT
ACCOUNTING.
.8
2.1 Accounting for Carbon-India and International.............................................8
2.1.1 Global Scenario...................................................................................... 8
2.1.2
India
.8
2.2 VALUATION OF CERS................................................................................... 10
2.2.1 COST OF CERs:..................................................................................... 10
2.2.2 NET REALIZABLE VALUE OF CERs:........................................................11
2.3 CLASSIFICATION TABLE FOR CARBON CREDITS IN INDIA:...........................12
3. CASE STUDY..................................................................................................... 14
3.1 GREENPLY INDUSTRIES LTD........................................................................14
3.2 HOW IT EARNED CARBON CREDITS............................................................14
3.3 HOW MUCH IT EARNED............................................................................... 15
3.4 KEY FACTS:................................................................................................. 15
3.5 CONCLUSION.............................................................................................. 15
4. PRESENT SCENARIO AND VIABILITY OF CARBON CREDIT BUSINESS................16
5. FUTURE OF CARBON CREDIT AS A BUSINESS..................................................18
6. BIBLIOGRAPHY................................................................................................. 19
1. INTRODUCTION
With the progress of mankind there has been an increasing adverse effect on the global
environment. This has caused immense global warming. It may be caused due to climate
change, rapid industrial growth, increase in energy consumption, increase in carbon dioxide
and other green house gas emission. Climate Change, in a broad sense refers to long term
changes in climate, including average temperature and precipitation. Global warming is
seriously affecting plants, animals, humans and the Earth. Thus, we have been forced to look
a long way ahead.
registered and approved CDM projects are called Certified Emission Reductions
(CERs).
1.5 STANDARDS
There are a number of different certificate types for carbon credits generated, certified by
different certifying bodies with different "standards". However, they fall into three broad
categories:
1. Kyoto Protocol compliant standards
2. Voluntary standards
3. Premium standards
Kyoto Protocol Compliant Standards
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Kyoto is a cap and trade system that fixes an upper limit on the Annex 1 countries mostly
developed for carbon emissions. There are 2 kinds of carbon credits that can be created to this
end: Joint Implementation and The Clean Development Mechanism.
Voluntary Standards
Voluntary carbon credit standards refer to the emerging market for carbon credits outside the
Kyoto Protocol compliance regime. The following are the main standards used in Australia.
There are other standards from around the world, and Australia is now bringing it's own
standards into line with those in Europe, UK and USA.
Voluntary Carbon Standard (VCS)
The VCS Program provides a robust, global standard for approval of credible voluntary
offsets. VCS offsets must be real (have happened), additional (beyond business-as-usual
activities), measurable, permanent (not temporarily displace emissions), independently
verified and unique (not used more than once to offset emissions).
NSW Greenhouse Gas Reduction Scheme (GGAS)
The NSW Greenhouse Gas Reduction Scheme (GGAS) commenced on 1 January 2003.
These were some of the first third party certified carbon credits available in the world. NSW
Forests produced NGACs that were the first third party certified forestry carbon credits
traded globally.
Renewable Energy Certificates (REC)
Renewable Energy Certificates (RECs), also known as Green tags, Renewable Energy
Credits, Renewable Electricity Certificates, or Tradable Renewable Certificates (TRCs),
represent proof that 1 megawatt-hour (MWh) of electricity was generated from an
eligible renewable energy resource.
There are many different types of REC standards around the world. In Australia, there are
several ways of producing RECs, including GreenPower.
Note: RECs are different from carbon credits which certify that 1 tonne of CO2e has been
saved or removed.
Premium Standards
Above and beyond both the Kyoto and Voluntary standards are a number of "Premium"
standards. Projects with these premium standards are generally first certified either under the
VCS or as CDM CERs or JI ERUs.
Gold Standard (GS)
The Gold Standard is a non- profit foundation under Swiss law and is funded by public and
private donations. It is working in the Clean Development (CDM), Joint Implementation (JI)
and voluntary markets to provide high quality premium carbon credits.
The GS is based upon a rigorous assessment framework that makes an assessment of the
project type and its sustainable development. Projects must be 'additional' meaning that the
people behind a project need to demonstrate that the project would not have occurred without
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the combined incentives that carbon credits provide. Due to financial, political or other
barriers, the project must prove it goes beyond a "business as usual" scenario and that
greenhouse gas emissions are lower with the project rather than without the project.
1.5.1 BUYERS
Carbon buyers are mostly companies falling short of their carbon emission cap. But, public
utilities, manufacturing entities, brokers, banks, and others can also buy credits for
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investment purposes. Carbon, like any other commodities, has started trading on Commodity
Exchanges.
It means that if the buyer thinks that the current price is low for him, he can wait for the
prices to increase and then sell his credits. So, mostly investors buy now to sell later. There is
a big requirement of carbon credits in Europe.
These carbon credits are majorly with the large manufacturing companies who adopt
UNFCCC norms. Retail or small investors can come in the market and buy the
contract/certificate if they think the market of carbon is going to strengthen up. Like any
other asset they can buy these too. The credit/asset is kept in the form of an electronic
certificate.
1.5.2 SELLERS
A carbon credit certifies or permits emission of one tonne of carbon dioxide (CO2) and these
credits can be traded for money. To be able to sell carbon credits, the seller has to get a
certificate for the carbon credits from one of the governing bodies, which is required to
declare/authenticate the credits being sold. There are a number of different certificate types,
provided by different certifying bodies with different standards. However, they fall into three
broad categories:
1. Kyoto Protocol compliant standards
2. Voluntary standards
3. Premium standards
The major seller countries are as follows:
As CER trading is being done in India, and many countries in Annexure-I of Kyoto Protocol
have an carbon emission cap so they are buying CER from developing nations like India,
China etc. Therefore CER has become a concern of accounting in the trade accounts and
there is a need of some accounting standard for CER. Different countries follow different
accounting standard. International Accounting Standards Board (IASB) creates accounting
standard for global scenario. In India the accounting guideline are given by ICAI and it is in
the process of making a standard framework for accounting practice for CER.
a possible asset that arises from past events the existence of which will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the enterprise.
A contingent asset is not shown in financial account except in footnote.
But when the enterprise gets conformation from the UNFCCC that CERs have been issued to
the enterprise. After this certification a CER now has all the features of an Asset as set
out by the Framework.
As Enterprise gets CER certification from UNFCCC it has created an ASSET, Now
raises the question Which type of asset is it?
Now as the CER is generated as an asset we have to check the nature of this asset.
As CER are intangible in nature because of its non-physical form but according to definition
of intangible asset given below
An intangible asset is an identifiable non-monetary asset, without physical
substance, held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes.
As there is no emission cap for Indian companies so CER generated by them are not used in
production or any other activities mentioned above. But they are generated and held by
enterprises for sale.
So CERs as mentioned intangible asset above are out of scope of treated as intangible asset.
So they are dealt with another accounting standard that is Intangible asset held for sell are out
of purview of intangible asset and treated as Inventories. And inventories are defined as
Inventories are asset:
i)
Held for sale in the ordinary course of action
ii)
In the process of production for such sale
iii)
In the form of materials and supply to be consumed in production process or in the
rendering of service.
So being an Intangible Asset CERs are treated in accounts as Inventories (as per AS2 )
As mentioned above CERs do not come into existence until UNFCCC recognized it and
provide certification for it. So any cost incurred before the CERs coming into existence are
not inventoried but they are treated as intangible asset. Thus only the expense incurred for
certification and operating are shown in inventory.
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What can
carbon
Credit be?
AS
Applicable
An
Intangible
Asset
AS-26
Reasons for
classification
Advantages of
this
classification
Disadvantages of this
classification
1. Tax benefits
for the company
classifying this
as an Intangible
Asset.
2. Benefit of
Amortization can
also be availed
on this asset.
1. Maintenance of
Separate Asset Register
for this Asset.
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A
Contingent
Asset
An
Inventory
AS-29
AS-2
1. Tax benefits
for the company
classifying this
as an Contingent
Asset.
2. Benefit of
Amortization can
also be availed
on this asset.
1. Easy
Computation.
1. Stakeholders in a
dilemma, regarding the
date of realization of this
asset.
2. Financial Reporting
will complicate, since
this would require an
audit for quantification
of this Contingency.
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Other
Income
AS-9
2. Governments
have an edge
since the sale of
the inventory
attracts the
Corporate tax
2. Separate employment
to asses the Inflow and
outflow of the credits.3.
Foreign Currency
exchange rate would
make the accounting
more complicated.
1. Easy
Computation.
1. It is an important and
material item, but shall
be looked upon by the
investor as just another
income.
2. Governments
have an edge
since the sale of
the inventory
attracts the
Corporate tax
3. CASE STUDY
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3.5 CONCLUSION
Thus we can see that Income by way of sale of Carbon Credit was beneficial to Greenply
Industries and the Income was credited to the Profit and Loss Account.
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India has generated nearly 30 Million carbon credits and 140 million in run, which is the
second highest generated volume in the world. India was the second largest among the ten
developing nations that ratified the protocol, with 2225 projects (as of Aug 2014) registered
with the CDM, behind China, with 3,969 projects spread across various sectors chiefly in
energy efficiency ,renewable energy and biomass energy projects.
Carbon, like many commodities, is being traded on India's Multi Commodity Exchange
(MCE). It is first exchange in Asia to trade carbon credits. (Carbon credits in india).
For example, Delhi Metro Rail Corporation (DMRC) is the first rail project in the world
which is earning carbon credits by using regenerative brake system in its rolling stock that
saves 30 percent electricity consumption.
DMRC supposedly can claim 400,000 Certified Emission Reductions (CERs) for a 10-year
credit period commencing from December 2007, the year of project registration. Estimated
calculation of its worth is Rs 1.2 crore per year for 10 years. (Carbon Credit: India)
However, there has been a continuous fall in the price of a carbon credit for the for past two
years from 24 to a meager 84 cents at present.( January, 2014)
Reduction in demand and falling prices of CERs have resulted in a surplus in developing
nations like India, also significantly resulting in reduction of the number of projects going for
for CDM registration.
With prices crashing, companies are left with large amount of carbon credits in hope of a
price rise. For example, Tata Power has set up renewable energy projects making up for 2025 per cent of its total power production through a mix of hydro, solar, wind, geothermal and
waste gas generation. 4 of the renewable projects are registered under CDM. The company
generated 2.6 million CERs, out of which only 200,000 were sold; 1.4 million are sold but yet
to be paid for and the left have not been sold due to low prices.
Of many reasons which have been cited, it is agreed that the reduction in CDM projects, CER
prices and demand are connected to the European economic slowdown, particularly since the
US decided not be the part of the international carbon trade from the very beginning. The low
prices reduce the future investment in future emission reduction projects, also bringing down
the viability of carbon markets. (The Carbon Cycle)
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6. BIBLIOGRAPHY
Carbon Credit: India. (n.d.). Retrieved from http://www.sustainuance.com/how-carbon-offsets-couldbe-india-inc-s-big-opportunity/
Carbon credits in india. (n.d.). Retrieved from http://www.globaladvisors.in/carboncredits.htm
CDM Pipeline Organisation. (n.d.). Retrieved from http://cdmpipeline.org/cdm-projects-region.htm
Enviornmental Information system center . (n.d.). Retrieved from
http://www.nswai.com/images/newsletters/feb2007.pdf
India and Carbon Credits. (n.d.). Retrieved from http://www.onlinecarbonfinance.com/india-andcarbon-credits.htm
The Carbon Cycle. (n.d.). Retrieved from
http://www.businessworld.in/news/business/environment/the-carbon-cycle/1223558/page-1.html
Greenply Annual Report Retrieved from :
http://www.greenply.com/images/pdf/Annual_Report_2008-09.pdf
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