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27th December, 2011
                                               Tuesday



 CARBON CREDITS


Prepared and Presented by:
•Ms. Shruti M.           • Mr. Kailash S.
•Ms. Darshika Singhal    • Mr. Anupam Mittal
                         • 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           Changes in wind          Changes in
   level                    and precipitation        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

• UNFCCC’s 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 Aug’02, 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 market-
    based 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 doesn’t 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 UNFCCC’s
  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           CERs actually issued to entity.
  generating entity.


  Treated as Contingent Asset.             As Assets.
Accounting Aspects (contd..)
•                 Recognition in Financial Statements



     Future Economics Benefits             Asset has a Cost or
     will flow to entity                   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       •   Experts

•   Operator          •   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 India’s 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 World’s 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 CA’s 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

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Carbon credit

  • 1. 27th December, 2011 Tuesday CARBON CREDITS Prepared and Presented by: •Ms. Shruti M. • Mr. Kailash S. •Ms. Darshika Singhal • Mr. Anupam Mittal • Ms. Heena Nagrani •Mr. Punit Harkut •Ms. Meghana Agrawal •Mr. Hardik Varyani •Mr. Varun Aggarwal •Mr. Pratik Salgia
  • 2. Climate Change Rapid Industrial Growth Increased energy consumption Increased CO2 and other GHG emissions Global Warming due to increased concentration of GHG Increasing sea Changes in wind Changes in level and precipitation crop yields
  • 3. 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
  • 4. 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.
  • 5. 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.
  • 6. United Nations Framework Convention on Climate Change • UNFCCC’s 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
  • 7. 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 Aug’02, and maintains that the major responsibility of curbing emission rests with the developed countries, which have accumulated emissions over a long period of time.
  • 8. 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 market- based 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).
  • 9. 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.
  • 10. 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
  • 11. CDM Projects Types: Energy Efficiency Projects Transport Projects Methane Recovery Projects Industrial Process Changes Cogeneration Agricultural Sector
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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 doesn’t 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.
  • 17. 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 UNFCCC’s 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. 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).
  • 22. 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.
  • 23. Types of Carbon Trading
  • 24. 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
  • 25. 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
  • 26. Accounting Aspects • CERs are Assets. Recognition of CERs as an Asset. Period upto CERs are issued to CERs actually issued to entity. generating entity. Treated as Contingent Asset. As Assets.
  • 27. Accounting Aspects (contd..) • Recognition in Financial Statements Future Economics Benefits Asset has a Cost or will flow to entity 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
  • 28. Taxation Aspects • Depreciation on CDM Devices:  Energy saving devices, renewal energy devices.  Air pollution control devices, solid waste control equipments.
  • 29. Taxation Aspects (Contd..) • Expectations from Government:  Income from other sources  Special (Minimum) rate  Tax holidays  MAT exemption – VCF
  • 30. 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
  • 31. Disadvantages of Carbon Trading • Right To Pollute • Lack of Centralized system or global framework • No effective Carbon reduction in the atmosphere
  • 33. Parties Involved in Carbon Trading • Project entity • Supplier • Sponsor • Buyer • Lender • Insurer • Equity provider • Rating agencies • Constructor • Experts • Operator • Host government
  • 34. 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
  • 36. 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.
  • 37. 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.
  • 38. 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 India’s 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 World’s 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.
  • 39. 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.
  • 40. 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.
  • 41. 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.
  • 42. 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 CA’s 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.