CARBON CREDIT ACCOUNTING - A CASE STUDY

MrPiyushKumarRameshbhai

[B.com(a/c),B.com(stat),M.com(a/c),M.com(stat),M.Phil.]

Ph.D.Scholar,HemchandracharyaNorthGujaratUniversity,Patan,Gujarat,India.

INTRODUCTION:

Globalwarmingproblemhasbecomeamajorproblemforeverycountrynowadays.Therefore,after1970,variousorganizationsfromdifferentcountriescame forward to overcome such problems. The UNFCCC (UNITED NATIONS FRAMEWORKCONVENTIONONCLIMATECHANGE)wasthefirsteffort to prevent pollution like GHG (greenhouse gases), which is increasing in general. The environment was founded in 1992 in Rio de Janeiro, the capital of BrazilGlobalConferenceonClimateChangeduetoGreenHouseGasesMany countriesexpressedconcernaboutit.Atthisconference,severalcountriessigned theUNFCCC.Then,in1997,aglobalconferenceinKyoto,Japandraftedadraft toreducetheemissionofgreenhousegases,andhenceitwasnamedtheKyoto Protocol.Thisprotocolwasdulydated.Enactedintolawon16/02/2005.

Thisorganizationcameintoexistenceafter1992.First,heundertookeffortsto reducepollutionfromtheatmosphereby5%.Developedindustrializedcountries thathaveratifiedtheActhaveagreedtoreducetheirgreenhousegasemissions by5.2%oftheir1990levelsfrom2008to2012.GHG=Sincetheamountofcarbon dioxide, carbon monoxide, etc. is mainly high in greenhouse gases, UNFCCCfirsttookeffortstostopit.

Twotypesofproceduresarerecognizedhere.

1. TradeinGreenHouseGasesand

2. CleanDevelopmentMechanism(CDM)

Accordingtothislaw,thereisnonecessaryconditionfordevelopingcountriesto implementthetermsoftheKyotoProtocol,butitisagoodopportunitytogetforeigninvestmentbyreducingpollutionintheircountrythroughtheabovemechanism.

Whatiscarboncredit?

Acarboncreditisacertificateissuedtocertifyemissionreductions.Thesecertificates are traded on the international market and purchased by companies in developedcountriesthatsigntheKyotoProtocoltoreduceGHGemissionsinthe most cost-effective manner Acarbon credit is a financial instrument and is an intangibleasset.Untiltheyaresold,theyaretreatedasassets(inventory)inthe balancesheet.

Theconceptofcarboncreditcameintobeingasaresultofincreasingawareness oftheneedforpollutioncontrol.Ittookformalformafteraninternationalagreement between 41 countries popularly known as the Kyoto Protocol.Acarbon creditisacertificategiventocountriesthataresuccessfulinreducingemissions thatcauseglobalwarming.Thisagreementwasbroughtintoexistencetoreduce greenhouse gases. According to the provisions of this agreement, developing countrieshavetoreducetheemissionofgreenhousegasesandtheycansellthe creditsobtainedbythistodevelopedcountries.Developedcountriescanreduce pollutionatarelativelylowcost.Thisisbecausethecostofpurchasingcreditsis lowerthanthecostofabatement.

Howdoescarboncreditcomeintoexistence?

AccordingtoArticle12oftheAgreement,suchanagreementisbetweendevelopedindustrializedcountriesanddevelopingindustrializedcountries.Underthe termsoftheagreement,anindustryinadevelopingcountryagreestoreducethe amountofcarbonandothergreenhousegasesemittedbyitsindustry Bydoing so,thisdevelopingindustrializedcountryearnscarboncreditsknownasCertifiedEmissionReduction(CER).Adevelopedindustrializedcountrycansellthe carbon credits thus earned to a developing country This amount from the sale willhelpthedevelopingcountry'sindustryreducetheamountofgreenhousegas pollutionAbatementtechnologieswillbeadoptedanddevelopedcountrieswill beabletoshowthattheyhavereducedpollutionbypurchasingcreditsanddemonstratingtheircommitmenttocomplyingwiththetermsofthisagreement.The agreement aims to increase foreign investment in developing countries and reducepollutionbytradingcarbonemissions.

KyotoProtocol: Ingeneral,theKyotoProtocolisasetofrulesforbothdevelopedanddeveloping countries. As many as 41 developed countries first undertook such efforts to cleantheatmosphereandpreventpollution.

Here

as

pertherulesofKyotoProtocol

Ÿ Todevelopedcountries–ANNEX-1COUNTRIESaswell

Developingcountriesareknownas–NONANNEX–11COUNTRIES.

AccordingtotheKyotoProtocol,developingandleastdevelopedcountriesare notboundbytheiremissions.UndertheKyotoProtocol,countrieswithbinding emission reduction targets that are currently under development are granted allowances, i.e. carbon credits, equal to the number of permitted emissions to meettheprescribedreductiontargets.Thiscarboncreditrepresentsanallowance for emitting one metric ton of carbon dioxide equivalent. To meet emission reductiontargets,obligatingcountries(developedcountries)inturnsetlimitson GHG emissions by their domestic businesses and institutions. In addition, to enable developed countries to meet their emission reduction targets, the Kyoto Protocolisbasedonthreemarket-basedmechanisms.

1. JointImplementation(JI):

Thejointimplementationhere(JOINTIMPLEMENTATION)willbeanyone developed country going to a developing country Global Warming Effortswillbemadetoeliminatesuchproblems.Thedevelopedcountrywill strivetoreducetheGHGemissionsofthedevelopingcountry

UnderJI,adevelopedcountrywitharelativelyhighcostofdomesticGHG reductioncansetupaprojectinanotherdevelopedcountrywitharelatively low cost and receive carbon credits that can be applied toward their emissionstargets.

2. CleanDevelopmentMechanism(CDM):

UndertheCDM,adevelopedcountrycanundertakeaGHGreductionprojectactivityinadevelopingcountrywherethecostofGHGreductionisgenerallymuchlowerandthedevelopedcountrywillbeawardedcarboncredits for meeting its emission reduction targets. E.g. Plans include reforestation schemesandinvestingincleantechnologies.

InthecaseofCDM,organizationsfromdeveloping/leastdevelopedcountriescansetupGHGreductionprojects,getthemapprovedbytheUNFCCC and get carbon credits. Such carbon credits generated by organizations in developedcountrieswithemissionreductiontargetscanbepurchased.The unit associated with CDM is the Certified Emission Reduction ( CER) whereoneCERisequivalenttoonemetrictonofcarbondioxide.

HeregenerallyanycountryundertakeseffortstoreducetheamountofGHG initsowncountry E.g.MunicipalitiesinGujaratbyErosionofforestsPlant moretreestoprevent

3.

InternationalEmissionsTrading(IET):

Under the IET, developed countries with emission reduction targets can trade in the international carbon credit market. This means that organizationsindevelopedcountriesexceedtheiremissionlimitsandcanbuycarbon creditsfromothercountrieswhoseactualemissionsarebelowtheirsetlimits.Carboncreditscanbeexchangedbetweenbusinessesorboughtandsold intheinternationalmarketatprevailingmarketprices.

Non-polluting companies in less developed countries can sell carbon dioxide emissionallowances(carboncredits)andearnextramoneyintheprocess.

HereaccordingtothisconceptallthecountrieswhichcomeinANNEX-1That is,developedcountrieswillselltheirERUstodevelopingcountriesandmakea profitwillget

ERU=EMISSION

REDUCTIONUNITS

Herearethesavingsfromeachcountry'semissionstargetsmetbytheUNFCCC CurryownsincreasedunitsIt'snotintheinternationalmarketBuyingandselling Processofitsmarketpricewilldoaccordingly

ERU=CER

CER=CERTIFIEDEMISSIONREDUCTION

E.g.AcountrylikeIndiaproduces1,00,000tonnesofelectricitybyusingwindmillsinsteadofcoal havesaved.Thatmeans1,00,000CERcarboncreditshave beenobtained.

Ÿ Ifnowthis1,00,000CERHowmanyIndians,ifIndiasellsRs,Let'scalculatewhatweget.

Total=1,00,000CER

ValueofoneCER=5EURO

1,00,000CER*5EURO*78=3,90,00,000Rs.

Carbontrade:

Thismethodofbuyingandsellingcarboncreditsisknownascarbontrading.

Carbontradehascreatedanewtradingplatformattheinternationalleveltoday Everycountrycantrytogetcarboncreditsbysettingalimitinitsowncountry andgetlesspollutionthanthatandsellsuchCERsattheinternationalleveland earnprofit.

Calculationofcarbonemissions:

Internationally accepted methodologies are implemented and calculated to determine whether an industry has reduced its carbon emissions. For this purpose,carbonemissionsareconsideredasabaselinebeforetheimplementationof themechanismproject.Carbonemissionsarethenmeasuredafterimplementing themechanism.ThischangeisconvertedintothestandardunitofCER.

CDMprojects:

1. Theprojectshouldprotectbiologicaldiversityandminimizetheuseofnaturalresources

2. PriorapprovaloftheCDMExecutiveBoardisrequiredforanyproject.

3. There is a provision to introduce CDM only in projects implemented after theyear-endof2000.

4. TheareaunderforestareadatedThereisaprovisiontoapplytheCDMprojectonlyinareasnotfallingon31/12/1989.

5. Carbonreductionshouldbedemonstratedaftertheintroductionofpollution abatementprocesses.

6. Thereshouldbeanindependentauditor'scertificationthatthecarbonreductionintheatmospherebytheprojectismeasurableandlong-term.

7. Shouldbeconsistentwiththedefinitionofbalanceddevelopmentofthegovernmentofthecountryconcerned.

8. Thereisaprovisiontofixthedurationoftheprojectbeforestartingtheproject.Atermisforsevenyears.Thistermmayberenewed.Thesecondtermis fortenyears.Thistermisnotrenewable.

9.2%oftheproceedsfromthesaleofcarboncreditsisearmarkedforspendingoncountriesmostaffectedbyclimatechange.

10. Leakageieaccidentalcarbonemissionandtheirmanagementshouldbementionedintheprojectmanagement.

11. ProvisionismadetouseacertainportionofthecarboncreditfortheadministrationcostsoftheCDM.

12. ThereisaprovisionnottofundtheCDMprojectfromtheOfficialDevelopmentFund.

Projectreport:

First of all, a project report should be prepared. It should mention the detailed methodology and its results. The views of the local people should also be includedinit.Thenitisnecessarytogetapprovalfortheprojectfromthegovernmentoftherespectivecountry

Auditor'sapproval:

Theprojectrequiresnotonlygovernmentapproval,butalsotheapprovalofan auditorCDM,theExecutiveBoardappointsanindependentauditorforthesame.

Theauditorverifiestheprojectproperly Itexaminesthewayofcalculatingcarbonreduction,itsmonitoring,governmentapproval,etc.TheRegistrationAuditorsubmitshisreportandprojectreporttotheCDMExecutiveBoard.Thenthe projectisregisteredforamaximumoftwomonths.

Discloser:

Afterregistration,theprojectcanbeimplemented.Anindependentauditoralso verifies whether carbon emissions actually occur as specified in the project report.The auditor submits his report to the CDM Executive Board. CERs are allocated based on this report. Gujarat Fluoro Chemical Ltd. Is located in the Panchmahal district in Gujarat. India's first and the world's third CDM project hasbeenbuilt.Thiscompanymanufacturesgasesusedforrefrigerators.Dueto thiscompany'sEco-friendlytechnology,theemissionofagreenhousegascalled HFC23isreduced.

Whattypeofasset isCER?

Considering the non-physical nature of CER, it is included in theAccounting Standard(AS26),IntangibleAssetsAsperAS-26,thedefinitionof"Intangible Asset"isnotedasfollows

"Anintangibleassetisanidentifiablenon-monetaryasset,withoutphysicalsubstance,heldforuseintheproductionorsupplyofgoodsorservices,forleaseto others,orforadministrativepurposes.”

FromtheaboveinformationwecannotethatalthoughCERsarenon-monetary assetswithoutphysicalform,theydonotstrictlyfallwithinthemeaningof"intangibleassets"asperAS26.ThereasonisthatCERsarenotheldforuse.productionorsupplyofgoodsorservicesandCERsareneitherusedforadministrativepurposesnorusedforthepurposeofleasingtoothers.

CERisinventorythatexistsbecauseitisproducedandheldforthepurposeof saleintheordinarycourseofbusiness.Therefore,eventhoughCERisanintangibleasset,itisaccountedforintheBstandardandshallconformtotherequirementsofAS2.

Presentation:

Emissionrightscertifiedaspartofexistinginventoriesshouldbepresentedinthe balancesheetseparatelyfromothercategoriesofinventoriessuchasrawmaterials,work-in-process,finishedgoods,andothers.

Financialstatement:

Thefinancialstatementsshoulddisclosethefollowinginformationregardingcertifiedemissionrights:

Ÿ

CERsheldasinventoryandthebasisofvaluation.

NumberofCERsundercertification.

Ÿ

Ÿ

Depreciation and operation and maintenance costs of emission reductionequipmentincurredduringtheyear

CONCLUSION:

Carbontradingisaneffectivetoolfordevelopingandnon-developedcountries to obtain additional benefits. The Clean Development Mechanism is also an effective source of technological and economic development for developing countries with environmental upgrading.Although India is the largest beneficiaryofcarbontrading,itstillhascarboncreditsinthemarketNottherightpolicy.Fortheproperfunctioninganddevelopmentofcarbonmarketsandcarbon tradingpractices,aseparatefinancialaccountingstandardmustbeestablished.

As a result, CO2 emissions in any country will decrease, problems like global warmingwilldecrease,pollutionwilldecrease,tradewillincrease,thesenseof socialresponsibilitywillincrease,andeachcountrywillgetcarboncredit.Getit andsellitforprofitwillget,theamountofGHGwilldecrease,andthestandard oflivingofthepeopleoftheircountrywillimprove.

REFERENCES:

I. Trivedi S. (2016), “GlobalWarming and Kyoto Protocol: Indian Scenario on Carbon Credits”, <http://wwwindiacore com/bulletin/papers-gp5/sachin-trivedi-globalwarning-and-kyoto- protocol-indian-scenario-on-carbon-credits.pdf>, accessed on June29,2016.

II. Kumar KSK (2016), “Carbon Trading”, <http://coe.mse.ac.in/dp/Paper%2016.pdf> accessedonAugust09,2016.

III. Bothra, Nidhi – (Carbon Credits- Unraveling Regulatory, Taxation & Accounting Issues).

IV Brands&CarbonOffsets–CarbonOffsets,Daily,2008,pp-08-12.