Presentation on Carbon Credits - Nidhi Bothra

By Nidhi BothraVinod Kothari Consultants P Ltd

1012 Krishna1012 Krishna224 AJC Bose Road

Kolkata – 700017. IndiaPh no – 91-33-22817715/ 1276/ 3742

Email: nidhi@vinodkothari comEmail: [email protected]

Concerns on ecological imbalances and global warming issues have several times been addressed and discussed at various Summits in the

tpast◦ Rio de Janeiro Summit or the Earth Summit in 1992◦ Montreal Protocol◦ Vienna Conference◦ Kyoto Protocol◦ Kyoto Protocol◦ Copenhagen SummitSix recognised GHG gases◦ Carbon dioxide◦ Methane◦ Nitrous oxide◦ Hydrofluorocarbons◦ Perfluorocarbons◦ Sulphur hexafluorideN d f d i i GHG i i l i l b l d bNeed for reduction in GHG to maintain ecological balance and can be done in two ways:◦ Sequestration, to reduce the impact of emissions◦ Offset the impact of emission of GHG by undertaking greener project

Understanding Carbon Credits by Nidhi Bothra

The projected emissions growth are as below, the need for mitigating global warming is quintessential


What were introduced as tradable rights to control pollution by John Dales, economist from Canada, in 1968 are today in y J , , yvogue…A generic term to the attempt to mitigate the growth in concentrations of GHGOne carbon credit is equal to one ton of carbon dioxide it isOne carbon credit is equal to one ton of carbon dioxide, it is an “Entitlement Certificates” issued by the United Nations Framework Convention on Climate Change (UNFCCC) acknowledging reduction in emissionsCertified Emission Reductions (CERs) or carbon credits earnedCertified Emission Reductions (CERs) or carbon credits earned through the reductions in emission of greenhouse gases. CERs are:◦ self generated

purchased through CER purchase agreements◦ traded in the international carbon credit market

trading on the stock exchanges bidding for tenders floated by several governments


C b f t i t f th GHGCarbon footprint – measure of the GHG emissions caused by an entity. Carbon footprint is a subset of ecological footprintfootprint is a subset of ecological footprint. Mitigation of carbon footprint is called carbon offsets. For sustainable development people want to stay carbon neutral by offsetting their carbon f t i tfootprints


187 countries by signing and ratifying the treaty committed themselves to reduce the carboncommitted themselves to reduce the carbon emission levels by at least 5% below the 1990 baseline emission levels by the commitment period of 2008-2010.of 2008 2010.Targets not applicable to developing and least developed nationsThe Protocol spoke about ‘common butThe Protocol spoke about common but differentiated responsibility, through the three emission reduction mechanism :-

Cl D l t M h i (CDM)◦ Clean Development Mechanism (CDM)◦ Joint Implementation (JI)◦ Emission Trading


JI are projects undertaken by one developed t f th b fit f th thcountry for the benefit of the other

Emission reductions are awarded as Emission Reduction Units (ERUs). is a trading unit under ( ) gthe Kyoto Protocol representing a reduction of greenhouse gases under the Joint Implementation mechanism where itImplementation mechanism, where it represents one tonne of CO2equivalent reducedTh J i t I l t ti j tThe Joint Implementation projects are supervised by the Joint Implementation Supervisory Committee (JISC)


Kyoto Protocol introduced the concept of ‘cap and trade’ systemtrade system◦ carbon dioxide emissions should be capped ◦ Emission reductions quantified in real terms can be tradedEU Greenhouse Gas Emission Trading System (EU-ETS) , UK E i i T di G (ETG) Chi Cli tUK Emissions Trading Group (ETG), Chicago Climate Exchange (CCX), and the New South Wales Greenhouse Gas Reduction Scheme are offspring of the cap and trade system.t ade systeThe EU-ETS is the largest greenhouse gas emissions trading scheme in the world.◦ 2.8 billion tons of carbon dioxide were traded in the EU-ETS in

2008 accounting for nearly 60 percent of the world's total2008, accounting for nearly 60 percent of the world s total, compared to 94 million tons in 2005.

More than 20 platforms for trading carbon in the world


A voluntary carbon market exists outside the compliance market; i e outside the Kyoto compliantcompliance market; i.e outside the Kyoto compliant mechanism.These are voluntary initiatives by socially responsible companies and individuals wanting toresponsible companies and individuals wanting to become carbon neutralThe Chicago Climate Exchange, is a member based exchange for voluntary GHG reductions for the g yUnited States.The carbon credits generated outside the compliance mechanism are verified and traded in h l b l h k ll fthe global over the counter market as well for

greenhouse gas emissions and are called verified emission reductions (VERs)


A very active marketThe two prime categories of carbon instruments thatThe two prime categories of carbon instruments that can be traded in the marketplace are:◦ carbon allowances or the offset credits ◦ allowance derivatives

swaps, options & futures allowing companies to lock in pricing on carbon unitsLeading to price discovery and liquidity however since the financial crisis there is a lot of hostility with regard to trading in carbon derivatives terming it as “ineffective”derivatives terming it as ineffective

Major Exchanges trading CERs◦ European Exchange Climate (ECX)◦ Nymex Green Exchangey g◦ Nordpool◦ Powernext◦ OTC markets using bilateral trade agreements


There is a recent surge in the carbon trading activities in EuropeWith the growing need for curbing pollution levels in developed nations carbon tradinglevels in developed nations, carbon trading has emerged as a multi-billion dollar market in global emission tradingin global emission trading

Source: Commodity Insights Yearbook 2009, MCX


Article 12 of the Protocol defines Clean Development MechanismPurposePurpose◦ assist Parties not included in Annex I in achieving sustainable development◦ to assist Parties included in Annex I in achieving compliance with their

quantified emission limitation and reduction commitments under Article 3.The CDM allows emission-reduction (or emission removal)The CDM allows emission reduction (or emission removal) projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2One of the flexibility mechanismsCERs earned since 2000 to the end of the first commitment period can be used for the purpose of achieving compliance in the first commitment periodCDM registry ensures that there is accurate accounting ofCDM registry ensures that there is accurate accounting of issuance, holding, transfer, acquisition and cancellation of CERs in all the projects


Buyers of CERs – Developed nations or Annex I i d h K P lcountries as under the Kyoto Protocol

Suppliers of CERs – Developing nations like India, China Brazil etc or Non-Annex I countriesChina, Brazil etc or Non Annex I countriesParties involved in a project activity◦ Project Participant◦ Project Design Document◦ Designated Operational Entities◦ Designated National Authorityg y◦ Executive Board (CDM – EB)◦ CER – Certified Emission Rights


Source: http://cdm unfccc int/Projects/pac/index htmlSource: http://cdm.unfccc.int/Projects/pac/index.html


Project Design – basic framework of a project activity estimating emission reduction to be submitted with EB◦ Set a “baseline” which would represent the anthropogenic emissions that would

fp p g

occur in absence of the proposed project activity◦ Demonstrate essence of “additionality” and the project should contribute to

sustainable development◦ Determining Monitoring methodology Third party validation reportThird party validation reportPDD along with the validation report has to be submitted to the Designated National Authority (DNA) for the host country approval and the project proposer shall commit to provide an annual report for monitoring, certification and issuance of CERs. Then the DNA shall issue

l f l f h ja letter of approval for the projectThe project is submitted for registration with the CDM Executive Board, which shall make the documents public for comments. implementation and the monitoring stageO i ifi i d ifi i b i d d DOEOn-site verification and verification report by independent DOEIssuance of CERRecord of issued CER is CDM registry


Typically negotiation for the sale of CERs starts once the PDD is finalized The Term Sheet is duly prepared andPDD is finalized. The Term Sheet is duly prepared and then parties enter into an Emission Reductions Purchase Agreement (ERPA) which will duly spell out the purchase

i ti i d f d li t f CER t bprice, time period of delivery, amount of CERs to be transferred etc.Key features for a CDM project to qualify:◦ Development funds should not be involved in implementation◦ They should have a well defined measurable baseline◦ CDM projects should be measurable real time◦ Should support sustainable development◦ Should conform to UNFCCC approved methodologies◦ Additionality should be established


Can either be a domestic legal entity or an international organisation which has been accredited and designated by EB and is responsible for;p ;◦ Validation and registration of a proposed CDM project activity which will

be considered valid after 8 weeks if no request for review was made◦ It verifies emission reduction of a registered CDM project activity, certifies

as appropriate and requests the Board to issue Certified Emissionas appropriate and requests the Board to issue Certified Emission Reductions accordingly. The issuance will be considered final 15 days after the request is made unless a request of review is made

◦ There is procedure of accrediting operational applicant entities which is being carried out by accreditation panel (CDM AP) along withbeing carried out by accreditation panel (CDM – AP) along with assessment team (CDM – AT)


After the project participants submit the project design document, the DOE needs to be get the project activity validated and registered with the CDM - EB. DOE may◦ Submit a new baseline methodology and/ or monitoring methodology prior to

validation and registration for CDM Executive Boards approval, prior to validation along with draft CDM – PDD or;

◦ Use an approved existing methodologyV lid i Th DOE d lid h h j iValidation - The DOE needs to validate that the project attains additionality and then registration is a formal acceptance of the project by the Executive Board. Registration is the prerequisite for the verification, certification and issuance of CERs related to ,that project activity.Verification – Independent periodic verification / monitoring of the reductions in the emissions as a result of the registered CDM projectprojectCertification – written assurance that the project has achieved the reduction in the emissions, during the specified time period, as verified


The Conference of Parties serving as a meeting for the parties to the Kyoto Protocol mentioned in the modalities and procedures for CDMfor CDM –◦ "29. Parties participating in the CDM shall designate

a national authority for the CDM.”


To avoid giving credits to projects that would have happened anyway ("freeriders"), rules have been specified to ensure additionality of the projectthe projectThere is a lot of ambiguity on qualification of a project as additional.a project as additional.


Broad categorization of methodologies◦ Methodologies for CDM project activities◦ Methodologies for afforestation and reforestation CDM project activities◦ Methodologies for afforestation and reforestation CDM project activities◦ Methodologies for small scale CDM project activitiesThe modalities and the procedures lay down◦ Role of the executive board◦ Accreditation and designation of operational entities◦ Designated operational entities◦ Participation requirement◦ Validation and registrationg

Role of Designated operational entities◦ Monitoring◦ Vertification◦ Issuance of CERs◦ Issuance of CERs◦ Indicates how the Project Design Document should be

Economic/ Socio-economic impact of the projectBaseline methodologyProcedures to be followedProcedures to be followed


CERs issued are first transferred to the pending account of CDM Registry from where they get forwarded to the

i l inational registry accountProject participant of Annex I Party to the Kyoto Protocol whose national registries are not yet connected t th I t ti l T ti L (ITL) l fto the International Transaction Log (ITL) may apply for a temporary holding account in the CDM registryProject participant of Non - Annex I Party to the Kyoto P t l l f t h ldi t iProtocol may apply for a permanent holding account in the CDM Registry at the time of the first issuance of CERs from their project activity and may be forwarded directly to a national registry account thereafterdirectly to a national registry account thereafterRegistry does not accept emission trading between accounts


Annual Average CERs*

Expected CERs until end of 2012**CERs 2012

CDM project pipeline: > 4200 N/A > 2,900,000,000p pof which:

, , ,

--- 2315 are registered 375,520,755 > 1,810,000,000

--- 65 are requesting registration 4,903,027 > 10,000,000

* Assumption: All activities deliver simultaneously their expected annual average emission reductionsAssumption: All activities deliver simultaneously their expected annual average emission reductions** Assumption: No renewal of crediting periods


Source: Commodity Insights Yearbook 2009, MCX


Title Number of CERs

Issued CERs 428,469,271

Total CERs Requested 452,465,339Understanding Carbon Credits by Nidhi Bothra

Region Number of projects

NAI-Africa 45

NAI-Asia and the Pacific 1790Pacific

NAI-Eastern Europe 13

NAI L ti A iNAI-Latin America and the Caribbean

474


• Huge demand for carbon credits in the developed nations brought immense opportunity for developingnations brought immense opportunity for developing nations like India

• Estimates are - one third of the total CDM projects registered with UNFCCC are from India

• India claims 31% of the total world carbon credit trade• Future forecasts - a CRISIL research report issued inFuture forecasts a CRISIL research report issued in

May, 2010, states that carbon credits generated from emission reduction projects undertaken in India, will triple over next three years and the numbers aretriple over next three years and the numbers are expected to increase from 72 million in November 2009 to 246 million by December 2012


• In India, NCDMA is the Designated National Authority (DNA) that evaluates and approves the CDM projects as per the guidelines and general criteria laid down in the relevant rulesgeneral criteria laid down in the relevant rules and modalities pertaining to CDM in addition to the guidelines issued by the Clean g yDevelopment Mechanism Executive Board and Conference of Parties serving as Meeting of P ti t th U it d N ti F kParties to the United Nations Framework Convention on Climate Change.


Seventh conference of Parties to UNFCCC decided that the Parties participating in CDM shouldthat the Parties participating in CDM should designate a National Authority for the CDMEvery CDM project needs written approval from the DNA stating that the project activity assists the host country in achieving sustainable development.pBusiness Standard News –◦ The Indian government has approved more than 1,400

projects as part of the Clean Development Mechanismprojects as part of the Clean Development Mechanism (CDM) attracting around $6 billion (Rs 28,000 crore) into the country by 2012 through sale of Certified Emission Reduction (CER) certificates


• Purposeto assist developing country Parties in achieving– to assist developing country Parties in achieving sustainable development, thereby contributing to the ultimate objective of the Convention

– to assist developed country Parties in achieving li i h f h i ifi d i icompliance with part of their quantified emission

limitation and reduction commitments under Article 3• Eligibility Criteria

Emission Additionality: The project should lead to real– Emission Additionality: The project should lead to real, measurable and long term GHG mitigation. The additional GHG reductions are to be calculated with reference to a baseline.Fi i l Addi i li Th f C ifi d– Financial Additionality: The procurement of Certified Emission Reduction (CERs) should not be from Official Development Assistance (ODA)


• BaselinesThe project proposal must clearly and transparently describe p j p p y p ymethodology of determination of baseline. It should confirm to following:

• Baselines should be precise, transparent, comparable and k blworkable;

• Should avoid overestimation;• The methodology for determination of baseline should be homogeneous and reliable;• Potential errors should be indicated;• Potential errors should be indicated;• System boundaries of baselines should be established;• Interval between updates of baselines should be clearly described;• Role of externalities should be brought out (social economic Role of externalities should be brought out (social, economic and environmental);• Should include historic emission data-sets wherever available;• Lifetime of project cycle should be clearly mentioned;


A recent Press Information Bureau, press release, stated that:that:◦ India has 520 registered CDM projects, out of the total 2313

projects registered by the CDM Executive Board of the UNFCCC◦ The projects have the potential to generate 43 million Certified

Emission Reduction Units (CERs) per annum amounting to 12% ( ) p g(approx) of the total annual CERs generated by registered CDM projects globally

◦ As on date 79 million CERs have been issued to Indian projects ◦ The value of actual CER issued to Indian projects amounts to US$ p j

790 million, assuming a conservative price of $10 per CER◦ Indian solid waste management market is valued at around

$155.56 million (Rs 728 crore) and is expected to grow at a rate of around 20 to 25 per cent in the next three to five years.Thi i i di i f h h i l i fl f f i di◦ This is indicative of the huge potential inflow of foreign direct investments into India


India, being one of the leading generators of CERs through CDM has a large scope in emissions tradingthrough CDM, has a large scope in emissions tradingForward Markets Commission granted trading permission to carbon credits and has been included in the list of commodities - ‘others’ categoryg yMulti Commodity Exchange of India limited (MCX) launched carbon credit futures trade in 2008 and was Asia’s first Commodity Exchange to launch futures trading in carbon credits to be in league with Chicagotrading in carbon credits to be in league with Chicago Climate Exchange and European Climate Exchange. MCX has been honored with India’s first green exchangeexchangeIndian commodity exchange does not allow direct participation of foreign institutions in India restricting trade where buyers are largely overseas buyers


How to account for CERs?◦ Government Grants◦ Government Grants◦ Intangible Asset◦ InventoryNo separate standard dealing with CERsp gInternational Accounting Standards Board (IASB) had issued an interpretation IFRIC 3 on Emission Rights but later withdrew, continuing debate on the appropriate treatment for CERsappropriate treatment for CERs. Institute of Chartered Accountants of India (ICAI) has issued an Exposure Draft of the Guidance Note on Accounting for Self-generated Certified EmissionAccounting for Self generated Certified Emission Reductions in 2009. ICAI has laid more emphasis on CDM as relevant to India


Expenses in the research and development phase◦ Any cost incurred on development should be accounted for under AS 26 for

intangible assets. CERs held with the CDM Executive BoardCERs held with the CDM Executive Board◦ Where CERs are in the approval stage, these should be accounted for as per the

provisions of AS 29 as Contingent Assets (Para 30 of AS 29 says that an enterprise should not recognize a contingent asset)

◦ Once approved should be recorded in the books as an intangible asset. id tifi bilitidentifiabilitycontrol over resources expectation of future economic benefits flowing to the enterprise.

CERs held for sale ◦ CER which are to be traded in the ordinary course of business, i.e asset held as y ,

‘available for sale’ - accounted for as Inventory under provisions of AS 2. Cost at which CERs to be recorded in books ◦ in case intangible asset expenses are to be capitalized ◦ in case CERs treated as inventory, costs relating to consultant fees, levies imposed by

UNFCCC for approving of CERs are to be inventorised and are to be recorded as lowerUNFCCC for approving of CERs are to be inventorised and are to be recorded as lower or cost or net realizable value

other incidental cost taken to the profit & loss account Any other tangible or intangible asset generated in the process is to be recorded as per the existing accounting standard governing them, i.e AS 10 and AS 26 respectively10 and AS 26 respectively.


Reliance was placed on judgment of the Hon’ble Supreme Court in the matter of Vikas Sales Corporation & Another vspCommissioner of Commercial Taxes & Another , JT 1996 (5) SC 482. In the present case, it was held that:◦ REP licenses conferred upon the transferee choate right that was

exercisable immediatelyli h d i t i i l f th i hi h i d d t f th◦ licenses had intrinsic value of their own which was independent of the value of the goods which could be imported

◦ licenses were bought and sold freely in the market, i.e they had a ready market for trade

In another case of Tata Consultancy Services vs State of AndhraIn another case of Tata Consultancy Services vs. State of Andhra Pradesh and BSNL vs UOI [2006] 152 Taxman 135/ 282 ITR 273/ 145 STC 1, it was held that anything that has the following attributes will qualify to be goods:◦ Utilityy◦ capable of being bought and sold, and ◦ capable of being transmitted, transferred, delivered, stored and

possessed. CER by virtue of fulfilling the above mentioned attributes

l f b d d “ d ”qualifies to be considered as “goods.”


Ambiguity in treatment ◦ Actionable claim or security

Claim to debt or beneficial interest in the moveable propertyClaim to debt or beneficial interest in the moveable property whether existent, accruing, conditional or contingent

◦ ServiceRationale being CERs are exported to developed countries or are traded like securities on the stock exchanges henceare traded like securities on the stock exchanges, hence attracting service tax

◦ GoodNotification issued by the Government of the National C it l T it f D lhi f b dit t b t t dCapital Territory of Delhi for carbon credits are to be treated as “goods” CER were explained as tradable commodity having

market valueready marketwilling buyers and sellers freely transferable as marketable commodities


Notification No. 256/CDVAT/2009/43 dated 13.01.2010 issued by the Government of the National Capital Territory of Delhi concludedthe Government of the National Capital Territory of Delhi, concluded that Certified Emission Rights (Carbon Credits) are taxable under DVAT Act, 2004 and the rate applicable is 4% as the said item is covered under Entry No.3 of IIIrd Schedule appended to the DVAT A 2004 (I ibl d )Act, 2004 (Intangible goods)Entity engaged in the activity of sale or purchase of carbon credits is a “dealer” in terms of the definition of dealer as contained in Section 2(1) of the DVAT Act 20042(1) of the DVAT Act, 2004Service tax will be applicable on account of dealing in CERs on the exchange platform and in case of contracts resulting in delivery VAT will be applicable.Sale of CERs to overseas buyers should qualify as exports, and no VAT applicable however there is no clarification rendered in this case


Presentation on Carbon Credits - Nidhi Bothra

Documents

Transcript of Presentation on Carbon Credits - Nidhi Bothra