Monthly Archives: June 2012

Accounting for Carbon Credits

Sorry folks for the long delay in posting! Hereafter I will ensure that I am at least posting short articles frequently. Accounting for Carbon Credits or perhaps, carbon credit itself is one of the most debatable topics. After the implementation of Kyoto Protocol, Carbon Credits emerged as a distinct commodity by itself capable of being bought, sold or offset (used). Since Carbon Credits do not have a physical existence, the accounting and financial reporting of the same has aroused many interesting issues and challenges.  Before going into the detailed accounting treatment of carbon credits it would be apt to go into a small introduction about what carbon credit is and its nature.

 

What is Carbon Credit?

As everyone is aware, Carbon – di –oxide (CO2) is the major contributor to global warming. Everyday more and more CO2 and other Green House Gases (GHGs) are pumped into our atmosphere. This is causing rapid climatic changes, much against human welfare. To address this issue of global warming, the United Nations Framework Convention on Climate Change (UNFCCC) was adopted in 1992.  To supplement the UNFCCC, the Kyoto Protocol was enforced to limit the maximum amount of GHGs a country can emit into the atmosphere. This limit is at present is applicable only to 41 developed countries which are party to the Kyoto Protocol. These countries are also called Annex I countries. India being a developing country the emission commitment is not applicable.

In order to enforce this emission limit, the concept of Carbon Credit was proposed. According to this concept, each carbon credit is equal to 1 Metric Tonne of CO2 or an equivalent amount of other GHGs. Each Annex I country should hold one carbon credit in order to emit 1 Metric Tonne of Carbon into the atmosphere. In simple terms a carbon credit is a license / permit to emit 1 Tonne of Carbon into the atmosphere. Carbon emission credits are issued by the UNFCCC in demat form. Therefore they can be traded just like shares in stock / commodity exchanges. As per the Kyoto Protocol there are three types of carbon credits to serve three different purposes: Continue reading Accounting for Carbon Credits