Carbon Credits: Use & Importance

Information on Carbon Credit
One challenge facing the human race is that of GLOBAL WARMING. Global warming is the rise in the average temperature of Earth’s atmosphere and oceans. Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere.

There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis.

Emission marketsClimate exchanges have been established to provide a Sport market in allowances, as well as Future  and Options market to help discover a market price and maintain liquidity. Carbon prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent. Other greenhouse gases can also be traded, but are quoted as standard multiples of carbon dioxide with respect to their global warming potential.

Currently there are five exchanges trading in carbon allowances, namely:-

1. European Climate Exchange,
2. NASDAQ OMX Commodities Europe,
3. PowerNext,
4. Commodity Exchange Brastislava, &
5. European Energy Exchange.

Following is the Point-wise explanation for more understanding of the subject:-

1. Self generated CERTIFIED EMISSION REDUCTIONS (CERs).
2. To address the issue of Global Warming , the UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE (UNFCCC) was adopted in 1992.
3. With the OBJECTIVE of LIMITING the CONCENTRATION OF GREEN HOUSE GASES (GHGs) in the atmosphere.
4. Subsequently, to supplement the CONVENTION, the KYOTO PROTOCOL  came into force in February’ 2005.
5. Which SETS LIMITS to the MAXIMUM AMOUNT  of emission of GHGs by countries.
6. The kyoto protocol at present COMMITS 41 DEVELOPED COUNTRIES (known as ANNEX- I countries).
7. To reduce their GHG emissions by at least 5% below their 1990 baseline emission by the commitment period of 2008-2012.
8. GHGs refer to polluting gases including carbon dioxide which cause global warming.
9. As per the kyoto protocol, at present, developing and least-developed countries are not bound by the amount of GHG emissions that they can release in the atmosphere, though they too generate GHG emissions.
10. Under the kyoto protocol, countries with binding emission reduction targets (which at present are applicable to developed countries) in order to meet the assigned reduction targets are issued allowances (CARBON CREDITS) equal to the amount of emissions allowed.
11. An allowance (CARBON CREDIT) represents an allowance to emit ONE METRIC TONNE of carbon dioxide equivalent.
12. To meet the EMISSION REDUCTION TARGETS, binding countries in turn SETS LIMITS on the GHG emissions by their local businesses and entities.
13. FURTHER, in order to enable the DEVELOPED COUNTRIES to meet their emission reduction targets, kyoto protocol provides “THREE MARKET-BASED MECHANISMS”.
14. ONE JOINT IMPLEMENTATION (JI) SECONDà CLEAN DEVELOPMENT MECHANISM (CDM) THIRD INTERNATIONAL EMISSION TRADING (IET)
15. Under JI, a DEVELOPED COUNTRY with a relatively high cost of domestic GHG reduction CAN SET UP A PROJECT in another DEVELOPED COUNTRY that has a relatively low cost and EARN CARBON CREDITS that may be applied to their EMISSION REDUCTION TARGETS.
16. Under CDM, a DEVELOPED COUNTRY can take up a GHG reduction project activity in a developing country where the cost of GHG reduction is usually much lower and the DEVELOPED COUNTRY would be given CARBON CREDITS for meeting its EMISSION REDUCTION TARGETS.
17. EXAMPLES OF PROJECTS include REFORESTATION SCHEMES and INVESTMENT IN CLEAN TECHNOLOGIES.
18. In case of CDM, entities in DEVELOPING/LEAST DEVELOPED COUNTRIES can set up a GHG reduction project, get it APPROVED by UNFCCC and EARN CARBON CREDITS.
19. Such CARBON CREDITS generated can be bought by entities of developed countries with EMISSION REDUCTION TARGETS.
20. ONE CER (CERTIFIED EMISSION REDUCTION) is equal to ONE METRIC TONNE of CARBON DIOXIDE EQUIVALENT.
21. Under IET, developed countries with emission reduction targets CAN SIMPLY TRADE in the INTERNATIONAL CARBON CREDIT MARKET.
22. This implies that ENTITIES of DEVELOPED COUNTRIES exceeding their EMISSION LIMITS can BUY carbon credits from those whose actual emission are BELOW their EMISSION LIMITS.
23. CARBON CREDITS can be EXCHANGED between BUSINESSES/ENTITIES or BOUGHT and SOLD in INTERNATIONAL MARKET at the PREVAILING MARKET PRICE.
24. These mechanisms serve the OBJECTIVE of BOTH the DEVELOPED COUNTRIES with EMISSION REDUCTION TARGETS, who are the BUYERS OF CARBON CREDITS as well as of the DEVELOPING and LEAST DEVELOPED COUNTRIES with NO EMISSION TARGETS (at present), who are the SELLER/SUPPLIERS of CARBON CREDITS.
25. The non-polluting companies from less developed countries CAN SELL the quantity of carbon dioxide emissions they have reduced (carbon credits) and EARN EXTRA MONEY  in the process. This mechanism of BUYING AND SELLING CARBON CREDITS is know as “CARBON TRADING”.

The above Article is compiled by Javed Ansari, the Accounting Technician having the Accounting Technician certificate issued by the Institute of Chartered Accountants of India under the Integrated Professional Competence Course.