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 Earths 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) SECOND 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.