Carbon Credits and sustainable development: A contribution to economic appraisal in business world

Abstract:

At present, a number of approaches are being adopted to reduce carbon emissions. These range from efforts by individuals and firms to reduce their climate footprints to initiatives at city, state, regional and global levels. Two major milestones among these initiatives of the commitment of governments to reduce emissions are “United Nations Framework Convention on Climate Change (UNFCCC)” and in 1997 “The Kyoto Protocol”.

Kyoto Protocol set limits on the binding countries for the maximum limit of GHG emission. Under this protocol, certain emission targets were fixed for the countries. These countries are required to meet the prescribed targets through national measures. However, the Protocol also offers them an additional means to meet their targets by way of three market-based mechanisms:-

  1. International Emissions Trading
  2. Clean Development Mechanism (CDM)
  3. Joint implementation (JI)

Benefits of Emission Trading:

An emission trading system (ETS) is cap and trade based mechanism. It has emerged as a powerful policy instrument for managing greenhouse gas (GHG) emissions. It provides a path for the development of new technologies and also encourages operational excellence. This trading system is inflexible, command-and-control regulation, and taxpayer-funded support programs because:

  • It is specifically designed keeping in view the objective of environment protection.
  • With cap and trade system, it is the most economical mechanism for restricting GHG emission.
  • It delivers a clear price signal against which to measure abatement investments Trading is not the only policy instrument that governments should use – but failing to give a major role to trading will impose unnecessary costs and create policy confusion.

Recomendation:

After the detailed study on accounting aspects of carbon credit and CERs, it is clear that there is no specific method for accounting and recording of carbon transaction. The analyst and the research papers and the Guidance Notes issued by the Institute of Chartered Accountants of India states that there are 4 ways in which the Credits can be recorded, as a Contingent Asset, as an Intangible Asset, as an inventoryand in form of Other Income.

Every Author or the guidance Note has his own theories. So practically after analysing the studies as above, we can say that recording the Carbon Credits like an Intangible Assetas well as Inventoriesis a justified idea.

In Indian context, the classification of the Credits as an Intangible Asset is recommendable because buying and selling of credits are not so frequent, especially in a country like India, where even the accounting procedure is unclear. The amount involved is huge. Even the transactions are infrequent. If the project is for a long term then the credits shall be bought or sold in phases. At that time, the recognition of these in the books of accounts shall become a cumbersome task, if they are recorded as sales and purchases. The reason being, that they are recurring once or for a short time. So they should be classified as extraordinary items.

So instead of recognising as such and to avoid their different treatments, classification as an intangible asset is justified.