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Government Takes First Stab At Standardizing Carbon Trading… Industry However Remains Skeptical…

Is this good news or bad, only time will tell; but the government has finally woken up to standardize carbon trading in India. A new set of norms to enable transparent accounting of the increasing number of carbon credits earned by Indian companies, which are presently classified as other income, is being written by the Institute of Chartered Accountants of India (ICAI).

The new ICAI norms will make it easier for banks to provide credit for such projects. Such norms are much needed if India aspires to beat China in the CDM game. Currently most companies show earnings out of carbon credit trading as other income as they are not recognized by tax laws. Once an accounting standard is defined, companies will have to show these earnings separately.

Hopefully, this is just the starting point in CDM-Project reforms.

The industry has been asking for the favorable tax regime for CDM projects. Industry captains feel these instruments should not be taxed as CDM gives certificates to discourage emission of greenhouse gases and therefore, earnings from carbon credit are for a bigger cause.

Some sceptics fear that once standardized, the government may decide to tax incomes earned through carbon trading as capital gains tax or even securities transaction tax if they are treated as instruments similar to equity shares. This will be unfortunate, as it may discourage companies to explore the CDM option.

India and China lead countries in earning carbon credits. According to government statistics, around 35% of the total 819 projects registered by the CDM executive board are from India, the highest in the world. The Indian National CDM Authority has given host country approval to 753 projects, facilitating investments of more than Rs 630 billion. The CDM executive board only considers projects approved by the host country. These projects, which are in the sectors of energy efficiency, fuel switching, industrial processes, municipal solid waste, and renewable energy, have the potential to generate 421 million CERs by 2012.

Let us hope this is the first step towards encouraging CDM trade rather than stifling a nascent business opportunity for Indian corporates!

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