What is Carbon Credit?
A carbon credit is a permit that allows the holding company to release a certain amount of carbon dioxide or other greenhouse gases. One load requires a mass equal to one ton of carbon dioxide to be released.
The carbon allowance is one-half of a "cap-and-trade" scheme. Polluting companies are awarded credits that allow them to continue polluting up to a specific limit. The business can, meanwhile, sell any unneeded credits to another company that needs them.
Therefore, private companies are doubly motivated to minimize carbon emissions. If they surpass the limit, they'll be fined. By saving and reselling some of its pollution permits, they can make money.
Types of Carbon Credits
There are two types of credits:
- Voluntary emissions reduction (VER): A carbon offset that is exchanged in the over-the-counter or voluntary market for credits.
- Certified emissions reduction (CER): Emission units (or credits) created through a regulatory framework with the purpose of offsetting a project's emissions. The main difference between the two is that there is a third-party certifying body that regulates the CER as opposed to the VER.
Trading Credits
Carbon credits can be traded on both private and public markets. Current rules of trading allow the international transfer of credits.
The prices of credits are primarily driven by the levels of supply and demand in the markets. Due to the differences in the supply and demand in different countries, the prices of the credits fluctuate.
Although carbon credits are beneficial to society, it is not easy for an average investor to start using them as investment vehicles. The certified emissions reductions (CERs) are the only product that can be used as investments in the credits. However, CERs are sold by special carbon funds established by large financial institutions. The carbon funds provide small investors with the opportunity to enter the market.
There are special exchanges that specialize in the trading of the credits, including the European Climate Exchange, the NASDAQ OMX Commodities Europe exchange, and the European Energy Exchange.
Taxation of Income from Transfer of Carbon Credits
As per section 115BBG of the Income Tax Act,1961, where the total income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of-
- the amount of income tax calculated on the income by way of transfer of carbon credits, at the rate of ten percent; and
- the amount of income tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).
It is also stated that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income from the transfer of Carbon Credits.
Note- For the purposes of this section “carbon credit” in respect of one unit shall mean a reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by the United Nations Framework on Climate Change and which can be traded in the market at its prevailing market price.
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