Nowadays in the cities and even towns of India, a new business has come into picture, which though related to trading, is a departure from the usual commodity or stock trading. It is the trading of polluting gases, which is also known as carbon trading. Carbon trading, sometimes called emission trading, is a market-based tool to limit Greenhouse Gases (GHGs). It is basically a commercial activity that aims at protecting the earth from the harmful emission of gases from industries. The emergence of this opportunity of revenue generation by taking up structured Clean Development Mechanism (CDM) projects has brought about a novel dimension to accounting and taxation. The present article focuses on the contours of Kyoto Protocol, highlighting the financial and accounting challenges being faced by companies in a developing country like India, where it is an emerging field.

The Kyoto Protocol, legally came into force on February 15, 2005, when Russia ratified the treaty, demanding a 5.2% cut in Greenhouse Gases (GHGs) emissions from the industrialized world as a whole by 2012. Along with China and Brazil, India has emerged as one of its largest beneficiaries in terms of a new source of revenue because of the presence of Clean Development Mechanism (CDM). Its presence promotes suitable development in developing countries, while spurring cost-effective reductions in GHGs emissions in the more polluting developed countries. The government issues permits to polluting companies within set limits. Each permit allows the company to emit one metric ton of CO₂ and after crossing the same, it has two options left open, i.e., either to stop emissions of pollutants or to purchase new permits from other companies or carbon traders who have saved their issued ones.

The idea was to make developed countries pay for their wild ways with emissions, while at the same time, monetarily rewarding countries with good behavior in this regard. The carbon market is based on three mechanisms under the Kyoto Protocol: emission trading, joint implementation and CDM. While emission trading and joint implementation are concerned with developed countries, CDM is of particular interest to developing countries like India.

The process of generating Certified Emission Reductions (CERs) has been initiated as can be witnessed from the two projects of Honduras and one from India, which have received their CERs. Up to June 2005, the National CDM Authority (NCA) has already approved 90 such projects. Categorically, companies engaged in renewable energy generation like Suslon (wind energy), Webel SL (solar power) and Jaiprakash Industries (hydro power); in sugar like Belrampur Chini; in steel like JSW Steel, Tata Steel; and in chemicals like SRF (tyre cord) are expected to reap the windfall. United Nations Framework Convention on Climate Change (UNFCCC) has already approved four CDM projects being set up by Gujarat Flurochemicals, Kalpataru Power, Clarion Power and Dehar Power.

Accounting World Magazine, Accounting and Taxation, Carbon Trading, Greenhouse Gases, Clean Development Mechanism, Certified Emission Reductions, International Financial Reporting Standards, IFRS, Global Markets, Commercial Transactions, Commercial Activities, Multi Commodity Exchange.