Can I Claim a Carbon Credit?

1. We make energy efficient batteries used in two-wheelers. Are we eligible for carbon credits?

2. We undertake tree plantations as part of our CSR projects. Are we eligible for carbon credits?

Carbon credits have been in the buzz these days. With the Government of India announcing Green Credits Programme and large multi-nationals like Apple & Google sponsoring environmental projects for offsets, a lot of companies are evaluating carbon credits to earn an extra dollar for their social projects. The questions on top, are two of the common type of doubts that most companies have about voluntary carbon credits.

Let’s decode this step-by-step.

Question 1

Are all energy efficient products eligible for carbon credits?

The simple answer is ‘no’. Here’s why?

i. Project-based only: Firstly, carbon credits are project-based, and not product-based. Hence, products that have a positive environmental or social impact in the normal course of business, do not stand to benefit from carbon credits alone, unless they are part of a larger environmental or social project.

Example:

• Company is developing energy efficient cookstoves: Ineligible (product-specific)

• Company has a project to distribute energy-efficient cookstoves in rural areas that use firewood: Eligible (project-specific, part of an environmental & social project)

ii. Additionality: The emissions reduction or impact from the project must be additional, meaning it should not have occurred without the carbon credit revenue.  This means existing businesses or projects that are generally self-compensating cannot file for voluntary carbon credits under the recognised standards.

Example:

• Waste Management company wishes to build another facility: Ineligible (no additionality – business activity possible without credits)

• An NGO wishes to install a waste water treatment facility to clean the oceans: Eligible (recycles waste with no direct monetary benefits)

iii. Costs: The process of registration for carbon credits (including documentation and consulting fee) is generally very high. Hence, a project has to be large enough to actually benefit from carbon credits (and cover the costs of applying).

Besides these, there are other criteria such as: the project’s impact must be real, measurable, permanent and cause no significant harm to the environment or any social communities. The project must meet all these criteria to be eligible for carbon credits.

If you just discovered that your product is ineligible for carbon credits – don’t be disappointed. Just because a company cannot claim carbon credits doesn’t mean there is no merit in undertaking these activities. Several companies are building a competitive moat around their energy-efficient products. For instance, cars with better mileage, 5-star rated ACs, induction stoves, etc. So, do not shy away from making an impact – it will eventually reap some benefits.

Question 2

Are tree plantations, undertaken as part of CSR activity, eligible for carbon credits?

CSR activities in India are undertaken under Section 135 of the Companies Act, 2013, with the objective to facilitate social work over and above the Company’s business activities. It prohibits use of CSR funds for direct commercial benefits.

By this logic, CSR projects become ineligible for carbon credits because they result in a direct commercial benefit in the form of carbon credits revenue to the Company.

However, experts suggest that there is no harm in earning revenue off CSR projects if such revenue is ploughed back in those projects. This means that, companies may claim carbon credits for their project if the intended revenue from these projects is used back in the CSR projects, and not for other business purposes.

While this may be a good technical argument, we have seen that in reality, most CSR projects are not large enough to exceed the costs of claiming carbon credits. Further, in many cases, it is difficult to establish additionality (as discussed in Point ii above) since CSR obligations sufficiently fund these projects every year. Companies should also note that even if carbon credits revenue is used back in the project, it does not reduce the Company’s obligation to contribute 2% of its net average profits every year. The revenue will effectively be used over and above the Company’s legal obligation.

To conclude, it is best to think of carbon credits not as a monetary incentive for CSR, but as possible add on to existing CSR projects, provided the projects meet other criteria as listed in Question 1 above.

In case you have any other questions pertaining to carbon credits, or anything related to sustainability, do let us know in the comments section below or write to use at info@esgityadvisors.com.