Section 115BBG Of The Income Tax

In the present era, it’s difficult not to notice the increasing effects of carbon dioxide in our daily lives. Carbon dioxide levels have been rising at an alarming rate in recent years, with major contributors including fossil fuel combustion, industrialization, deforestation, and so on. As a developing country, India is regarded as one of the major contributors to carbon emissions. Though it is a concerning prospect, given the recent announcements made as part of Budget 2018, there is a silver lining to this bleak situation.

What is Carbon trading?

The Kyoto Protocol, developed under the UN Framework Convention on Climate Change, brings together 169 countries to reduce carbon emissions. This protocol’s carbon trading is an exchange of carbon credits between nations that is specifically designed to reduce carbon dioxide emissions. It is an innovative step toward a healthier environment.

There is no denying that global warming is one of the most serious threats to humanity, and we can only combat it through global collaboration if we want to lessen its impact. Indeed, trading carbon credits is a wise solution to the world’s problems.

As a result, Carbon Credits are an incentive given to an industrial undertaking for reducing GHG (Green House Gases) emissions, including carbon dioxides, which can be accomplished in a variety of ways, such as switching to wind and solar energy, forest regeneration, installation of energy-efficient machinery, landfill methane capture, and so on.

Union Budget of India 2018

  • According to the explanatory memorandum for the Finance Bill, the income tax (IT) department has treated the income earned on the transfer of carbon credits as business income. 
  • Until now, this income was taxed at a rate of 30%. With the 2018 Budget proposing to reduce the tax on carbon credit income from 30% to 10%, trading carbon credits have become more appealing across industries and even individuals. This change will go into effect on April 1, 2018. The budget document also emphasizes the importance of bringing clarity to the issue of income taxation from carbon credit transfers. In addition, a proposal to insert a new section 115BBG is made to encourage environmental protection measures. 
  • Under this section, a concession rate of income tax of 10% (plus applicable surcharge and CESS) will be offered for the assessment of the total income, which includes any income from carbon credit transfers, which will be applied to the gross amount of such income. Under the Act, no expenditure or allowance for such income is permitted.
Section 115BBG Of The Income Tax

Benefitting – India and its people:

India, as a developing country, does not have binding carbon emission targets to meet. As a result, we have “credits” for emitting less carbon, which can be offered to countries with deficits. Emitters who reduce their emissions at a low cost sell their excess allowances to emitters who face higher reduction costs.

Why is there a need for carbon credits?

  • Certain developed countries have agreed to reduce their GHG emissions as part of the Kyoto Protocols in exchange for carbon credits. Each industrialized country is allotted a certain number of units. The initial assigned amount is denominated in “Assigned Amount Units” (AAUs), which are equivalent to 1 ton of CO2 or equivalent emissions of other greenhouse gases such as methane, nitrogen oxides, and so on, and are entered into the country’s national registry. 
  • If a country’s credit limit is reached, it can save the credits, exchange them for money, or give them to another country that has reached its limit. 
  • All of these transactions are denoted by carbon credits, and their market trading is known as “Carbon Trading/Emission Trading.” A certificate of certified emission reduction (CER) is awarded to an entity that reduces emissions.

Types of Carbon Credits

Section 115BBG Of The Income Tax
  • Voluntary emissions reduction (VER): A carbon offset that is traded for credits on the open market.
  • Certified emissions reduction (CER): Emission units (or credits) are created through a regulatory framework to offset the emissions of a project. 

The primary distinction between the two is that the CER, as opposed to the VER, is regulated by a third-party certifying body.

Trading Credits

  • Carbon credits can be traded in both the public and private markets. Current trading rules permit the international transfer of credits. Credit prices are largely determined by market supply and demand. Credit prices fluctuate due to variations in supply and demand across countries.
  • Although carbon credits are beneficial to society, investors find it difficult to use them as an investment vehicle. The only product that can be used as an investment in credits is certified emission reduction (CERs). CERs, on the other hand, are sold by large financial institutions through special carbon funds. Small investors can gain access to the market via carbon funds.
  • There are specialized exchanges for trading credits, such as the European Climate Exchange, the NASDAQ OMX Commodities Europe exchange, and the European Energy Exchange.


Carbon credit trading is expected to be the most profitable business in the coming years. It currently has the fastest growing financial market in the world economy. India, as a developing country, has a large potential for greenhouse gas reduction and carbon trading. With recent changes and signs of support and recognition from the Indian government, the future of carbon trading looks bright.