International Carbon Credit Market: A Confusing Game of Purchase and Sale, Transcending National Boundaries
In the global fight against climate change, Carbon Credit Certificates (CCCs) have emerged as a market-based tool to control greenhouse gas emissions. These certificates represent the right to emit one metric ton of carbon dioxide, transforming environmental responsibility into a tradable economic unit.
Before November 23, 2022, transactions involving CCCs in Singapore were treated as a supply of services and subject to Goods and Services Tax (GST). However, since that date, Singapore has excluded most CCC transactions from the GST, providing a boost to the carbon credit market in the city-state.
In contrast, the United Kingdom (UK) classifies CCCs as taxable supplies of services and imposes Value Added Tax (VAT). Other countries like Germany and the European Union implement carbon pricing through emissions trading and taxes, aiming to reduce greenhouse gas emissions while balancing economic impacts. Germany, for example, uses a CO2 certificate price and offers subsidies and compensations to ease burdens on businesses and households, while India's carbon tax approach is generally more direct and focused on specific sectors without extensive compensatory frameworks.
Brazil has exempted carbon credit sales from both state and federal consumption taxes post tax reform, creating a more favourable environment for carbon credit trading. Australia zero-rates carbon credits for GST purposes, and China treats CCCs as intangible assets and imposes a 6% VAT. Canada requires buyers to account for Goods and Services Tax (GST) / harmonised sales tax (HST) themselves.
In India, CCCs are taxed at 18%, but this rate and the nature of the supply have been clarified and changed over time. In the absence of specific machinery provisions, the purchase of CCCs in electronic form from overseas suppliers does not attract customs duty or GST under reverse charge on account of import of services in India.
The European Union has not seen significant regulatory changes in the carbon credit market at the level of the bloc. However, individual countries, like Germany, have extended the domestic reverse charge mechanism on carbon credit transactions until 2026.
The carbon credit trading programs have spurred major investments in solar farms, windmills, and projects that help industries cut electricity use. In India, the Central Government is authorised to issue CCCs to eligible projects, and the Bureau of Energy Efficiency (BEE) manages the carbon market. BEE sets emission reduction targets for various sectors, approves agencies to verify carbon savings, and awards certificates to organisations that meet or exceed their savings targets.
However, inconsistencies in regulatory structure and taxation treatment across jurisdictions create uncertainty in cross-border transactions involving CCCs. This uncertainty underscores the need for international cooperation to harmonise regulations and create a more predictable environment for the global carbon credit market.
