Monday, 25 November 2024.
Last week we released the 21 Good Practices for Voluntary Carbon Markets (VCM) from IOSCO, International Organization of Securities Commissions, the international securities regulator.
At the end of that article, we indicated that IOSCO still highlighted a certain concern, the need for more clarity regarding the legal nature and regulatory classification of carbon credits.
Our readers know that this topic is on own radar, specially through our posts about UNIDROIT’s working group. For example, last September 2024 we published the 12 Principles on the Legal Nature of Carbon Credits proposed by them, with the summary report of their 3rd session being published afterwards. And then, in October, when we met and were able to hear from Ludovino Lopes, a member of that working group.
In the Good Practices report about the VCMs, IOSCO quotes the Egyptian Financial Regulatory Authority several times. It is indeed very interesting to see the strategic approach towards VCMs by that regulator.
It caught our attention the part about the official guidelines for the accounting treatment of carbon credits in financial records.
Depending on specific criteria, carbon credits are recognized as either financial instruments or intangible assets based on four key scenarios:
1. When carbon credits are issued to the project developer, who is also the owner of the emission reduction project:
a. Intangible Asset: If the credits are retained for offsetting.
b. Financial Instrument: If the credits are intended for sale.
2. When carbon credits are issued to the project developer, but the developer is a different entity from the owner of the emission reduction project:
a. In this case, the carbon credits are recognized as a Financial Instrument.
3. When carbon credits are purchased from the market to achieve carbon neutrality:
a. The carbon credits are classified as an Intangible Asset.
4. When carbon credits are purchased from the market for trading purposes:
a. The carbon credits are treated as a Financial Instrument.
Click here to see a presentation by the Egyptian regulator with all that and much more.
