Host governments for carbon credit projects are trying to ensure as much revenue as possible stays in the country and benefits the local communities. But the way they are going about it risks having the opposite effect.
For low income countries, voluntary carbon credits offer an opportunity to earn foreign currency, whilst safeguarding the natural environment and generating much-needed jobs for local communities. The numbers could be very significant – according to Trove analysis the voluntary carbon market was worth around $2 billion last year, and could reach $40 billion, as corporations strive to offset residual emissions on the way towards net zero.
Developing nations are in line to host a lot of these new projects. These governments will need to maintain the confidence of project investors and corporate buyers while ensuring that an equitable share of the rewards stay in the country. Three countries in Africa (Zimbabwe, Kenya and Zambia) have recently introduced measures to govern carbon trading – or signalled that they plan to do so.
In May, Zimbabwe’s environment minister proposed the government take 50% of carbon credit sales, with foreign investors limited to 30% and the balance of 20% going to local communities. On 18 Aug, the government updated this decision allowing foreign investors to take 70% of the proceeds, although a quarter of the revenue needs to be invested in consultation with local authorities. So, in Zimbabwe the share allocated to foreign investors is now set to be around 50%.
The Kenyan government has also been working on a new carbon market framework. An amendment to the Kenyan Climate Change Act 2016, passed at the end of June, decreed that at least 25% of earnings in the previous year from a voluntary carbon project should be given to local communities. Meanwhile, a private members’ bill in the national assembly has mooted a significantly larger take for local and central government entities from voluntary projects.
In June this year, Kenyan county governor Joseph Lenku said he wanted to revoke all carbon credit contracts between private entities / conservation organisations and indigenous communities. This was based on the view that the agreements were opaque and disadvantageous, and that local people had signed deals without understanding the market.
In July, Zambia said it had plans to regulate the sale of carbon credits and take a share of the proceeds for itself, following similar moves by Zimbabwe and other African countries. “The biggest issue in this market is revenue sharing,” Collins Nzovu, minister of the green economy and environment, said in an interview with Bloomberg. “If we got 50%, we would be very happy,” he added, suggesting that deals would be negotiated case-by-case.
These moves follow on from experiences in Asia, where last year the Indonesian government, introduced an export limit of 70% of the credits generated from a project. Other countries may also take the lead from these countries. Malawi has been talking about rewriting the revenue share for some of its voluntary carbon projects, with the minister of natural resources and climate change saying he did “not want to commit to any percentage at this time but we will go for the highest possible”. Meanwhile, Tanzania’s Ministry of Environment has reportedly imposed hefty annual fees totalling 18% of gross revenue on voluntary carbon projects.
Good intentions, bad outcomes
These measures are rooted in good intentions. Governments want to ensure that a fair share of revenues are directed to local communities or go into economic development. Whether, in practice, the money ends up in the right places is another matter. The trouble is that they are likely to reduce carbon-related revenues to host countries, not increase them.
The carbon credit market is genuinely global. While Zimbabwe, Kenya and Zambia contain 150 separate registered carbon projects, they account for only 3% of all projects globally, and 5% of global carbon credit issuances (in 2022). Buyers of carbon credits and investors in projects have many options to choose from and can source projects in countries where these restrictions are not in place. Investment and trading in carbon credit projects is therefore likely to be directed to countries without these capital restrictions. Of all economic resources, capital is the most mobile.
Host governments are probably looking to examples of other natural resource markets, such as oil, where production or export taxes are commonplace. These work to some degree, but they do so because global commodity prices are often significantly higher than production costs. This allows enough margin for governments to impose taxes without materially distorting investment decisions. Of course there are limits, but governments typically know where they are. Set them too high and investors will look elsewhere.
In the case of the global carbon credit market there is sufficient supply in the near term to force prices closer to (or even below in some cases) the cost of producing the credit. As such, there will be little room to apply domestic taxes without quickly encouraging investors to switch location and choose lower cost options. At the same time, with increasing transparency and improved standards of auditing, greater attention is being put on the involvement of local communities in projects.
Remaining flexible
If the intention is to ensure equitable shares of the proceeds of carbon credit sales, the market itself might provide the solution. Competition between projects will keep prices in check and ensure traders don’t make excessive profits. Even if prices do rise, agreements can be struck with local communities where they receive a proportion of the upside. Of course, prices can go down as well as up and there is value to local communities in having guaranteed payments – something that is often overlooked in the finger-pointing at the role of traders. Host governments should worry less about profiteering from carbon credit sales and focus on making their countries good places to invest in carbon projects – this is likely to bring greatest benefit to both the environment and their people.