BUSINESS FOCUS with BALEWA ZYUULU

ZAMBIA MUST UNLOCK THE POTENTIAL OF CARBON MARKETS

REDUCING emissions and decarbonizing economies is urgently required, however time is running out and the technology to do so is not always available. That’s where carbon credits come in. Therefore, establishing a robust carbon credits market is crucial to reducing carbon emissions in Zambia.

In our last edition of the Business Focus, we were discussing green bond opportunities in Zambia and in this edition, we are focusing on understanding the carbon markets and how Zambia can leverage the opportunities that come with trading in carbon credits.

What are carbon markets?

Carbon markets are trading systems in which carbon credits are sold and bought. Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.

On the other hand, Carbon credits are measurable, verifiable emission reductions from certified climate action projects. These projects reduce, remove or avoid greenhouse gas (GHG) emissions.

One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. When a credit is used to reduce, sequester, or avoid emissions, it becomes an offset and is no longer tradable.

Why are carbon markets important?

In 2021, the Intergovernmental Panel on Climate Change (IPCC) released a fresh report card on the world’s progress towards slowing climate change. The bad news: Greenhouse gas (GHG) emissions are still rising across all major sectors globally, albeit at a slower pace. Among the good news: renewables are now cheap – cheaper often than coal, oil, and gas.

Despite some progress, the world faces a formidable challenge. Scientists warn 2°C of warming will be exceeded during the 21st century unless we achieve deep reductions in GHG emissions now.

Therefore, effective action will require concerted and sufficient investment, knowing also that the costs of inaction will be far higher. Developing countries such as Zambia will need up to US$6 trillion by 2030 to finance not even half of their climate action goals (as listed in their Nationally Determined Contributions or NDCs). 

Climate change poses significant economic, financial, social, and environmental risks to the world. Limiting global warming to 1.5°C within the century is still within reach but requires transformational changes to the global economy, including the pricing of greenhouse gases (GHGs).

 Effective carbon markets based on science-based decarbonization pathways are an essential tool in enabling an efficient marketplace for deploying carbon pricing. This report outlines a vision for the evolution of both the compliance and voluntary carbon markets, and outlines key recommendations for market participants, policymakers, regulators, climate science bodies, and other stakeholders.

Carbon markets have gained traction globally in the wake of the UN Climate Change Conference (COP26) and the recently held COP27.

Countries have the option to establish compliance or voluntary markets for carbon trading. Unlike carbon allowances in a compliance market, where rules are set by national or international authorities, the voluntary carbon market (VCM) does not have any governance.

The driving oversight for VCM is self-governed standards from independent globally recognized third-party verifiers (such as Verra and The Gold Standard). The carbon credits are purchased by multinational corporations (or individuals) voluntarily to meet its sustainability goals. What distinguishes the voluntary carbon market from compliance markets is the ability to engage in VCM regardless of geographical location or business sector.

According to chance Kabaghe, the Executive Director of Indaba Agricultural Policy Research Institute (IAPRI), Participants from different parts of the world can come to Zambia to trade in Carbon credits while Zambians are still watching from the terraces.

“People from different walks of life are minting millions of money in trading in carbon credits while we still watch things from the terraces. We need to change the narrative, we can’t continue to be spectators in our own country,” he said.

Mr Kabaghe is of the view that there are more benefits in investing in Carbon credits than farming which contributes to environmental degradation.

“It is a known fact that Carbon credits will play an essential role in achieving Zambia’s decarbonization commitments. Land-use change and the forestry sector contributed 60% to overall emissions in Zambia, followed by the agriculture (27%) and waste sectors (4%). Significant potential exists for government and private entities to generate carbon credits by preserving their forests, as around 60% of the total land area is forested.” he explained.

Natural ecosystems can play a pivotal role in absorbing carbon emissions while getting monetized by governments and companies for conserving the environment. Experts believe Zambia was still at the embryonic stage of establishing a carbon trading system, although there was a growing appetite for a carbon market in recent years.

The country has taken a results-based climate financing approach through its involvement as a pilot country in the Reducing Emissions through Deforestation and Degradation (UN-REDD) scheme. REDD projects remain the most popular in the Zambian voluntary carbon market, with the development of a national REDD strategy framework for forest carbon management to create carbon credits. Private organizations and NGOs in Zambia are working towards establishing carbon credits through ground-level water and land management projects, as well as portable solar light projects.

Carbon trading in Zambia is currently regulated by the Forest Act (Regulations 66) of 2021, but this does not comprehensively cover all aspects of carbon trading.7

A significant lacuna in the Zambian legislation sits under the Value Added Tax (VAT) Act, where carbon credits are not expressly provided for as a good nor qualified as a supply of a service. However, the VAT (Supply)

Experts advise that Carbon credits have uniform properties and are able to be expressed in monetary worth; therefore, they should rightly be classified as goods to that extent. Further, in light of the ‘interest in land’ aspect of the definition of goods in the VAT Act, local communities and carbon traders earn an equitable interest in the forest reserve lands which hold their carbon rights.

This provides further scope for carbon credits to be classified as goods in the VAT Act.

Beyond the tax challenges highlighted above, we note that the 2023 National budget included plans to develop guidelines to regulate the carbon market in line with the Kyoto Protocol on climate change.

in December 2022, the Government formulated interim guidelines on carbon trading focused on the end-to-end management of the carbon market, including approval, implementation, and regulation of carbon projects in

The Government should continue to focus on generating carbon credits within the forestry and agricultural sectors and leveraging the existing carbon pricing mechanisms, such as the REDD+ mechanism.

 Engaging rural communities with business partnerships, arranging crop-education programs for farmers, and extensive landscape management can help build a low-emission potential for the country through carbon offset opportunities.

In Zambia, the carbon fund business model facilitates the transaction of carbon credits from agribusiness that demonstrates emission reduction.

The Government must also consider mandatory public disclosure by companies involved in carbon credit trading revenue and the share distributed to the relevant communities to increase transparency and build credibility.

To unlock the full potential of carbon trading, Zambia must consider exploring carbon pricing in the form of an ETS by proposing a tax incentive for companies operating a carbon trading exchange or a carbon tax. Countries such as Nigeria, Kenya, and South Africa have either established or are in the final stages of implementing laws related to carbon trading. Zambia may also consider extending the carbon taxes beyond motor vehicle surtax to other carbon-emitting sectors to propel the economy towards a more sustainable growth path.

 Zambia can apply the experience from Uganda by establishing a governance structure consisting of a multi-sectoral independent advisory committee on climate change, including communities on the climate consultation board, to take a holistic approach to designing a carbon market.

The Africa Carbon Markets Initiative (ACMI), officially unveiled at COP27 by a consortium of African countries (Kenya, Malawi, Gabon, Nigeria, and Togo) and carbon credit experts, is a much-needed push to scale the VCM in Africa.13 ACMI aims to generate ~300 MtCO2e of carbon credits annually by 2030. While Zambia has thus far not officially committed to collaborating with ACMI, the initiative will provide the direction for the Zambian Government as they position carbon markets as a critical source of climate finance to unlock jobs and drive climate action.

Investing in digital technology, such as block chain, to verify the transaction of carbon credits and regularly tracking a project’s emission reduction impact can help streamline the measurement, reporting, and verification (MRV) of carbon credits.

The Government can address data privacy concerns associated with digital technologies by formulating guidelines describing how sensitive emission information may be collected, used, and stored.

What are the challenges?

Progress has been made towards agreeing on the processes and methodologies that countries need to follow to access the carbon markets. And there are many opportunities – not least the benefits that will accrue by diverting a share of the proceeds to support the most vulnerable countries to adapt to climate change.

However, there are also serious concerns including issues related to double-counting of GHG emission reductions, human rights abuses, and green washing (in which companies falsely market their green credentials, for example, misrepresentations of climate-neutral products or services). This is why the Paris Agreement negotiations on this topic have been so complex and protracted.

For carbon markets to be successful, these issues must be addressed. Emission reductions and removals must be real and aligned with the country’s NDC. There must be transparency in the institutional and financial infrastructure for carbon market transactions. And there must be adequate social and environmental safeguards to mitigate against any adverse project impacts – and to promote positive ones.

UN Secretary-General Antonio Guterres has urged the world to “put the pedal to the metal” in addressing the climate crisis.

Both the Eighth National Development Plan (8NDP) and the draft Strategic Plan for the Ministry of Green Economy and Environment (MGEE) for the period 2022 to 2026 have identified Carbon Markets and Trading among the key drivers for accelerated national efforts to address adverse impacts of climate change through adaptation and mitigation among rural communities but also by involving private businesses and financial institutions in supporting the government in achieving its NDC under the Paris Agreement.

The Author is an Economist and a multiple Award winning and certified Financial Journalist.