“Accelerating Economic Recovery, Climatic Change Adaptation & Mitigation, and Enhancing Productive Sectors for Improved Livelihood” was the theme of the 2024/25 Budget Speech. From this theme, it is evident that the Government is thinking of ways to manage the existing natural resources such that it meets current needs without compromising the ability of future generations to meet theirs. One of the initiatives is to break through the “noise” of carbon credits by achieving the global climate targets and emphasising a commitment to both economic recovery and environmental sustainability.
Carbon credits are part of a broader sphere known as carbon trading, a market-based approach to reduce carbon dioxide or its equivalent in greenhouse gases, which contribute to global warming and climate change. The system operates on the principle of cap-and-trade. Governments or international bodies set a cap on the total amount of greenhouse gases that can be emitted. Companies or countries are then allocated or can purchase carbon credits up to this cap. If they emit less than their allowance, they can sell their excess credits to others who need them, thereby creating a financial incentive to reduce greenhouse gas emissions.
The global carbon market has grown substantially, driven by international agreements such as the Kyoto Protocol and the Paris Agreement. These agreements have set binding targets for reducing greenhouse gas emissions and carbon trading plays a part in this. The market for carbon credits is not only a tool for environmental protection but also a significant economic opportunity. It allows developing countries to attract investment in green technologies and sustainable practices, thereby fostering economic growth while addressing climate change.
There is potential for carbon trading to reshape various sectors. For instance, in the energy sector, promoting the use of gas for cooking and other household applications can significantly reduce emissions and deforestation from the use of charcoal which is particularly impactful. Moreover, companies may invest in cleaner energy technologies such as solar energy to foster positive change. The transport sector may see a significant shift towards electric vehicles and investment in public transportation infrastructure as a way of reducing emissions. Farmers might adopt more sustainable practices, such as no-till farming, crop rotation, and organic farming, to reduce emissions. Financial institutions can increase investments in green technologies and sustainable projects and create new financial instruments and trading opportunities.
As a signatory to various international treaties, Tanzania is obligated to establish mechanisms to meet its emission reduction commitments and it can do this whilst seizing opportunities in the carbon credit trading. This may involve taking decisive measures to curb emissions from deforestation and forest degradation and strategise on prioritising conservation, sustainable forest management, and the enhancement of forest carbon stocks. Furthermore, promoting voluntary cooperation, collaborative approaches, and non-market strategies will be crucial in achieving these environmental objectives and benefiting from a sustainable carbon economy.
Like many other developing countries, Tanzania stands to benefit from the carbon credit market. The country is endowed with vast natural resources, including forests, which act as carbon sinks by absorbing carbon dioxide from the atmosphere. By participating in carbon trading, Tanzania can monetise its efforts to preserve these natural resources. Initiatives such as reforestation, afforestation, and sustainable land management can generate carbon credits, which can then be sold in the international market and can be a source of income for local communities.
In recent years, the Tanzania government has acknowledged the importance of carbon trading and has placed the Ministry responsible for Environment to oversee the carbon credit market, ensuring the integrity of transactions. However, the costs and benefits sharing scheme in place pose a threat to the sector’s development. For example, the Carbon Trading Regulations of 2022 stipulate that 69% of the revenue from the sale of Verified Emission Reductions (VERs) must be allocated to various government authorities, leaving businesses with only 31% to cover for their operational expenses including payment of salaries and other administrative costs.
Similar to others, companies involved in the carbon trading are subject to taxes under Tanzanian law, including corporate income tax, withholding tax and service levies.
For sustainability in this industry, there is a need for the government in consultation with stakeholders to streamline the scheme and provide incentive to this sector as the carbon trading sector to the economy is well recognised and there is still room for it to grow exponentially. However, the fees structure applied and the tax treatment of the sector is not aligned with best-practice principles of taxation, which may discourage investments and as a result, have an impact on the industry’s development.
To encourage participation in the carbon credit market, the Tanzanian government may offer tax incentives to entities engaged in environmentally sustainable projects. These incentives could include either tax holidays, reduced tax rates, or exemptions for specific activities related to carbon trading. For instance, it is noted that in agriculture the law permits an outright deduction of the capital-intensive expenditures in this sector. This is a positive move that fosters sustainable agricultural practices, which are crucial for realising the full potential of the carbon credit market.
Taking inspiration from our neighbour Kenya, which has led in global climate action through international agreements and innovative environmental policies, we can also make a significant impact. Kenya has successfully attracted considerable investments in carbon projects, with major companies like Gucci and Netflix collaborating to offset their emissions through initiatives in the country. By following this model, we can reinforce our commitment to sustainability and draw similar investment and collaboration opportunities.
