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VCM shock as Zimbabwe claims carbon credit revenues

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Zimbabwe has proposed a new carbon credit framework, which will see the Government taking half of the revenue and could undercut investment in the market. Given the confusion about credit certification already causing issues for corporate buyers, additional instability could impact those already struggling to identify the best fit for their emission reduction goals.

  • With the Government claiming 50% of revenues, local and foreign investors will be limited to returns of 20% and 30% respectively.
  • Sudden changes in regulatory frameworks can upset markets, but the loss of such a significant revenue stream seems likely to undercut market dynamics.
  • Minister of Information, Publicity and Broadcasting Service, Monica Mutsvangwa was reported to have said all existing carbon deals are now ‘null and void’.

The Zimbabwean Government has published a national carbon credit framework outlining guidance on the compliance and voluntary carbon markets in the country. It seeks to take 50% of revenues generated by such projects, providing a significant shock to the market. The core driver behind the purchase of carbon credits is to help in decarbonisation requirements, or to offsets the cost of transition to renewables. The destabilisation of that market undercuts the current approach to accelerating decarbonisation.

Dr Harald Heubaum, deputy director of the Centre for Sustainable Finance at SOAS, said: “It’s not surprising that increasingly profitable VCMs are attracting the interest of a governments weighed down by high inflation and an unsustainable debt burden. It’s really only a matter of time for countries in similar economic straits to follow suit. What is surprising is that as much as 50% of all revenues are to go to the government and an additional 20% to local investors. That leaves only 30% to foreign investors – if replicated elsewhere, it would create a challenge for the future growth of the market.”

Carbon market shock

Irina Tsukerman, geopolitical analyst and president of strategic advisory group Scarab Rising, said: “The decision by the government to demand 50% of the carbon credit revenue be relinquished to the authorities is part of the shocking decision which essentially cancels the offset programs, and which has had a profound effect on the carbon markets sending them into shock. The new decision only gives the relevant business two months to comply with the new requirements, which largely undoes any positive financial impact of having those credits to begin with.”

This move essentially nationalises carbon credit production giving the Government control and cancels all prior deals with international organisations, which will have the opposite effect of instilling confidence whether in foreign or domestic investors. Tsukerman adds: “This moves will look like nothing more than a corrupt power grab, sending the message that the renewables industry is just a tool for government’s self-enrichment, that any international reparations or climate investments are likely to be misappropriated, and that Zimbabwe is just not a safe place for doing business because the authorities do not keep to their deals and promises, and that potentially lucrative business ventures are vulnerable to intervention and confiscation the moment they start becoming profitable.

The two months grace period is meant to soften the block and allow for compliance to take place so that the companies would not instantaneously become subject to destructive penalties and to chaos. However, says Tsukerman: “At the end of the day, that grace period does little to reassure stakeholders, and the impact of the decision on the markets and on the industry will not improve based on simply having a little more time to implement this intrusive decision.”

A problem for the carbon markets or simply growing pains?

There is genuine concern that such actions will further undermine corporate and investor confidence in the carbon markets, although some see this as part of the growing pains in a market that remains relatively nascent. Gold Standard has certified 18 carbon projects to date in Zimbabwe and director Jamie Ballentyne said: “As the carbon market grows and the implementation of Nationally Determined Contributions (NDCs) begins, it is inevitable and understandable that many governments will seek stronger oversight of voluntary carbon market activities than was the case historically.”

South Pole was one of the originators of the Kariba REDD+ project, which was one of the first large scale REDD+ forest protection projects, which is based in Zimbabwe. In a statement the company said: “South Pole is reviewing the latest statement from the Zimbabwean Government on the Carbon Credit Framework. We are assessing the implications that this new potential regulation might have on the Kariba REDD+ project and the local communities. We will comment further when this review is complete, and once next steps have been clarified between the project and the Zimbabwean government. Currently, the latest updates are just proposals by the Zimbabwean government. Until they become law, anything we – or others – say would be pure speculation.”

Uncertainty remains a problem for market development

While the South Pole statement is accurate, that we shouldn’t worry until greater clarity about the Government’s position is given, it is difficult to avoid the impact of the uncertainty that such an announcement makes. One of the challenges facing the carbon markets in particular is that carbon credits are treated like a commodity.

Still, they are completely reliant on government and policy frameworks in order to be effective. One of the concerns raised is that such a significant proportion of revenue will mean that harder-to-finance projects will simply fail to raise much-needed funds.

Ballantyne added: “Governments have a choice when doing so: to take steps that will enable positive investment into climate action and sustainable development, or to take steps that will hinder it. It must be remembered that carbon market activities inherently rely on carbon finance revenues for their viability; taking this revenue away risks the continuation of these activities, and the impact they are delivering for the climate, environment and local communities. Gold Standard will carefully review the implications of this announcement, including for affected projects.”

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