What is Carbon Trading?
Carbon trading (also known as “carbon emissions trade”) is the buying and selling of verified and certified credits that permit an entity to emit a certain amount of greenhouse gases. Carbon trading represents a novel approach in combating global warming by mitigating its environmental impacts.
The concept of carbon trading stems from the cap-and-trade mechanism advocated by the United Nations Treaty known as the Kyoto Protocol of 2005 established to address the challenges of global warming. Globally, the carbon credits are issued and regulated by the United Nations Framework Convention on Climate Change of 1992 (also known as “the Paris Agreement).
How Does Carbon Trading Work?
In simple terms, carbon trading involves a buyer (usually a company or industry owner) acquiring credits from a seller (usually a land owner) who owns large acres of forestry in an area authorized by the Government.
Carbon credits are traded through carbon markets which operate similarly to other financial markets, the only difference is that carbon markets deal with buying and selling of units of carbon emissions reduction or removals and these credits are held in electronic registries. Carbon credits can be traded on various platforms such as exchanges, brokerages and over-the-counter markets. The platforms facilitate the buying and selling of carbon credits between entities looking to either meet regulatory requirements, offset their emissions or invest in sustainable projects.
The cost of carbon credits is variable and subject to fluctuations influenced by diverse factors such as supply and demand dynamics, regulatory structures, compliance standards, quality assurance and verification procedures, project attributes, geographic positioning, and investor inclination. Those factors can cause the market price to fluctuate depending on the position of the buyer and seller and such predicament provide the price at the end. The price of carbon credits can be negotiated like any other financial instruments and the parties must negotiate with regards with relevant regulations and standards governing carbon markets.
Carbon Trading in Tanzania.
The concept of carbon trading was introduced in Tanzania in 2022 through the National Carbon Trading Guidelines which were aimed to be a guide to international, regional and national stakeholders engaging in carbon trading in Tanzania. In the same year, Tanzanian introduced the Environmental Management (Control and Management of Carbon Trading) Regulations vide Government Notice Number 636 of 2022 (hereinafter referred to as “the Regulations”) and later on, its amendment of 2023 both under the Environmental Management Act, Number 20 of 2004 and the Written Laws (Miscellaneous Amendments) Act Number 3 of 2021. The Regulations were made with the aim of controlling and managing carbon trading as well as providing the legal framework of carbon trading in Tanzania as set out in Regulation 5 of the Regulations. The Ministry of Environment regulates carbon trading in Tanzania and through Regulation 5 of the Regulations, the Designated National Authority (also known as the “National Focal Point”) was established to help it coordinating matters relating to environment and carbon trading projects in the country.
Since carbon trading projects require preservation of forests, Local Government Authorities have become heavily involved in such projects as they are the link between the Central Government or investors and local communities as prescribed in Regulation 17 of the Regulations. Carbon trading is expected to result in advantageous outcomes for the Government, as it stands to gain revenue through auctioning carbon credits and imposing taxes. Simultaneously, local communities stand to gain from job creation and opportunities, as well as environmental advantages like afforestation projects and soil conservation.
Tanzania is yet to introduce tax benefits for carbon trading but other countries such as the United States of America, are deducting taxes depending on the kind of carbon credits that a person or company owns and in the United Kingdom, the tax benefits depend on the purchase of carbon credits if it is wholly and exclusively for the purpose of trade.
The Government’s dedication to carbon trading has yielded positive results, with Tanzania receiving 35 applications for carbon trading projects as at December, 2023. With its extensive 48 million hectares of forestry, Tanzania has emerged as a frontrunner in the global carbon trade, thus attracting attention for further carbon trading opportunities. However, considering that this area is at its infancy, it is difficult at this stage to pinpoint how much this sector will contribute to the Gross Domestic Product as, currently, it is not a sector of the economy that is heavily invested in, such as agriculture, tourism and mining.
Imogen E. Homanga – Legal Intern
Note: This is not a legal opinion, and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
