How to tax carbon markets without killing them

Investors and developers are nervously watching momentum towards substantial taxation of African carbon ventures. Government decisions could boost or doom the sector.

The news: Kenya plans to impose a 25% tax on carbon credit revenues. Other African countries are on a similar path.

• Tanzania: 9% of revenue

• Zimbabwe: 30% of revenue

• Zambia: Up to 50% of revenue

Why it matters: Percentages are important, but what is being taxed matters even more. Revenue taxes impact ventures differently than profit taxes.

The governments' side: The argument for taxing revenues is based on a pragmatic approach. It focuses on:

• Urgency: Carbon developers may take years to become profitable but African treasuries need income now to fund infrastructure and skilling.

• Transparency: Many developers are incorporated outside Africa, making it hard for tax authorities to judge profitability and hold payers to account.

What they say: Proponents of taxing revenues point out that:

• Royalties in the mining and hydrocarbon sector often work similar to a revenue tax.

• Earmarking of revenue taxes for green purposes would benefit all including investors.

Why not: Opponents of taxing revenues also reason pragmatically. They point out:

• Taxing profits would mean sharing risk with the state, making investment more likely.

• Revenue taxes change the basic economics of carbon ventures, making many outright unattractive for investors.

• The most vulnerable projects often happen to be the ones with the greatest benefits for local communities thanks to ongoing investment in local services.

A warning: Investors and developers are hardly disinterested observers. Still, they are adamant that revenue taxes are counter-productive. "We'll simply go elsewhere," one said.

Stepping back: Both sides of the debate have legitimate interests that need to be satisfied for African carbon markets to work well in the long term.

• Governments do need cash sooner rather than later and should ensure that transactions boost their treasuries continuously.

• Developers are right to say that ensuring solid economics and a measure of risk-sharing with official partners would boost investment.

Towards a solution: Compromise is messy but seemingly unavoidable. Some pointers:

• Governments could make a amount of revenue tax-free for a certain period or up to a certain level, relying on a profit tax in the startup phase.

• Carbon developers may be offered better terms if they agree to increased transparency vis-a-vis local tax authorities.

• Having variable tax rates rather than a single bracket would boost the economics of marginal projects while growing the tax take.