Insight Focus

• Zimbabwe has voided all of its existing carbon credit contracts.
• It’s introducing a new revenue split arrangement for emissions reduction projects.
• Investors are now factoring in political risk and lower returns to global carbon markets.

Zimbabwe last week sent shock waves around the voluntary carbon markets when it announced it had voided all existing contracts for carbon credits generated in the country, and introduced a new revenue split arrangement for emission reducing projects.

The move threatens to upend the global market in carbon credits by cutting the flow of foreign investment to developing countries as investors factor in heightened political risk and lower returns.

The country’s government said that all prior agreements that had been signed with international companies were “null and void” and future projects would restrict foreign investors to just 30% of the revenue from carbon credits. A further 20% would be reserved for domestic investors, while the government would take the remaining 50% of the price.

Zimbabwe hosts around 30 carbon offset projects in various stages of development, including the 2-million acre Kariba forest protection initiative operated by South Pole, a prominent international project developer.

The news shocked market participants, who warned that such sudden changes of policy risk the long-term viability of projects and interest in the country.

Zimbabwe’s decision is being closely followed by other countries. Already, Kenya has tabled legislation that would keep 25% of revenue for local communities, and Tanzania has announced its intention to implement a similar revenue-sharing structure to Zimbabwe.

Despite the turmoil that Zimbabwe’s sudden decision triggered, some observers point out that the emerging rules of the new international carbon market that is being set up by the United Nations puts significant pressure on developing countries who host carbon credit projects.

Under Article 6 of the Paris Agreement, each country sets itself an emissions reduction target, and implements policies to achieve that goal over time.

If a country wants to use the international markets, buying carbon credits to set against its target, it can do so. But each transaction must be reflected in countries’ own national carbon accounts.

These “corresponding adjustments” mean that a nation must increase its balance of emissions when it sells credits abroad. A seller cannot claim the reductions it has sold for itself, and in practice this makes its reduction target harder to achieve.

As a result developing countries who host carbon offset projects are beginning to look upon carbon credits they can generate as “sovereign assets”, and are becoming more cautious about selling them.

An increasing focus on making real emissions reductions means that these countries are beginning to see that the easiest and cheapest reductions should be kept for themselves, at least until their targets are reached. Higher-cost reductions can be made with foreign investment.

It is possible that some carbon credit projects may continue to exist outside the UN rules, which means that transactions of their credits would not be required to make a corresponding adjustment. The decision whether or not to apply Article 6 status to a project rests with the host nation.

But carbon offset buyers, especially large publicly-quoted companies, are likely to seek credits that follow the highest-level standards and accreditation. Buying UN-approved credits will also offer the most options in terms of trading, since they could be used either by companies or by governments.

This drift towards treating carbon reductions as sovereign assets may have a longer term strengthening impact on carbon credit prices. If host countries are keen to generate more revenue for themselves from these sales, and if foreign investors will earn less in total revenue from their investments, prices may need to rise in order to satisfy all parties.

In recent weeks prices for some classes of carbon offsets have fallen to as little as $2/tonne, while more popular or high-quality projects can still fetch in excess of $20/tonne. These prices reflect the project type, the location, the age of the offset, as well as the market’s sentiment regarding the environmental integrity of the credits.

In recent months there have been serious concerns raised about the quality of the measurement of emission reductions in some project types, such as avoided deforestation. These concerns are not universal, since many projects offer significantly more accurate measurement of emissions reductions.