Fighting greenhouse gases with financial innovation
One of the best illustrations of the interconnectedness of countries is the ongoing battle against global warming. County leaders realise it’s in everyone’s best interest to curb the production of harmful greenhouse gas emissions and thus preserve the planet we all depend on. Over the past three decades there have been numerous multi-country conventions to discuss unified approaches to combating harmful gas emissions.
At these meetings attendees sought agreement on the type of gas emission that needed to be curtailed, the contribution of individual countries to reaching gas emission reduction targets, and the timeframes for meeting said targets. The most important meetings to date include the United Nations Framework Convention on Climate Change (UNFCCC) which took place in 1992 without producing any binding regulations, and the Kyoto Protocol of 1997. The latter produced binding obligations on certain member states. In his presentation, Carbon Credits – the Future of Infrastructure Development Finance, Sandanathi Gwina of law firm Deneys Reitz, discussed recent developments in the field.
Shopping for carbon credits
The struggle to comply with Kyoto Protocol targets gave birth to a new financial market trading in carbon credits. Carbon credits, said Gwina, are intangible, tradable units that are awarded to a project as a recognition that the project will contribute to the reduction of carbon gasses to the atmosphere. The United Nations Industrial Development Organisation provides a more comprehensive definition: “Carbon credits are not physical goods, but rather electronic units held in the national registries and in the Clear Development Mechanism (CDM) registry. Neither the Protocol nor the Marrakesh Accords envisages any paper evidence of ownership of carbon credits, which are intangible and, by definition, transferable.”
A market for carbon credits sprang from the different commitments of developed and developing economies to reduce carbon gas emissions. “There are specified targets that developed countries need to meet in terms of reducing the emissions within their borders,” said Gwina. Stringent emission obligations meant that developed countries had to offset some of their carbon emissions with developing countries. Companies in developed countries can “go out and buy the carbon credits they require from other companies and countries,” said Gwina. The result was an ‘instant’ trade environment in carbon credits. Deals totalling $138bn were concluded last year, against nothing five years ago.
To enable the various Kyoto Protocol members to meet their obligations, each country had to establish designated national authorities to approve qualifying carbon emissions projects within that country, as well as a private entity to monitor, verify and certificate the carbon credit industry.
Regulating carbon credits in South Africa
South Africa measures carbon emissions projects using CDM guidelines. Regulations were promulgated under National Environmental Management Act in 2004, and are housed within the department of minerals and energy affairs (DMA). Local contracts, developed under the CDM, are known as certified emissions reduction (CER) purchase agreements. Performance on these contracts is through the registry at the DMA. A qualifying project is registered at the DMA and its credits awarded. The registry is amended once the delivery of the carbon credits takes place.
“The legal nature of carbon credits is an evolving concept,” said Gwina, adding that the law was not yet fully circled, and was still playing catch up. South African tax authorities already recognise the financial instrument. In the 2009 Taxation Law Amendment Act the receipt and disposal from carbon credits is addressed. Government wants to promote activity in the carbon credit space, and there aren’t huge tax obligations to impede the sale of such instruments. The tax treatment of carbon credits is discussed, in detail, in Section 12 (k) of the amendments.
Carbon credits cannot be traded on official exchanges as they are not yet recognised as a financial instrument locally, though the JSE is investigating the possibility of offering derivatives over carbon credits in the near future.
Benefits of carbon credits
There are a number of motivations for corporations in developing countries to enter into carbon credit agreements. A project that delivers carbon credit can negotiate an upfront price for these credits, offsetting the carbon credit price against development costs. But those using the carbon credit to offset development costs must be aware of the lower price they are likely to receive. “There are elements that can be used to enhance traditional project finance transactions by creating additional revenue streams and security,” said Gwina.
Because there is a market for carbon credits you can purchase carbon credits directly in the local market and on-sell them to international corporations. There are risks: carbon credits are intangible and security issues should be carefully weighed. In addition, the carbon credit field is relatively new and purchasers are usually offshore. “South Africa needs to stand up and take advantage of this ever growing market,” said Gwina. Local companies need to be aware of the long-term benefits of green development, including the possibility of using carbon offsets for financial benefit. And lawmakers have to ensure that the law keeps pace with commercial activity in the field, both internationally and at home.
Editor’s thoughts: The domestic private sector must do its part for the environment by committing to ‘green’ projects, and taking advantage of the range of incentives on offer for eco-friendly investment. Is South Africa doing enough to curb greenhouse gas emissions? Add your comments below, or send them to [email protected]
