THE country’s carbon credit regulations pertaining to registration of projects, fees land tenure system and taxation should be reformed in order to unlock the huge potential number of projects across Tanzania that could attract private investments, experts have demanded.

The Uongozi Institute, in a report released last week titled ‘Carbon Trading in Tanzania: Policy options to unlock its potential,’ authors Noah Makula Pauline, Fasco Chengula and Emanoel Alfred asserted that tax rules for carbon credit revenue should be altered, even though carbon credit activity should be treated like any other business.

“These activities directly help with climate change mitigation and sustainable development, hence tax policies should be carefully designed, such as offering tax incentives or exemptions. This will encourage participation in carbon markets and support broader environmental goals, instead of imposing taxes that could slow down progress,” they explained.

Taxation and levy arrangements in the country’s carbon trading sector pose significant challenges for investors and local communities in land-based projects, the report noted, indicating that every investor they interviewed lamented the high taxes and fees.

“These taxes are charged directly to the projects or to projects associated with the carbon trading initiative. For example, the distribution of funds from carbon credit sales, based on the benefit-sharing agreements between project developers and communities, occurs after necessary taxes and government fees are paid,” the report affirms.

The research indicated that local communities are still subject to withholding tax, as carbon credit revenue is treated as income like other goods, although carbon credits represent outcomes of activities designed to reduce emissions. “From a tax perspective, governments often view them as marketable commodities that generate taxable income for communities and project developers,” it stated.

“Critics argue that taxing these revenues diminish incentives for communities and developers to maintain or expand carbon sequestration efforts as it reduces financial returns, potentially compromising the quality of the credits and undermining project sustainability. This, in turn, could weaken community engagement in conservation efforts and diminish social co-benefits like improved livelihoods and sustainable development typically associated with carbon offset projects,” the authors cautioned.

There is considerable ambiguity with respect to royalty arrangements in the carbon trading regulatory framework, which makes it difficult for project developers and investors to understand their financial obligations and the benefits they can expect from their investments, they said.

Uncertainty around royalties can lead to disputes, hinder project planning and financing, and reduce the attractiveness of Tanzania’s carbon market to potential investors, they specified, underlining that project registration requirements and processes also need to customized to fit different stakeholder compositions, especially non-land-based projects.