Mobilising domestic resources crucial for climate financing

Dodoma. A recent study suggests a significant mismatch between the demand and supply of resources for climate financing, leading to an increased demand for Domestic Resource Mobilisation (DRM) among African countries including Tanzania.

The study, titled Domestic Resource Mobilisation in Tanzania’s Extractive Sector for Climate Financing, was conducted by Prof Abel Kinyondo from PADO Consultancy. Policy Forum (PF) Tanzania and the Tax Justice Network-Africa (TJNA) commissioned the study, funded by the African Climate Foundation (ACF).

The research findings presented in Dodoma last week, highlight various funding instruments, including the $100 billion target and the green new deal, as well as debt-for-climate swaps, the carbon border adjustment mechanism, green bonds, and carbon markets. The study aimed to provide evidence on how taxation can effectively contribute to climate financing in resource-rich countries, such as Tanzania.

Speaking during the event, Prof Kinyondo emphasised the imbalance between the high demand for resources to finance climate actions and the limited and unpredictable availability of these resources in most African countries. He stressed the inevitability of DRM to enable African countries to fund their climate actions and ensure sustainable development.

“It follows that DRM is inevitable to enable African countries to finance their climate actions and ensure that there is sustainable development,” he said, adding that despite having climate change mitigation policies and budgets, Tanzania continues to heavily rely on global funding, leading to an increased demand for DRM.

Prof Kinyondo highlighted that the current climate funding, which amounts to around $630 billion annually, which is equivalent to 10 percent of the total global demand falls far short of the $3 trillion to $6 trillion required for global investment by 2030, as indicated by the OECD, World Bank, and UN Environment report.

“Debt is the primary source of financing for the said investments,” he said. Prof Kinyondo said apart from the fund not being enough, it was also inaccessible, noting that most importantly, the funds could be accessed in terms of concessional arrangements, therefore increasing debt stress for Africa and developing nations.

According to him, accessing such funds places Africa and developing countries into debt traps, suggesting that an emphasis on DRM is of paramount importance.

Prof Kinyondo also noted the contribution of the extractive industry to Tanzania’s GDP, growing from 4.8 percent to 7.2 percent between 2016/17 and 2020/21, according to the Tanzania Extractive Industries Transparency Initiative (TEITI).

Artisanal, small-scale subsectors

The growth was driven largely by the increased global price of gold. Gold accounts for 86 percent of the total revenues from Tanzania’s extractive sector. Prof Kinyondo emphasised the need for formalising the artisanal and small-scale subsectors, which contribute 30 percent to the sector’s revenue.

However, Prof Kinyondo said that DRM faces threats from growing trends of Illicit Financial Flows (IFFs). Despite Tanzania’s efforts to curb IFFs, a recent report indicates an annual loss of $1.5 billion.

Presenting the research findings, Prof Kinyondo said that 10 out of 14 respondents believed that extractive companies, as significant polluters, should fund climate action.

The remaining four respondents said it was the responsibility of multinationals to pay taxes, levies, fees, and charges, and that the government should undertake additional obligations through efficient use of collected tax revenue from the sector.

“10 of the total respondents said they were unaware of any government strategy to mobilise domestic resources to support climate action. However, one of the respondents said the extractive sector contributed to DRM through different revenue streams and impositions charged on actors and products from the sector, such as a significant portion from employment taxes and levies,” the respondent was quoted as saying.

“There have been contributions towards climate work through extractive companies’ Corporate Social Responsibility (CSR) initiatives. However, there aren’t publicly known concrete plans to finance climate change with revenues from the extractive sector,” the respondent added.

Twelve respondents out of 14 supported the idea of introducing new budget instruments on the grounds that taxes could be used for DRM and climate financing.

Prof Kinyondo said only two respondents opposed the arrangement, saying that the industry was already heavily taxed. They proposed that the existing fiscal instruments should be used for climate financing.

“In order to create a fair tax instrument to support climate financing, conducting an actualisation assessment for carbon emissions by industry and level of investment is crucial. For instance, compared to the manufacturing of gold and graphite, operations that employ generators in their operations emit more greenhouse gases (GHG),” said the respondent.

Climate change impacts

Like other countries across the world, Tanzania has been adversely affected by climate change, despite being among the least emitters of GHG.

According to the document, the country is ranked 10th in Sub- Saharan Africa in the frequency and occurrence of natural disasters, with flood incidents increasing by 45 percent. This is despite the decline in regional and global trends by 14 percent and 15 percent, respectively.

“Climate change has claimed hundreds of lives, damaged infrastructure, destroyed houses and affected agriculture, which is the country’s backbone,” reads part of the report.

Since Tanzania also relies on natural resources, hydropower for electricity generation, and coastline tourism, climate change poses a huge obstacle to its development, according to the document.

The research findings show that in Tanzania, climate change has led to a water shortage, significantly impacting demands not only for home consumption and irrigation but also for industrial uses and operations in the informal sector.

The document says that climate change has also negatively affected operations in the mines, with Artisanal Small Scale Mining (ASM) being the worst affected.

Research recommendations

The research recommends that the government should stop awarding harmful tax incentives in the extractive sector for effective DRM and climate financing, enter into favourable and beneficial bilateral investment treaties and establish a carbon pricing mechanism for financing climate adaptation and resilience.

Others are instituting targeted incentives for companies that employ renewable and efficient technologies and establishing green taxes on activities, products and practices that are carbon-intensive to internalise carbon emissions.

Other recommendations are ring-fencing some of the revenues from the extractive sector to finance climate adaptation and resilience and encouraging companies to invest in climate action in the mine host communities through CSR initiatives.

Stakeholders’ take

Launching the report, the deputy minister of state in the Vice President’s Office (VPO)-Environment and Union Affairs, Khamis Hamza Khamis, said funds collected through DRM should complement government climate mitigation initiatives such as tree planting.

Ms Mukupa Nsenduluka from the TJNA said Africa is a resource- rich continent capable of mobilising resources through taxation.

“Meaningful climate financing in Africa can only be achieved if we have adequate financing, with DRM being the only sustainable way. Africa and Tanzania can address the climate crisis through enough collection of taxes from the extractive sector,” she said.

The State of Tax Justice report shows that international tax abuse costs the world $483 billion annually, which is over four times the amount pledged for climate financing, equivalent to $100 billion. Ms Nsenduluka believes that plugging the loopholes would enable developing countries to finance their climate actions.

A representative from the Governance and Economic Policy Centre, Mr Stephen Aloys, said better governance of mobilised resources is crucial. “If leakages continue, DRM will be meaningless in financing climate action,” he said.

According to Open Mind Tanzania director Dominic Ndungur, the VPO has a huge budget for funding climate change, and so instead of promoting DRM, the funds should be used to finance development projects. He said funding for climate action should be left to large polluters.

Special Seats Member of Parliament, Nusrat Hanje, emphasized the need for Tanzania to decrease its dependence on donor-funded projects. She urged comprehensive brainstorming to identify innovative sources of income generation.