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Zambia: 2023 National Budget – government considering green finance mechanisms

13 October 2022
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Zambia has joined the list of a few African countries taking early steps to experiment with innovative green financing approaches such as trading credits from emission reduction projects (carbon trading) and green bonds to finance adaptation and sustainable development projects.

During the announcement of the Budget, the Minister unveiled a series of environmental sustainability measures, including proposals to review legislation to effectively regulate the carbon market in line with the Kyoto Protocol on Climate Change, to develop guidelines and listing rules for green bond trading, and to sensitise potential green bond issuers and investors across the country.

Carbon trading

In particular, the Minister announced that the Government is in the process of developing legislation to regulate carbon trading in Zambia in line with the Kyoto Protocol on Climate Change, which operationalises the United Nations Framework Convention on Climate Change by committing industrialized countries and economies in transition to limit and reduce greenhouse gas (GHG) emissions in accordance with agreed individual targets.

Currently, carbon trading in Zambia is regulated by Forest Act 4 of 2015 as read with the Forest Act (Carbon Management) Regulations 66 of 2021. However, the current legislation is not sufficiently comprehensive to cover all facets of carbon trading.

Green bonds

The Minister revealed that to encourage investment in Zambia’s low-carbon development pathways, the Government is pursuing green bonds as an innovative source of financing.

It was also confirmed that the Government is undertaking the development of a pipeline of potential developmental projects to be financed through green bonds, which are one of the most readily accessible and economical options to help raise large amounts of capital for infrastructure development that meet environmental targets.

To encourage investment in projects with environmental benefits, the Minister has proposed that all interest income on green bonds listed on a securities exchange in Zambia with a maturity of at least three years be exempted from withholding tax. Currently, interest income earned on corporate or government bonds is charged at a rate of 15%.

To further attract private sector investment in climate-resilience programmes, the Minister also revealed that the Government is working to improve the policy and regulatory environment and create market-based mechanisms to incentivise businesses.

The introduction of green bonds in Zambia is a positive step, particularly in the renewable energy sector, as this will enable the development of Zambia’s solar resources, geothermal capacity and unexploited wind sites, which justify renewable energy investors utilising green bond financing.

Additionally, in the effort to curb the effects of climate change, green bonds in investment fields such as sustainable agriculture, industry, transportation, and water and waste management, to name a few, will not only protect the environment but will create jobs and stimulate economic growth.

Political will is a critical success factor in unlocking green finance (which encompasses financial policies, programmes, products and services that support the transformation of an economy, as well as its systems and institutions) to attain sustainable development. We will have to wait and see how things progress beyond the establishment of a dedicated green economy ministry and the Securities and Exchange Commission’s (SEC) release of the Green Bonds Guidelines, almost two years ago.