Extractives Sector and Climate Finance in Zambia.pptx

Extractives Sector and Climate Finance in Zambia.pptx

1. Extractives Sector and Climate Finance in Zambia ] Presented by : Renavatio ] Date:20.12.2024

2. Introduction to Zambia's Economy and Extractive Sector Overview of Economy: Zambia’s economy is heavily reliant on mineral resources, particularly copper, cobalt, and gold. Top 10 copper producer globally, holding approximately 6% of the world’s known copper reserves. Economic Contribution of Extractive Sector: Accounts for approximately 12% of GDP and contributes about 70% of export earnings. Revenue from Mining (2023): USD 1.9 billion in taxes, reflecting an 11% increase compared to 2022. Driven by stronger export volumes, despite decline in copper production and lower copper prices.

3. Challenges of the Extractive Sector Volatile Commodity Prices: Copper price fluctuations directly impact fiscal stability and export revenues. E.g., Copper price dropped to $4,617/metric ton in 2020 due to COVID-19, leading to budget deficits. Environmental Degradation: Mining activities cause deforestation, soil erosion, and water contamination. Example: Water pollution in Copperbelt region due to toxic runoff. Social Displacement and Economic Disparities: Over 65,000 jobs created, but limited integration in ancillary industries. Lost opportunities for local industrial development and higher-value returns.

4. Economic and Environmental Impacts Economic Disparities: Limited focus on local beneficiation; much of raw mineral wealth is exported. Lost opportunities for local industrial development. Environmental Issues: Health risks to communities due to water contamination and heavy metal pollution. Example: Increased reports of pollution affecting Copperbelt communities.

5. Environmental and Social Impacts Deforestation: Loss of biodiversity and ecosystem services. Soil Erosion: Impacts on agricultural productivity and infrastructure. Water Contamination: Affects health and livelihoods in mining communities. Health Risks: Increased exposure to toxic chemicals and pollutants.

6. Climate Finance Needs in Zambia Estimated Climate Financing Needs: $50 billion by 2030; additional $10.4 billion for National Green Growth Strategy (2024-2030). Current Gaps in Funding: Limited access to international climate funds. Private sector engagement in green initiatives, e.g., Green Outcomes Fund ($53 million). Capacity Challenges: Limited capacity to develop bankable climate finance proposals.

7. International Climate Finance Mechanisms Global Funding Mechanisms: Green Climate Fund, bilateral agreements, carbon markets, weather-indexed insurance. Challenges: Limited alignment between policies and practical implementation. Need for institutional strengthening and public-private partnerships.

8. Zambia’s Vulnerability to Climate Change Climate-Sensitive Sectors: Economy reliant on agriculture and forestry, highly vulnerable to extreme weather events. Urgency for Adaptation Financing: Adaptation underfunded; requires innovative mechanisms and capacity building.

9. Addressing Challenges for Climate Finance Strengthen Institutional Frameworks: Enhance transparency and accountability in climate finance management. Promote Public-Private Partnerships: Leverage private financing for climate initiatives. Enhance Capacity Building: Develop proposals for accessing international climate funds. Innovative Financing Mechanisms: Explore carbon markets, weather-indexed insurance, and other financial instruments.

10. Regulatory Framework Governing the Extractive Sector Key Legislative Acts: Mines and Minerals Development Act (2015) Petroleum (Exploration and Production) Act (2008) Environmental Management Act Zambia Extractive Industries Transparency Initiative (ZEITI) Zambia Mining and Environmental Remediation and Improvement Project (ZMERIP) Strategic Mineral Declaration (2023): Certain minerals declared strategic to stimulate investment. Proposed Bill: Minerals Regulation Commission Bill to monitor and regulate the development of mineral resources.

11. Revenue Generation and Taxation Policies Royalty Rates (Sliding Scale): Copper: 4% for prices below $4,000/ton 6.5% for $4,001 - $5,000/ton 8.5% for $5,001 - $7,000/ton 10% for above $7,001/ton Corporate Income Tax: Standard rate of 30% with a variable profit tax up to 15%. Mineral Royalty Tax: Non-deductible, based on mineral value and operational status.

12. Incentives for Investment and Revenue Losses Fiscal Incentives: Custom Duty and VAT Exemptions. Stability Agreements. Impact of Incentives: Projected revenue losses of $360 million (2022-2023) due to tax breaks. Challenges: Tax avoidance practices (e.g., profit shifting, transfer pricing). Loss of revenue to illicit financial flows.

13. Challenges in Policy Implementation Transfer Pricing & Profit Shifting: Multinational corporations shifting profits to low-tax jurisdictions. Significant revenue losses due to tax avoidance practices. Revenue Losses: Hundreds of millions lost annually due to mispricing and undervaluing exports. Limited Administrative Capacity: Weak enforcement and oversight in the mining sector. Limited resources for tax audits and compliance.

14. Measures to Address Challenges Strengthening Transfer Pricing Regulations: Country-by-country reporting aligned with OECD guidelines. Beneficial ownership disclosure laws. Enhanced Monitoring Mechanisms: Strengthening Zambia Revenue Authority (ZRA) capabilities. Real-time tracking of production and export data using digital tools. Incentivizing Local Beneficiation: Focus on local beneficiation and value addition to minerals. Integrating environmental management costs into fiscal policies.

15. Environmental Fiscal Reforms and Sustainability Environmental Fiscal Reforms (EFRs): Implementing the Polluter Pays Principle (PPP). Incorporating environmental costs into mining royalties. Promoting Sustainable Practices: Integrating environmental costs into fiscal instruments. Encouraging sustainable development through fiscal reforms.

16. Key National Climate Policies National Policy on Climate Change (NPCC): Mainstream climate change into national planning. Promote cleaner, sustainable mining technologies. Eighth National Development Plan (8NDP): Focus on green economy, resource efficiency, and resilience. Highlights the importance of climate financing. Nationally Determined Contributions (NDCs): Commit to reducing GHG emissions by 25-47% by 2030. Strategies to reduce mining-related emissions and adopt CCS technologies.

17. Key Policies and Their Impact on the Extractive Sector Mines and Minerals Development Act (2015): Requires Environmental Impact Assessments (EIAs) and rehabilitation plans. Mining royalties and funds allocated to climate initiatives. Zambia Environmental Management Act (ZEMA) (2011): Enforces controls on emissions and waste disposal in mining. Fees from permits directed to climate projects. Renewable Energy Feed-in Tariff ( REFiT ) Strategy (2017): Promotes renewable energy use in mining operations. Green Climate Fund supports renewable energy projects.

18. Additional Climate Policies Supporting the Extractive Sector Forests Act (2015): Mitigate deforestation linked to mining activities. Promotes afforestation and reforestation programs. Participation in carbon credit schemes like REDD+. Carbon Tax and Emissions Regulations: Taxes on carbon-intensive activities, including mining. Drives investment in emissions-reducing technologies.

19. Challenges in Implementing Climate Policies Enforcement and Compliance: Insufficient resources and technical expertise for monitoring. Resistance due to high compliance costs. Funding and Investment: Inadequate financial resources for cleaner technologies and land rehabilitation. Limited access to climate finance for mining projects. Stakeholder Engagement: Need for better involvement of local communities and civil society. Addressing social dimensions of environmental impacts from mining.

20. Recommendations for Strengthening Climate Policies in Extractive Sector Enforcement Improvements: Implement automated platforms for monitoring and reporting. Strengthen regulations to prevent tax avoidance. Climate Financing: Allocate mining royalties to climate projects. Introduce bonds for land rehabilitation to ensure funds are available. Community Engagement: Increase participation of local communities in planning and implementation. Address social impacts from mining operations.

21. Introduction to Regional Frameworks: Africa Mining Vision (AMV) Adopted by the African Union (2009) : Ensures African countries derive substantial benefits from mineral resources. Promotes transparent, equitable, and sustainable exploitation of minerals. Key Goals for Zambia : Foster investment while ensuring national development through mining. Emphasize environmental sustainability and cleaner mining technologies. Promote resource optimization for climate finance. Implementation : Zambia can channel mining revenues (royalties, taxes) into climate finance and development projects. Aligns with environmental governance goals, supporting Zambia’s climate financing initiatives.

22. SADC Protocol on Mining (1997) Aims : Harmonize mining policies, standards, and regulations across the Southern Africa region. Promote sustainable development and regional industrialization. Benefits for Zambia : Supports local beneficiation and value addition. Encourages sharing of best practices in environmental management. Promotes the efficient use of mining revenues for development and climate goals. Implementation : Strengthen mining regulations to allocate revenues to national goals (e.g., climate adaptation and environmental restoration).

23. Challenges in Implementing Regional Frameworks Policy Alignment : Difficulty in aligning national policies with regional directives due to differing local priorities. Infrastructure and Connectivity : Limited infrastructure and connectivity hinder full participation in regional value chains. Monitoring and Compliance : Challenges in enforcing regional standards due to varying enforcement mechanisms. Stakeholder Engagement : Gaps in engaging all relevant stakeholders (local communities, civil society) during policy formulation and implementation.

24. Recommendations for Effective Implementation Enhance Policy Alignment : Ensure that national policies are better aligned with regional frameworks. Invest in Infrastructure : Improve infrastructure and connectivity to fully participate in regional value chains. Strengthen Monitoring and Compliance : Improve enforcement mechanisms and resource allocation for monitoring. Inclusive Stakeholder Engagement : Involve local communities and civil society in the policy formulation and implementation processes.

25. Discretionary Fiscal Incentives: Key Fiscal Incentives in Zambia’s Extractive Sector Reductions in Corporate Income Tax : Mining companies benefit from a reduced 30% tax rate, lower than the standard 35%. Potential for revenue loss ($50 million annually on $1 billion profits). Recommendation : Implement a progressive tax rate for higher profitability. Variable Profit Tax (APT) : Ranges from 0% to 15%, dependent on profitability. Challenge : 15% cap may be too low for highly profitable firms. Recommendation : Raise APT rates for profitable companies, especially during high commodity prices.

26. Key Fiscal Incentives (cont.) Loyalty Rates : Vary between 4% and 6% based on global copper prices. Recommendation : Introduce a progressive royalty system based on profitability, not just market price. Create differentiated rates based on environmental performance. Use : Allocate a portion of royalties for climate finance (e.g., National Climate Fund). Import Duty Waivers : Waivers on mining equipment, reducing operational costs. Revenue Loss : Estimated $75 million annually from import duty waivers. Recommendation : Consider targeted incentives for green technologies.

27. Key Fiscal Incentives (cont.) VAT Refund : Mining companies can claim VAT refunds on eligible transactions. Potential for large refunds—e.g., $32 million from a $200 million import. Impact : Revenue loss in the hundreds of millions annually. Recommendation : Redirect savings into climate initiatives.

28. Challenges Associated with Fiscal Incentives Revenue Loss : Substantial revenue losses from tax rate reductions and royalty holidays. Tax Base Erosion : Discretionary incentives reduce the tax base, impacting climate finance mobilization. Estimated Loss : $125 million to $150 million annually. Recommendation : Move to a progressive tax system with resource rent taxes. Compliance and Enforcement : Monitoring fiscal incentives is challenging. Need for stronger enforcement mechanisms. Recommendation : Build capacity of ZRA and related institutions for better tax collection and enforcement.

29. Transparency Issues in Zambia’s Extractive Sector Disclosure of Contracts and Agreements : Lack of transparency in contract terms, fiscal commitments, and environmental obligations. Revenue Reporting and Management : Discrepancies between reported production figures and government receipts. Beneficial Ownership : Difficulty in identifying beneficial owners, complicating tracking and combating corruption. Environmental Impact Reporting : Limited access to data on environmental impacts of mining activities.

30. Addressing Transparency Issues Zambia Extractive Industries Transparency Initiative (ZEITI) : Promotes the open and accountable management of resources. Key Achievements : Passage of the Access to Information Act (2016). Implementation of the Public Finance Management Act (2018). Improved tax collection and data reconciliation between ZRA and ZEITI. Push for beneficial ownership legislation. Outcome : Greater public access to financial and ownership data; improved transparency and accountability in the sector.

31. Key Climate Finance Issues in Zambia Funding Gap : Zambia needs $2 billion annually for its NDCs, but climate finance inflow is below this target. Dependency on External Funding : Reliance on foreign aid for climate projects. Inefficient Fund Utilization : Challenges with fund management, coordination, and implementation. Limited Private Sector Engagement : High risks and unclear returns deter private sector investment. Lack of Financial Innovation : Zambia has not fully leveraged innovative financial instruments like green bonds or climate funds.

32. Recommendations for Climate Finance Diversify Financing Sources : Reduce dependency on external funding and develop sustainable domestic financing mechanisms. Improve Fund Utilization : Strengthen coordination, reduce delays, and improve implementation efficiency. Engage the Private Sector : Promote investment in renewable energy and climate resilience projects. Develop Innovative Financial Instruments : Explore green bonds, risk insurance, and climate funds to mobilize additional resources for climate action.

33. Conclusion Overview Zambia’s ability to meet its $2 billion annual climate finance gap depends on: Enhanced domestic resource mobilization. Optimizing fiscal policies, private sector engagement, and financial innovation. Shifting towards a more domestically driven climate finance approach is critical. Optimizing the extractive sector fiscal regime could unlock $2 billion–$3 billion annually, reducing Zambia’s dependence on external financing . Domestic Resource Mobilization is key to closing the funding gap and reducing reliance on external finance. Optimizing fiscal policies in Zambia’s extractive sector could generate significant funding for climate action. A National Climate Finance Strategy , integrated with fiscal policies and regional frameworks, will ensure sustainable financing for Zambia’s climate goals.

34. Key Recommendations for Climate Finance Establish a Clear Climate Finance Framework Develop a National Climate Finance Strategy to align DRM goals with Zambia’s NDCs. Set specific revenue generation targets for climate finance within the national budget. Align DRM efforts with regional/international frameworks (e.g., African Union Climate Change Strategy, Paris Agreement).

35. Mainstream Climate Action in Fiscal Policies Integrate Climate Considerations into Tax Systems Introduce environmental taxes (carbon taxes, levies on emissions, charges on non-renewable resources). Eliminate fossil fuel subsidies and reallocate funds to renewable energy and climate-resilient projects. Implement climate-smart budgeting , ensuring government budgets include allocations for climate adaptation and mitigation.

36. Strengthen Public Revenue from the Extractive Sector Maximize Revenues from Natural Resources Revise mining royalties to reflect environmental costs, allocating a percentage to climate funds. Enforce the "polluter pays principle" in the extractive industries. Negotiate climate-focused benefit-sharing agreements with mining companies to finance adaptation programs in affected communities.

37. Create a Dedicated National Climate Fund Establish a Green Fund for Climate Projects Pool and manage resources from environmental taxes, mining royalties, and international climate finance . Co-finance projects in renewable energy, afforestation , and resilient infrastructure . Ensure transparency and accountability through regular audits and stakeholder involvement.

38. Thank you