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Experts Want Illicit Financial Flows Curbed to Ramp Up Domestic Climate Financing

Tanzania loses about US$1.5 billion annually due to illicit financial flows, which experts think could be used in climate financing.

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Dodoma. A new report was launched here on November 3, 2023, to generate evidence on how taxation can be an effective tool for climate financing in resource-rich Tanzania.

Conducted jointly by a local think-tank Policy Forum and Tax Justice Network-Africa, with funding from the African Climate Fund, the study is titled ‘Assessment of Domestic Resource Mobilization in Tanzania’s Extractive Sector for Climate Financing.’

Among other things, it assesses the effects of climate change in Tanzania. It determines how much the current International Financial System has led to tax injustice, hindering effective revenue collection in the country’s extractive industry.

According to the World Bank, by 2050, approximately 86 million Africans will be forced to migrate due to the lack of water, low agricultural productivity, floods, and storm surges resulting from climate change, emphasising the need for the continent to adapt and mitigate these climatic effects.

Illicit Financial Flows (IFFs) are one of the biggest obstacles for Tanzania to increase its domestic revenue collection capacity, despite the government implementing various measures to combat IFFs.

READ MORE: The Nairobi Declaration on Climate Change: Some Take-home Message for Tanzania

According to the report, the country is losing about US$1.5 billion annually due to IFFs, with most occurring in the extractive industry, which could be used in climate financing.

Crucial

Speaking during the launching of the report, Deputy Minister of Union and Environment, Khamis Hamza Khamis stated that domestic revenue is crucial for African countries to address the effects of climate change and achieve the African Agenda 2063.

He described the situation where African countries, despite contributing minimally to environmental pollution, still face significant impacts of climate change, posing challenges to the continent’s economic growth.

“To address these climate change challenges, more innovation is needed in our systems, especially in the financial sector,” Mr Khamis said. “We need to mobilise domestic resources from the extractive sector to enable funding for various projects to mitigate the significant impacts of climate change.”

Mr Khamis said Tanzania has been relying more on external sources to finance climate change adaptation measures, which it doesn’t have control over. Thus, as a country, Tanzania requires local funding to mitigate the effects of climate change.

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“We have launched a campaign for the protection of the environment, like ‘Soma na Mti,’ which aims to ensure that every student from primary school to university plants trees in their environment,” he explained. “Campaigns like this need more domestic financing.”

Tax justice

Mukupa Nsenduluka, a campaigner with the Tax Justice Network-Africa, a Kenyan-based coalition of CSOs fighting for tax justice, said during the event that meaningful climate action requires tax justice to curb illicit financial flows and revenue leakages from the extractive sector.

“Domestic revenue mobilisation from the extractive sector is key to Africa’s response to the climate crisis,” she said. “This study lays the foundation for tax justice and climate justice through mobilising domestic resource mobilisation.”

Tanzania’s extractive sector has been contributing a significant amount to the country’s gross domestic product, from 4.8 per cent in 2016/17 to 7.2 per cent in 2020/21. It has been contributing significantly to tax revenues and foreign exchange.

Abel Kinyondo, a researcher and senior lecturer at the University of Dar es Salaam, observed during the event that Tanzania is one of the African countries most vulnerable to climate change despite contributing very little to global greenhouse gas emissions. 

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This urgency calls for measures to mitigate the effects of climate change on the community since 65.5 per cent of Tanzanians depend directly on agricultural activities that have been affected by climate change.

“Domestic resource mobilisation in the extractive industry in Tanzania can be an effective way of climate financing,” Prof Kinyondo observed. “The country is richly endowed with minerals, including transition minerals that will increase demand in the future.”

As a resource-rich nation, experts insist that Tanzania’s extractive sector has a responsibility to finance climate action due to the industry’s enormous carbon footprint and its ability to spur innovation and the shift to greener technologies.

Key proposals

The report has laid down several proposals that can ensure Tanzania benefits from its extractive sector and thus be in a position to finance its climate actions.

The report insists on the need for authorities to stop the awarding of harmful tax incentives to companies in the extractive sector and establish a carbon pricing mechanism.

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To establish green taxes on activities, products, and practices that are carbon-intensive and provide incentives to companies that employ renewable and efficient technologies.

Others include using five to ten per cent of royalties from the extractive sector for climate financing and requiring extractive companies to invest in climate action through Corporate Social Responsibility (CSR) initiatives.

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