Ethiopia has recently enacted the Forest Development, Protection, and Utilization Regulation No. 544/2024 (“Regulation”) which has set the first detailed legal parameters for carbon trading in Ethiopia. The Regulation builds on the broader legal framework established by the Forest Development, Conservation and Utilization Proclamation No. 1065/2018 (“Proclamation”), which introduced carbon trading in the country’s forestry sector.
The Regulation sets the parameters for the management and utilization of forests, defines different types of forest developers, and details the requirements to access incentives. It governs forest carbon trading on different forest types, and allocates the use of revenue from the sale of carbon, including profit-sharing schemes and the roles of regulatory bodies. This issue of our insight piece delves deeper into these provisions under the Regulation and the Proclamation.
Classification of Forests
Under the Proclamation, forest ownership is classified into four major categories; private forests, community forests, association forests and state forests. Furthermore, state forests are classified into productive, protected, and preserved. Productive forests are those forests that have primarily economic benefits, while protective forests are primarily for conserving biodiversity. Preserved forests are defined as those with significant benefits and importance nationally, continentally, or globally. The designation of these forest lands will be decided through discussion with communities in the area along with appropriate institutions. In the management and use of all types of state forests, the Regulation stipulates that the revenue from carbon sales should be used for forest development, protection, and utilization.
Who are Forest Developers?
The Regulation defines a forest developer as a person who ‘develops, protects and utilizes a forest for various purposes’, and identifies the following types of forest developers:
- Small Scale Private Developers: Individuals or entities that develop forests on less than 5 hectares of land.
- Large-Scale Private Developers: Those who develop forests on 5 or more hectares of land.
- Institutional developers: This includes religious institutions, government bodies, and non-governmental organizations that develop forests on their own land holdings.
- Community developers: A group of people living in an area on communal land, or holding land conferred legally or through traditional means, that collectively develops forests.
- Forest Cooperatives: legal entities established under the Cooperative Societies Proclamation with the specific purpose of developing forests.
- Association forest developers: Includes youth, women, professionals, or community watershed development associations formed to develop forests.
All forest developers are granted forest carbon ownership rights. They are also permitted to transfer such rights to third parties.
Requirements to engage in forest development
Large-scale forest developers must adhere to several requirements to ensure sustainable forest management and compliance with regulations. They are required to submit a feasibility study and an environmental and social impact assessment document. Forest management must be conducted according to an approved forest management plan. Further, concerning threatened indigenous trees grown on their land, developers must submit evidence from the appropriate authority, ensuring that such actions are regulated and do not harm biodiversity. Institutional forest developers have a specific obligation to develop and sustain the protection of indigenous tree species and protected forests, ensuring the conservation of vital ecosystems.
Incentives for Forest developers
Under the Proclamation, private forest developers are eligible for incentives which include a) relief from taxation and b) exemption from land lease fee payment as well as c) access to finance. The Regulation provides additional details on the procedures to obtain the carbon incentives.
Land Lease Fee Exemption
To access forest land free of lease payment, private forest developers must meet several criteria, including:
- Creation of job opportunities for youth and women, though there are no quantifiable parameters set for this yet.
- Import substitution, and the developer’s capability to generate foreign currency through the production of forest products, including carbon,
- Employing improved forestry technologies and
- Fulfilling their corporate social responsibility
- Developers who commit to rehabilitating degraded landscapes and areas vulnerable to disasters are given priority.
Tax Exemption
The Proclamation provides that private developers and associations are free from “any kind of tax” for the first year of production. Community forest developers are exempt from any forest development income tax for the first two consecutive production years. To be granted tax relief, small-scale and community forest developers need to submit a certificate of land holding. Large-scale forest developers must provide a certificate of land holding, an approved forest management plan, a feasibility study, and a social and environmental impact assessment document. Additionally, they must submit written evidence from the concerned government authority confirming that they have appropriately developed and protected forests according to the approved forest management plan. The Proclamation obliges the government to support private and community development of forests by offering tax exemption on imported tools and technologies used for forest products production and forest development. However, such legislation has not yet been offered.
Access to Finance
To access loans from lending institutions, small-scale and community forest developers are required to submit a certificate of land holding. Large-scale forest developers need to submit a certificate of land holding, an approved forest management plan, a feasibility study, and a social and environmental impact assessment document.
Benefit Sharing
Under the Regulation, forest developers have the right to own, transfer and benefit from the sale of carbon under differing profit-sharing schemes and obligations. Private, community and association forest developers have the right to own the forest carbon generated and are entitled to receive the benefit from the sale of carbon and other ecosystem services generated from the forest developed on the land. If developers seek government support to facilitate the carbon trade, then developers must pay a service fee of 5% to the federal government and 15% to the regional government from revenue generated from the sale of the carbon.
Forest Concessions, Use and Management
The Regulation allows for forest concessions contract between the government and the concessionaire for the development, protection or utilization of a state forest. This is possible if the forest is a protected or productive forest, with an environmental and social impact assessment and a management plan. Interested bidders, which can take part in an open tender provided that they submit an application form, company registration documents, taxpayer identification number and a guarantee bond. A concession contract will last for a minimum period of five years.
Regional states and city administrations owning or managing forests are responsible for preparing the concession documents through an open tender process. The Regulation lists the criteria for screening bidders for forest concessions:
- Quality of the proposal for managing the forest
- Financial offer for managing the forest
- Financial capacity of the bidder
- Size and quality of the bidder’s workforce
- Experience in forest development, protection and utilization
- Other criteria issued by the concerned forest office.
In the sale of carbon, concession holders are entitled to 80% of the income generated, whereas 5% and 15% will be allocated to federal and regional governments, respectively.
A forest management plan is necessary not just for a forest concession contract but a mandatory requirement for developing forest land on more than 5 hectares of land. A forest management plan needs to be prepared by a certified professional but the process of obtaining the certificate will be determined by a future directive. The time limit of a forest management plan has not been stipulated. Consultations with stakeholders as well as approval from an authorized body on the plans and any changes thereof are necessary.
Regulatory Bodies
The entities with regulatory oversight in carbon trading under the Regulation are the Ministry of Agriculture (“MOA”), the Ethiopian Forestry Development, as well as the regional and city administrations. MOA is mandated to set operational systems, guidelines, and directives that will detail the implementation of the Regulation. The Ethiopian Forestry Development is entrusted with keeping up inventories and a database, engaging stakeholders in the sectors including investors. It is also responsible for the development of a technical manual for developing a forest management plan, its contents and approval process. Additionally, under the Ethiopian Environmental Protection Authority Establishment Regulation No. 545/2021, the Ethiopian Environmental Protection Authority (“EPA”) is authorized to regulate the amount of carbon stored in the ecosystem.
Additional Directives
The Regulation defers detailed regulations to subsidiary directives that will be enacted by the MOA or the Forestry Development. These include:
- The designation of forests as preserved, protected or productive
- The incentives for planting and developing endangered Indigenous tree species set out for small-scale developers
- The certificate award for developing, tending, utilizing and sustainably managing forests
- Compensation if a forest managed under a participatory forest management system is to be converted to an alternate land use
- Compensation if a forest managed under a forest concession is to be converted to an alternate land use
Conclusion
The Regulation provides a mechanism for various types of developers to participate in carbon trading in Ethiopia within the forestry sector. It is a positive step for carbon market regulation and contributes in meeting Ethiopia’s obligation under global climate goals.
However, further regulations are needed to fully embrace the opportunity of international carbon markets in sectors beyond forestry, such as energy, agriculture, mining, manufacturing, transport and aviation. As the Regulation’s scope is limited to the forestry sector, the conservation and sustainable use of natural resources in other sectors remain to be regulated. A comprehensive carbon trading framework is therefore urgently required to optimize the opportunities.
For more information, contact
Maya Misikir, maya@mekdesmezgebu.com
Mekdes Mezgebu, mekdes@mekdesmezgebu.com
