The LR8001 land rig operated by the China Oilfield Services at the KingFisher Development Area with 31 oil wells in Buhuka, Kikuube District. The rig is fully automated with well site de-noising control, zero discharge system and provides a transition to low carbon and protection of the regional ecological environment. PHOTO BY ALEX TUMUHIMBISE


Should oil companies pay carbon tax?

What you need to know:

As the world draws closer to cleaner energy sources beyond oil and gas amidst the demand for a low carbon future; tax experts argue that African governments should involve oil companies in paying carbon tax to offset, and compensate for environmental damages.

Three oil rigs – set miles apart- stand at towering heights in the Albertine rift valley in Western Uganda ready for oil drilling operations.
The rigs have created skepticism among host residents living near the oil wells with a fear of possible carbon emissions during oil drilling operations.  

Residents of Kirama village in Buliisa District asked French oil company Total Energies last month about the possibility of putting in measures to offset any climate issues caused during the drilling operations.
Uganda’s 1.4 billion barrels of commercially recoverable oil is part of a new wave of oil and gas projects across Africa sparking debate on carbon emissions.

In the next decade alone, East Africa is projected as the next petroleum province on the African continent with major projects in Kenya, Tanzania, Rwanda, Burundi, South Sudan and planned oil exploration in Democratic Republic of Congo.

Carbon tax
As the world draws closer to cleaner energy sources beyond oil and gas amidst the demand for a low carbon future; tax experts argue that African governments should involve oil companies in paying carbon tax to offset, and compensate for environmental damages.
A carbon tax is a specific excise tax — charged as a price per tonne of carbon, usually applied by weight or volume.  
The most common form of carbon taxation used worldwide is a tax focused on specific fossil fuels which are primarily oil, gas and coal and their derivative products.

Often referred to as the fuels approach, this method applies a tax at the earliest opportunity based on the fossil fuel’s production chain: either at (or close to) extraction, if the jurisdiction in question is resource rich or upon importation into a jurisdiction.

The African Tax Administration Forum (ATAF) in a published policy brief, ‘Carbon Taxation in Africa’ argues that a carbon tax can encourage a positive change in consumer behaviour.
This is to the extent that it provides an incentive for the consumer to acquire the least carbon-intensive product.

 That is because the tax would apply to a greater or lesser extent, depending on the carbon intensity of the product, resulting in a higher tax burden on more carbon-intensive products.
Some countries foresee the application of a carbon tax at midstream level such as at the energy processing plant level which is generally a downstream carbon tax.

Tatiana Falcão, author of the policy brief says, the idea is that a carbon tax on fossil fuels would automatically create a price differentiation between diesel, gasoline and natural gas.
This is because diesel is more carbon-intensive than gasoline, which in turn is more carbon-intensive than natural gas.

Therefore, a tax employed on a per ton of carbon would automatically affect diesel more than it would natural gas, creating an incentive for consumers to purchase products that use natural gas rather than diesel.

Carbon taxation has been put forward as one of the key approaches to raise revenue, as the world recovers from the recessionary environment caused by the Covid-19 pandemic.

This means that tax can afford new revenue resources domestically, while providing an economic incentive for the consumption of less carbon- intensive products.
The national context of each country will determine the approach that is most suited for the type of economy and pollution landscape in question.

The Chilean carbon tax is cited as an example where the government aimed at instituting a tax both to address carbon based emissions and to address health concerns in big cities.

The Carbon Pricing Leadership Coalition quoted in the brief, argued that, in order to achieve the targets set by the Paris Agreement, countries would need to apply a tax of $40 (Shs147,877) to $80 (Shs295,754) per tonne of carbondioxide.
Data from a 2020 World Bank Study demonstrates that carbon tax rates range from less than a dollar per tonne of carbon in Poland and Ukraine to $119 (439,934) per tonne of carbon in Sweden.

Crude oil containers in Buliisa District. PHOTO/FILE

The destination of the revenues accumulated via a carbon tax will be influenced by a country’s legal system.
The easiest and most transparent way suggested for governments is earmarking the creation of a trust fund or an environmental fund supported by environmental tax proceeds.  

Uganda’s case
Petroleum Authority of Uganda legal and corporate affairs director, Ali Ssekatawa says Uganda does not charge any form of carbon tax, but relies on the ‘polluter pays’ principle to make oil companies accountable.
The ‘polluter pays’ principle is a widely accepted practice that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment.   
Discussions on reducing the impact of oil on the environment have been ongoing since the discovery was made public in 2006.

The oil activities will take place in a highly sensitive environment within the Albertine Rift Valley.
The rift valley remains one of Africa’s most important areas for biodiversity and includes the Murchison Falls Conservation Area, Budongo Central Forest Reserve, and Lake Albert.

Mariam Nampeera, Total Energies’ general manager, says a biodiversity programme set on four pillars such as working with Uganda Wildlife Authority will focus on reducing human pressures and strengthening the ecological resilience of the Murchison Falls Protected Area.

The oil company is also working with the National Forestry Authority to roll out conservation and restoration measures for forests and their connectivity.

This will target the protection of 10,000 hectares of natural forest threatened with deforestation and restoration of 1,000 hectares of tropical forest.