Irish tax innovation to support REDD

February 11, 2012

According to a report in Environmental Finance, Ireland has become the first country in the world to recognize forest carbon credits in its tax regime – paving the way for the issuance of forest bonds, according to a leading banker.

On Wednesday, Ireland’s government published a finance bill which extends the range of carbon offsets recognized in its tax code to explicitly include those generated by projects that reduce emissions from deforestation and forest degradation (REDD).

The inclusion of REDD credits in the tax code makes establishing a special purpose vehicle (SPV) to buy forest carbon credits and then issue forestry bonds “very tax efficient, very cost-effective,” said Paul Harris, head of natural resources risk management at the Bank of Ireland in Dublin.

“This is part of the effort to ensure that Ireland offers the best possible environment for green finance,” he told Environmental Finance.

In recent years the Irish tax code has been amended to recognize mandatory and voluntary carbon credits. The new section allows costs associated with the creation of SPVs to be offset, and gives favorable treatment to any profits generated.

An SPV can be used to securitize carbon credits, with the cashflow used to pay the bondholders’ interest and principal.