Bahamas 2023 Combined

FEATURE

Beyond natural beauty:The carbon credits market and The Bahamas

Antoine Bastian, Executive Chairman and CEO of Genesis Fund Services Limited, explains how The Bahamas' huge wealth of seagrass meadows can contribute to addressing climate change

I

t has been a privilege for me to grow up in The Bahamas and enjoy the crystal-clear, aquamarine waters as a child and now I continue to marvel at its beauty on my daily drive to work. The opportunities to visit the idyllic, pristine, white sandy beaches at Cape Santa Maria in Long

and the Tropic of Cancer Beach in Exuma have allowed me to visualise even more of what The Bahamas has in terms of obvious natural assets and resources.

The value proposition of The Bahamas has never truly envisaged the oceans, seas, mangroves and marsh lands as having the potential to create a blue economy with direct contribution to the GDP in and by themselves. Rather, the perspective has always been that the true value of The Bahamas’ natural beauty, embodied in white sandy beaches and balmy breeze, was inextricably hitched to tourism sector. Today, however, with the climate crisis top of mind, the seagrass meadows, mangroves and salt marshes of The Bahamas may well be the answer to a considerable uptick in the overall Bahamian economy, with global implications for challenges posed by carbon

Sun, sand, sea and science

According to more recent scientific research, it is estimated that there is up to 92,000 sq. km of seagrass meadows throughout Bahamian waters, storing billions of tons of greenhouse gases (CO2e). In fact, and by some estimates, The Bahamas is believed to have at least 30% of the world’s seagrass meadows habitat. While it is perhaps not a helpful thought for sea bathers and sea waders, the discovery was formed through an innovative partnership with cameras on the backs of tiger sharks. As a result, the further ground truthing and mapping of the world’s largest
seagrass meadows has convinced the government of the Bahamas that
a new revolutionary economic, social and environment impact can be
brought to fruition through the monetisation of its blue natural assets and
development of a blue carbon credit regime.

Under the terms of the United Nation’s Article 6.4 of the Paris Agreement, and in particular the United Nation’s Carbon Offset Platform (offset.climateneutralnow.org), for the avoidance and removal of greenhouse emissions from the atmosphere, via projects in the developing world, The Bahamas Government enactment of the Climate Change and Carbon Initiatives Act, 2022 (the CCCIA) now provides regulatory framework for the accreditation and transactions of blue carbon credits.

The Bahamas has also enacted the Carbon Credit Trading Act, 2022. This legislation now enables the Securities Commission of The Bahamas to regulate the trading of carbon credits securities related to this new asset class. While the current legislation allows entities or individuals to manage the monetisation of blue carbon sales or trading, the seagrasses, saltmarshes, and mangroves remain the property of the government. In its current arrangement, 92.5% of all proceeds after operational costs will be the proceeds of the government of the Bahamas.

The economic opportunity

The economic opportunity for The Bahamas with regards to the carbon credit market is not only promising, but the overall potential impact of the sale of blue carbon credits could be revolutionary. As the world heads to a carbon dioxide reduction of 1.5 degrees, The Bahamas' nature-based global, institutional offering of blue carbon credits can potentially mean a “carbon wealth”, all owned by the sovereign, with a value north of 50 billion, and generating revenues in the hundreds of millions per annum.

Based on the preliminary mapping and core samples already done by Beneath the Wave (the group of marine scientist overseeing the project), the current seagrass meadows of The Bahamas, having regard to the trajectory for its decline (i.e. net of degradation) and additionality (i.e. possibility of expansion) could mean at the outset, at least 2.5 million carbon credits available in The Bahamas for the market as early as 2024, and up to 10 million carbon credits may be available on the voluntary market by 2030. Most analysts think that the estimated price for carbon credits will be around $90, or greater, per credit by 2030. Admittedly, the prices of carbon credits in the voluntary market, which have varied from a few dollars to over $100 per ton, have also been volatile and is predicated on many other difficult factors, including the nature of the project, the verification factors of additionality, the transparency of the project and more importantly the actual impact in the communities of the project.

Environmentally centred and internationally focused

While the economic upside has enormous potential, the Paris Agreement is keenly focused on the impact on society inclusive of adaptation and mitigation for the overall reduction of greenhouse gases, and the sale of any carbon credit in the voluntary market wrapped around a country’s National Determined Contribution. (NDC). NDCs are at the heart of the Paris Agreement and the achievement of its long-term goals. NDCs represents policies and or legislation submitted to the United Nations by each country to reduce national emissions and adjust to the impacts of climate change.

In this regard, The Bahamas has taken steps to meet these objectives by submitting to the UN its ‘Updated Intended Nationally Determined Contribution (NDC)’ and “The Bahamas’ First Biennial Update Report to the United Nations Framework Convention on Climate Change”(BUR). Together they form the basis for The Bahamas beginning to install two railway tracks… the rail for economic success but also the rail to impact the environment.

The Paris Agreement stipulates that each Party must prepare, communicate and maintain successive nationally determined contributions (NDCs) that it intends to achieve. The Bahamas NDC provides a fundamental framework that will evolve and develop. It clearly articulates the commitment of The Bahamas to achieving the UN’s published sustainable development goals. Carbon credits in the voluntary markets will not be successful if some of these goals are not included in the overall monetisation plan and work has begun in The Bahamas to realise this objective.

The 17 sustainable development goals (SDGs) to transform our world:

GOAL 1: No Poverty

GOAL 2: Zero Hunger

GOAL 3: Good Health and Well-being

GOAL 4: Quality Education

GOAL 5: Gender Equality

GOAL 6: Clean Water and Sanitation

GOAL 7: Affordable and Clean Energy

GOAL 8: Decent Work and Economic Growth

GOAL 9: Industry, Innovation and Infrastructure

GOAL 10: Reduced Inequality

GOAL 11: Sustainable Cities and Communities

GOAL 12: Responsible Consumption and Production

GOAL 13: Climate Action

GOAL 14: Life Below Water

GOAL 15: Life on Land

GOAL 16: Peace and Justice Strong Institutions

GOAL 17: Partnerships to achieve the Goal

Potential impact on The Bahamas

While this article cannot articulate with any certainty how proceeds from the sale of carbon credits, will be spent, Goal 2, which addresses the need for food security and the improvement of nutrition and sustainable agriculture, should be a priority. “The Bahamas National Pathway for Food Systems Transformations” prepared by the Ministry of Agriculture and Marine Resources, sets out bleak and worrisome facts about the nature of the Bahamas’ food imports. The reality is that 90% of all food items are imported. Capital injections for the development of efficient farms or for the purchase of very costly farm machinery and highly efficient farm solutions is a priority for The Bahamas.

The successful sale of blue carbon credits in the global market can transform the very nature of agriculture and aquaculture by adding capital inflows generated by the sales which automatically reduces the need to import and use foreign currency in doing so. The innovation of efficient farms eliminates old methods of slash and burn, thus making an immediate positive impact on the reduction of greenhouse gases due to cleaner methods of farming. The development of modern agricultural practices is paramount to building a sustainable and self-sufficient country, but these require large capital funding.

Goals 14 and 15 are also important and critical aspects of ensuring that the price in the voluntary carbon market of The Bahamas’ carbon credits is hitched to substantive adaptation and mitigation programs. The BUR and the NDC reports suggest that there is a lack of financial and technical support for the continuation of ongoing mitigation and adaption policies essential for the Bahamas’ part in the global climate improvement.

While legislation exists to improve the natural assets of the Bahamas, like the law banning commercial shark fishing and the selling and trading of shark, or the law that bans long-line fishing, fishing for turtles or stingrays, it is difficult to meet the NDC without major funding.

Further, the commitment to monitor, enhance and add more nationally protected areas like the Exuma Cays Land and Sea Park that was established in 1958 requires large funding. The ideology of conservation is a critical and a meaningful element for the monetisation of carbon credits in The Bahamas. Again, the ongoing funding for a generational endeavor may be made possible through the proceeds and the sale of the Bahamas’ blue carbon credits.

The success of The Bahamas’ plan for its part in climate change and the reduction of greenhouse cases is an expensive venture for a nation of

Exuma Cays Land and Sea Park

approximately 400,000 people. The World Bank’s designation of The Bahamas as a “high-income, developed country” eliminates the country from certain environmental funding for climate adaption and mitigation. During the period 2010 to 2020, The Bahamas government had financial inflows to use towards adaption and mitigation of climate change of approximately $154m. Of this, approximately $50m was earmarked from domestic taxes and other government funding. The reality of the statistic is sobering and is shockingly small compared to the ambitious seven-year commitments that was made by The Bahamas for the reduction of greenhouse gases and the overall principles of addressing climate change. However, successful monetisation of carbon credits may be able to achieve BUR and NDC commitments.

Conclusion

The Bahamas is keen on having its citizens transformed from tourism jobs, which accounts for more than 50% of GDP, to careers as stewards of the seagrass meadows, mangroves and pine forests restoration, or simply custodians of the Bahamas’ plethora of natural assets environmental biodiversity. The Bahamas is set to change its nations and its people’s narrative if the program to monetise blue carbon credits is successful. The imagery of pleasure boats or majestic cruise ships laden with excited tourists sailing through Bahamian waters is likely to be altered and enhanced with that of ships of environmentalist working to pioneer the global endeavor to lower greenhouse gases, achieve the reduction of global warming and save the planet from a climate catastrophe. The success of the blue carbon project in The Bahamas could be a global success. We must wait and see how The Bahamas reveals itself beyond its natural beauty and as a forerunner in the “blue” carbon market space and also a leading nation committed to the overall reduction of greenhouse gases.

Shonalee Munroe, Chief Operating Officer, Genesis Fund Services discusses changes she has seen over the past 17 years, what investors should look for in fund administration companies, and the qualities she thinks makes The Bahamas stand out as a place to do business

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INTERVIEW

FEATURE

Key developments and latest trends in banking & finance in The Bahamas

Christel Sands-Feaste, Alexandra T. Hall and Julia Koga da Silva of Higgs & Johnson look at the state of The Bahamas economy, what the Central Bank of The Bahamas is doing to update the country's payment system, and how the government is planning to modernise regulation of digital assets

W

ith the worst of the COVID-19 pandemic and related restrictions firmly in the past, the Bahamian economy has continued to recover over the last 12 months, primarily due to strong performance in the tourism sector, which some are referring to as “revenge

In the Monthly Economic and Financial Developments Report for July 2023, the Central Bank of The Bahamas indicated that “the growth trajectory of the domestic economy persisted, although at a moderate pace”, and this growth is projected to continue for the remainder of 2023. While this positive news is being well received, the cost-of-living crisis, high inflation, record energy costs and climate change remain at the forefront of the minds of Bahamian consumers (as applies to consumers in most other countries).

A number of themes have continued to dominate the legal and regulatory framework this year relating to financial services in The Bahamas, including:

•••

The continued focus of policymakers on strengthening public finances; The ongoing modernisation of the Bahamian payment system; and The establishment of a new regulatory frame¬work for the digital assets space.

While not restricted to the financial services sector alone, another important development impacting all Bahamian entities is the recent overhaul of the economic substance legislative framework.

Continued focus of policymakers on revenue enhancement

As part of the government’s ongoing efforts to increase revenue and strengthen public finances, additional human resources were allocated to the revenue collection sections of the Department of Inland Revenue. Meanwhile, the enforcement provisions in various revenue-related statutes, including the Value Added Tax Act, 2014, have been enhanced. In addition, the new Business License Act, 2023 (the ‘new BLA’), came into force on 1 July 2023, as a part of the annual budget exercise. The new BLA, among other things, repealed the prior Business License Act, 2010, and expanded the categories of businesses subject to business license tax. The requirement for financial institutions to pay an annual tax based on turnover remains.

Ongoing modernisation of the Bahamian payment system

The Central Bank of The Bahamas, Nassau

The Central Bank of The Bahamas Payment Systems Modernization Initiative is ongoing. 31 December 2024 remains the target date for the elimination of cheque usage. Local financial institutions continue to encourage customers to utilise virtual platforms for the delivery of their services.

Regarding the ‘Sand Dollar’, a digital currency denominated in Bahamian dollars, there have been increased efforts to raise public awareness of it and promote its use as an alternative to cash.

Modernisation of the regime related to digital assets

The legislation regulating the digital assets space (the DARE Act) was initially implemented in 2020. In 2022, the government of The Bahamas published the Policy White Paper on The Future of Digital Assets in The Bahamas (the ‘White Paper’), outlining its vision and policy position on the regulation

of the digital assets space over the next five years. The objectives outlined in the White Paper included growing the sector, increasing the attractiveness of The Bahamas for digital assets businesses, establishing The Bahamas as a leading digital assets hub, and encouraging innovation in the fintech space.

In order to address the rapid evolution of the sector and to strengthen the robustness of the regime, the Securities Commission of The Bahamas (the ‘Commission’) confirmed its intention to review and amend the DARE Act during the first half of 2022. As a result, a draft of the Digital Assets and Registered Exchanges Bill, 2023 (the ‘new Bill’), was circulated for industry consultation earlier in 2023. The new Bill seeks to enhance investor protection while maintaining sufficient flexibility to facilitate innovation. The amendments contemplated include, among other things:

•••••

Expanding the scope of digital asset activities that will be subject to regulation;

The introduction of capital requirements as prescribed by the Commission;

Mandatory ongoing financial reporting (including audited financial statements);

The mandatory segregation of client assets; and

Enhanced investigation and enforcement powers for the Commission.

It is anticipated that the new Bill will be brought into force later in 2023.

Overhaul of the economic substance framework

The recent overhaul of the regulatory framework relating to economic substance has impacted all Bahamian entities, not just those in the financial services sector. For background, in accordance with international best practices, in 2018, The Bahamas implemented legislation requiring Bahamian entities engaged in certain activities to establish a substantial economic presence in The Bahamas, and for all Bahamian entities to comply with substance reporting requirements. On 1 September 2023, the 2018 legislation was repealed and the Commercial Entities (Substance Requirements) Act, 2023 (the “new CESRA”), was brought into force. The new CESRA, among other things:

••••

Shifted the reporting obligation from the entity itself to its registered agent or, if the entity does not have a registered agent, the Compliance Commission;

Expanded the list of information which must be reported to the competent authority;

Mandates that registered agents or the Compliance Commission obtain this information from each Bahamian entity; and

Made some modifications to the classifications for reporting purposes.

The accompanying guidelines for the new CESRA were circulated on 8 September 2023.

Conclusion

The upward trend of the Bahamian economy is welcomed with cautious optimism. The recent legislative changes reflect The Bahamas’ commitment to complying with international best practices and maintaining a sound regulatory framework, while still encouraging innovation.

First published in Chambers Global Practice Guides, Banking & Finance 2023

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