The global market for carbon offsets is worth about $2 billion today and projected to grow to as much as $1 trillion in 15 years even as it faces fundamental questions about credibility and effectiveness. Add government appropriation to the list of risks for this climate solution.

A shock announcement this week that Zimbabwe will take half of all revenues generated from offsets projects developed on its territory is a harbinger of an uncertain future in the carbon trade. The African nation is the world’s 12th largest creator of offsets, with 4.2 million credits from 30 registered projects last year, according to BloombergNEF.

Zimbabwe’s move gives the government control of carbon credit production and cancels all past agreements with international organizations. That means more revenue generated from credits tied to protecting forests and other efforts to cut emissions will flow into national coffers rather than going to project developers.

There’s now risk that other countries might follow suit, creating new uncertainties for businesses that develop and sell offsets, corporations that purchase offsets as a way to counterbalance their greenhouse gas pollution and the cohort of traders who invest in this emerging asset class.

The move “blindsided” CO2balance, a company that runs five carbon offset projects in Zimbabwe. “Everyone knew changes were happening but we weren’t expecting this — it wasn’t on the horizon,” said Paul Chiplen, head of sales, in an interview on Thursday. “It does put a question mark in investors’ minds when you’re not quite sure of what level of return you’re getting.”

CO2balance is waiting to see what the government’s decision will mean for the viability of its projects.

Corporate buyers who rely on carbon credits will also face new doubts. The government’s decision “will significantly impact companies that have been big buyers of offsets in Zimbabwe,” a group that includes Gucci, Volkswagen AG and Bayer AG, wrote Kyle Harrison, head of sustainability research at BloombergNEF. “Such decisions will affect companies’ sustainability plans.”

“I think it is an entirely understandable thing for Zimbabwe to want to take a proportion of the funds from any exports of carbon from its territory,” said Edward Hanrahan, director at carbon project developer Climate Impact Partners. “But the issue is they acted rapidly and without prior notice.”

Offset developers in Zimbabwe and elsewhere had been expecting changes tied to the rollout of a United Nations-run international carbon market, which allows countries to trade credits used to meet emissions goals set under the Paris Agreement. Papua New Guinea, Indonesia, Honduras and India all introduced restrictions on carbon markets in their jurisdictions last year, some of which were later removed.

Under new UN rules put forward at the COP26 climate summit in late 2021, governments are left to decide whether to use carbon credits generated at home as a way to meet their own national emissions targets or to sell the credits to others. Each credit represents one ton of carbon dioxide and can be bought and sold many times before being used. The unregulated structure of the market involving companies, traders and governments creates risk of double counting. What if a government seeks to benefit by trading a credit produced in its territory after its been sold to an investor or used in a corporate sustainability plan?

Countries are beginning to see that “carbon is a sovereign asset just like any other commodity,” said Chris Leeds, head of carbon markets development at Standard Chartered Plc.

Treating carbon credits as just another export commodity underscores an imbalance at the heart of this global trade: Efforts to develop credits are usually funded by firms from wealthy countries and sold to corporate buyers in Europe and the US, yet most of the projects are located in emerging economies. This setup has been derided as a form of carbon colonialism that strips developing countries of an increasingly valuable resource.

“Rushing to frame the decision by Zimbabwe as ‘nationalization risk’ exposes a sense of entitlement to access those resources by the global North,” said Rich Gilmore, chief executive officer at investment manager Carbon Growth Partners in Melbourne. “We need to acknowledge that the past 200 years of resource extraction have miserably failed people and the planet. And if we want the carbon market to scale, we need to respect the right of the nations of the south to determine their own rules.”

Organizations involved in Zimbabwe’s carbon industry are still figuring out the full implications of a major shakeup. Gold Standard acts as a verifier for 19 carbon projects in Zimbabwe, for example, and appears to have been unprepared for the new policy. A spokesperson said governments seeking stronger oversight ought to act in a way “that will enable positive investment into climate action and sustainable development.”

Comments by officials in Zimbabwe have focused on one project in particular: Kariba, a supersized forestry effort operated in part by South Pole, the world’s leading seller of offsets. Mangaliso Ndlovu, minister of environment, climate, tourism and hospitality, said on Wednesday that the operators of the Kariba project will have to give the government half its revenue if the initiative is to survive; retrospective payments will not be sought.

A spokesperson for South Pole said it’s reviewing Zimbabwe’s announcement and “assessing the implications” for the Kariba project. The company did not respond to a request for further comment.

Observers such as BloombergNEF’s Harrison and Hanrahan of Climate Impact Partners expect the repercussions will extend far beyond Zimbabwe’s borders. Developers and investors might start to prioritize countries where governments have been transparent about their future carbon policies. Plus, if governments follow Zimbabwe in taking half of the project revenues, that will create a barrier to carbon projects that are the most costly to implement.

Some of the most expensive projects promise to have the biggest impact on the climate. “This could change the way a lot of deals are financed,” Hanrahan said. “If you’re a project financier you will have to understand the direction of travel in a host country’s government, who the decision makers are and what are their views. And you’ll also have to factor in a worst-case scenario whereby an unannounced levy is applied.”

It’s “entirely appropriate” for countries to seek a larger share from their carbon resources but they must “carefully consider the economics,” said Martijn Wilder, chief executive officer of Pollination, a climate advisory and investment firm. “If what’s left for a project developer is not sufficient to cover an investible rate of return, the project simply won’t happen.”

--With assistance from Sheryl Tian Tong Lee and Heesu Lee.