The carbon credits market is gaining momentum as one of the lifeline sectors in a depressed global economy. African nations have been exploring this novel market as one way to offset their bulging debts and raise loans by selling carbon credits, thereby unlocking billions for climate finance and economic development in the continent.
Climate change has had disastrous consequences especially for African countries but seemingly, nature now has the potential of providing developing nations with an economic boost.
Most African economies have been hanging on by a thread, in the wake of the myriad existential challenges that have bombarded the continent in the recent past. From climate induced natural disasters, food insecurity, political instability, civil unrest to heavy indebtedness as the aftermath of the Covid-19 pandemic and the Russian-Ukraine war.
As the deleterious effects continue to reverberate across the continent, inflation rates have gone through the roof in many nations and threats of a recession remain on the horizon. With grim economic outlooks for most African economies in 2023, countries have been clutching at straws to restore economic balance.
The carbon credit market
Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gases. Therefore, carbon markets are trading systems in which carbon credits are sold and bought. Carbon credits trading is one of the many technical interventions used to reduce the amount or concentration of greenhouse gases in the atmosphere.
Under the Kyoto Protocol’s Clean Development Mechanism (CDM), emissions by developed countries are capped, requiring them to fund cuts in poor countries through certified emission reduction permits.
The United Nations Economic Commission for Africa (UNECA) forecasts that through nature-based carbon removal, Africa can generate between $15 and $82 billion annually, depending on the price of carbon. To reiterate on the economic benefits, the new Africa Carbon Markets Initiative (ACMI) was launched at the twenty-seventh session of the Conference of the Parties (COP 27) in Sharm el-Sheikh, Egypt in November 2022.
This was an effort to substantially expand Africa’s participation in the voluntary carbon market, support the growth of carbon credit production and create jobs in Africa while protecting biodiversity. ACMI’s goal is for the growth of voluntary carbon markets in order to produce 300 million carbon credits annually by 2030 and 1.5 billion credits annually by 2050. It also seeks to unlock 6 billion in revenue by 2030 and over 120 billion by 2050, and support 30 million jobs by 2030 and over 110 million jobs by 2050.
Furthermore, ACMI’s roadmap report: ‘Harnessing carbon markets for Africa,’ identifies 13 action programs to support the growth of voluntary carbon markets (VCMs) on the continent. In partnership with major carbon credit buyers and financiers such as Standard Chartered, Nando’s and Exchange Trading Group, ACMI targets to establish an advance market commitment for high-integrity African carbon credits.
ACMI intends to send a strong demand signal for carbon credits across all project types, especially those where Africa has untapped potential. These include nature-based solutions, renewable energy projects, cook stoves, and many more.
“Carbon markets can deliver tremendous benefits for Nigeria and for Africa, creating jobs, driving green investment, and reducing emissions. Nigeria is putting the groundwork in place today so that in subsequent years, carbon credits become a major industry that will benefit our people.” H.E Yemi Osinbajo Vice President of Nigeria and ACMI steering committee member noted at COP27.
Despite Africa’s low greenhouse gas emissions, at 3 percent, it remains extremely vulnerable to climate change. Consequently, African countries are in the race to net zero emissions by 2050.The World Bank Group supports a number of projects in Africa that lower greenhouse gas emissions and earn carbon credits.
These include: the Humbo Assisted Natural Regeneration project in Ethiopia, the vehicle scrapping and recycling project in Egypt, the Olkaria II Unit Geothermal Expansion Project and the Sustainable Agriculture land management project in Kenya.
In addition, the bank supports Morocco’s Municipal Solid waste management program, Nigeria’s earthcare solid waste composting project, Rwanda’s Electrogaz compact Fluorescent lightbulb distribution, South Africa’s carbon tax and Madagascar’s Ankeniheny-Zahamena Corridor Biodiversity Conservation REDD+ project.
Understanding Carbon Trading
Carbon trade is basically the buying and selling of credits that permit a company or other entity to emit a certain amount of carbon dioxide or other greenhouse gases. The carbon credits and the carbon trade are authorized by governments, with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change.
It’s a market-based system that aims to provide economic incentives, to encourage organizations to reduce their environmental footprint. One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided altogether. Carbon trading is also referred to as carbon emissions trading.
Unlike voluntary offsets where consumers can choose to pay to compensate for their carbon footprint, carbon trading is a legally binding scheme and is calculated by individual governments and policymakers. It aims to put a price on CO2, following the principle of caps and trade.
The government sets a limit or cap, on emissions permitted per industry. Emission certificates in the amount of this total quantity are then placed on the market, by auctioning them or allocating them to polluters. In tandem, they must submit allowances equal to their emissions, then buy or sell them on the market at the close of the pre-defined period. Due to the lack of a global cap-and-trade scheme implementation plan, prices are regulated by markets.
There are two types of carbon markets: compliance and voluntary. Compliance markets are created as a result of any national, regional or international policy or regulatory requirement. On the other hand, voluntary carbon markets whether national or international, refer to the issuance, buying and selling of carbon credits on a voluntary basis.
The current supply of voluntary carbon credits comes mostly from private entities that develop carbon projects, or governments that develop programs certified by carbon standards, that generate emission reductions and removals. The demand comes from private individuals that want to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at a higher price to make a profit.
State of Africa’s Carbon Credits Market
Africa harbours the world’s second largest tropical rainforest after the Amazon. Situated in the Congo Basin and renowned as the ‘lungs of Africa’, it covers 268 million hectares in Central Africa. The Congo Basin spans across six countries which include the Central African Republic, Cameroon, Gabon, Equatorial Guinea, Republic of Congo. But its biggest territory lies in the Democratic Republic of Congo (DRC). It is worth noting that its ecosystem plays a pivotal role in climate mitigation, through absorption of greenhouse gases and carbon storage in the soil and trees.
The Congo Basin wields carbon-rich ecosystems, making it essential for the planet and all humanity, due to its unmatched carbon sink. By the same token, two of the countries in the Basin; DRC and Congo are ranked among the world’s leading tropical peatland, known as ‘Cuvette Centrale’ covering 145,000 square-kilometer area and is believed to hold an equivalent of three years’ worth of global emissions. The peatlands are especially integral in biodiversity conservation and carbon sequestration.
Peatlands are the largest natural terrestrial carbon store and are vital for mitigating and preventing the tumultuous effects of climate change, minimizing flood risk and drought, biodiversity preservation, safe guarding water quality, preventing seawater intrusion and regulating water flows. Peatlands have been known to supply food, fibre and other local products that sustain economies.
The Congo Basin is more resilient to climate change than the Amazon rainforest with its tall trees soaking up some 1.2 billion tons of carbon dioxide each year. These rainforest nations require private financing to protect their trees and switch to greener fuels and slow deforestation.
In Cameroon, the Dutch Green Business Group (DGB), a leader in carbon offsetting and ecosystem restoration company, announced that its two large-scale carbon projects which are expected to originate over 6.9 million carbon credits over their project lifetime had entered the development phase. In May 2022, the Democratic Republic of Congo (DRC) entered a $1B credit scheme with dClimate, a carbon investing firm which counts entrepreneurs such as Mark Cuban and Sergey Nazarov among its backers. The agreement spearheaded by President Félix Tshisekedi and President Joe Biden, is meant to remain in force for ten years and is worth almost $1bn, divided into ten annual instalments.
African nations such as Kenya, Malawi, Gabon, Nigeria and Togo shared their commitment to collaborating with ACMI to scale carbon credit production via voluntary carbon market activation plans. In totality, these 7 countries have a maximum potential to generate ~300+ Metric tons of carbon dioxide equivalent (MtCO2e). Even capturing 25% of this potential, ~75 MtCO2e would be double the total credits issued across the entire continent in 2021.
Gabon has been an active participant in this scene, going on record in 2021, as the first African country to receive funding amounting to $17m, for curbing deforestation from the Central African Forest Initiative (CAFI), a programme launched in 2019 and supported by the UN that plans to disburse a total of $150m within the next 10 years. In addition, mid-2022 saw the Gabonese Strategic Investment Fund (FGIS) join the Net-Zero Asset Owner alliance. This is a UN-launched initiative that commits to transitioning several investment portfolios to carbon neutrality.
The FGIS is the first African sovereign wealth fund, that has committed to financing zero-emission activities by 2050. Its objective is to set new targets every five years and report annually on its progress. In the last quarter of 2022, Amazon’s CEO Jeff Bezos took a trip to the country, lured by the potential of Gabon’s carbon credits market. The Billionaire pledged $35 million to the francophone country, as part of the ‘Bezos Earth Fund’s’ $110 million donation to the region to support conservation efforts.
The Fund is committed to disbursing grants worth $10B between 2020 and 2030 towards nature protection and combating climate change. The country held the biggest carbon credits sale, raising potentially more than $2 billion which put the country on the map. For Gabon, revenues from sovereign carbon credit sales will go to forest preservation, paying off sovereign debt, and supporting its transition to a sustainable economy.