The future of carbon markets in Africa

As conversations over raising climate financing peak, African policymakers are shifting focus on innovative mechanisms such as carbon markets. The continent has vast amounts of carbon stored in its ecosystems. A case example is the Congo Forest – the world’s second-largest forest – which absorbs 1.2 billion tons of CO2 each year. From Congo to the Atlas Mountains in Morocco, mangrove covers in the Indian Ocean coastlines to the rainforests in Western Africa; harnessing the potential of carbon markets could transform the continent’s trajectory.

The idea of carbon markets has been around the block for quite some time. However, it came to the fore during the last edition of the Conference of Parties (COP27), held in Sharm El-Sheik, Egypt, in November 2022. During the global meeting of heads of state, the Africa Carbon Markets Initiative (ACMI) was launched with a bold, long-term ambition to reach 300 million credits, unlocking $6 billion in income and supporting 30 million jobs by 2030. The initiative further targets raising $120 billion and supporting over 110 million jobs in Africa, by 2050.

Despite the grandiose promises, progress has been sluggish this year. So far, the continent has raised a combined total of $200 million in carbon credits in 2023, and just seven countries have signed up to develop country carbon activation plans: Burundi, Gabon, Kenya, Malawi, Mozambique, Nigeria, and Togo. However, globally, the voluntary carbon market has continued soaring at a record pace, reaching $8 billion in 2022. At the current rate, the market will reach between $20 and $40 billion by 2030.

As leaders, entrepreneurs, technologists, and investors gather in Dubai for COP28 to discuss strategies for driving green growth and climate finance solutions for Africa and the world, it is worth examining the factors behind the sluggish rollout of carbon credits. Transitioning to a net zero economy will be very expensive, costing an estimated $1.7 trillion by 2030. Therefore, African governments and the private sector should, with renewed urgency, look to harness the full potential of this rich but raw market.

“Carbon markets present a great opportunity for African countries to utilize their abundant natural resources to unlock economic value and accelerate sustainable industrialization and economic transformation and diversification,” Economic Commission for Africa Acting Executive Secretary, Mr. Antonio Pedro, said. “As Africa seeks to recover from the multi-crises of the COVID pandemic, energy crises and climate change, it is critical that we invest in sustainable value chains that will deliver jobs and resilience and inclusive economic growth. The carbon market presents such an opportunity for African countries. We must seize it.”

Carbon markets refer to a system where emitting companies must purchase permits or credits generated from emissions-reduction projects to cover for emissions that exceed their already set caps. The concept has gained significant traction in recent years. Roughly 25% of global emissions are now covered by some form of carbon pricing. The value of traded CO2 (Carbon dioxide) permits rose by 164% in 2021, reaching a record $851 billion.

Challenges of carbon markets

Carbon markets are rich with potential, but unlike other forms of investment, they are not reliable. The global carbon market in which the continent plays is very chaotic and volatile. The price of a ton of CO2 can range from $10 to $100. The volatility in this market is driven by changing national policies on climate, rising poverty, hike in oil prices, and uncertainty fueled by crises like the COVID-19 pandemic and Russia’s invasion of Ukraine.

The unpredictability makes it impossible for lower-income African countries to participate in the carbon markets on fair terms. Despite attempts to work within a common framework as a continent – the Africa Carbon Markets Initiative, African countries remain on the sidelines of global carbon markets. This situation is untenable as the continent requires $300 billion annually to meet its carbon goals.

Moreover, there is a lack of proper data on the amount of carbon stored in forests and soils in Africa. It makes it harder for the continent to pitch and gain extra financing from large multinationals and developed countries. Africa also largely lacks the skills and technologies required to perform such calculations, and facilities to monitor changing patterns of soil and atmosphere composition.

To illustrate how far Africa has to go to fully harness its potential for carbon markets, one has to look at a similar initiative promoted by the European Union. The EU’s Emissions Trading System (ETS) has grown to cover half of the European emissions and linked the continent with carbon markets in China, Switzerland, and other Southeast Asian countries. As a result, there has been reduced fragmentation, which in turn guarantees higher prices in the markets.

Moving forwards

The impacts of climate change are increasing with each passing day, and Africa cannot afford to dilly-dally in its pursuit of climate financing. Therefore, concerted efforts to create certainty and stable pricing of carbon credits by cooperating with outside partners like the European Union could prove a handful.

African countries should also market their land-restoration activities to global audiences and support locally-led businesses looking to venture into these spaces. Moreover, creating a reputable monitoring, reporting, and verification (MRV) framework is a top criterion for purchasing credits. Studies show that 90% of buyers rank MRV as a major factor in credit purchase decisions. As the spotlight on carbon offsets grows, buyers want to ensure that the credits they buy have an impact that’s easy to prove and defensible against claims of greenwashing.

In conclusion, many people across the continent will be watching closely how discussions on carbon markets evolve during COP28. Fingers crossed on new, meaningful developments.

Citations

Bielenberg, Aaron, et al. “Financing change: How to mobilize private-sector financing for sustainable infrastructure.” McKinsey Center for Business and Environment (2016): 24-25

Silver, Jonathan. “The potentials of carbon markets for infrastructure investment in sub-Saharan urban Africa.” Current Opinion in Environmental Sustainability 13 (2015): 25-31.

United Nations Development Program. Africa needs carbon markets. Retrieved August 25^th 2023 from https://climatepromise.undp.org/news-and-stories/africa-needs-carbon-markets