Carbon Trade:An Opportunity For Africa

There has been an increased global concern around issues of environmental conservation or the impact of human activity on the environment over the last century. The major contributor to environmental degradation has been pollution by industries many of whom are concerned with profits rather than the environment.

Further to that most of these major industries are located in the developed countries such as China, USA, and Europe etc. Ironically it is Africa which contributes the least that bears the brunt or effect of this phenomenon which was coined as Global Warming.

Following this worrying trends global leaders have been making great strides to manage the phenomenon through several treaties and agreement such as the Kyoto Protocol and Rio declaration. Further to that there has been recent talk of carbon trading as a tool for managing global warming. As is mostly the case Africa has been left behind the trade due to various reasons some of which will be addressed in this article.

Research indicates that the biggest gainers of carbon trading are China, India and Latin America. In this article we will explore briefly what carbon trading is all about and find out the potential opportunities that are there for Africa.

 What is Climate Change?

Climate change typically refers to the threat to our ecosystems and climatic conditions stemming from the release of greenhouse gases into the upper atmosphere. Most of these releases are now considered by a majority of the scientific community to be produced by human activities such as emissions from the burning of fossil fuels.

The threat of climate change is the direct physical effects of climate change on human activities, such as scarcity of inputs due to decreased agricultural production, adverse weather conditions disrupting pipelines, reduced water supply due to droughts, or destruction of fixed assets due to flooding.

What is the Response to Climate Change Threat so far?

The measures adopted by others in response to the threat of climate change — whether international, national, or local in origin — range from international treaties such as the Kyoto Protocol, to market measures such as increases in insurance premiums, to national government regulations forcing businesses to reduce their emissions of green house gases.

What Qualifies as a Greenhouse Gas (GHG)

1. Carbon Dioxide (CO2): Mostly from the combustion of fossil fuels (electricity generation, industry, and transport), comprising 70% of the total greenhouse effect.

2. Methane (CH4): Emitted during waste management and agriculture, comprising 20% of the total greenhouse effect. Methane has an impact on global warming 21 times that of CO2.

3. Nitrous Oxide (N2O): From burning fossil fuels, industrial processes and fertiliser production in particular, comprising 6% of the total greenhouse effect. Nitrous oxide has an impact on global warming 311 times that of CO2.

 Economic Opportunity in Africa

Movements toward greening the global economy and decoupling resource use from economic growth present new opportunities for African economies. As the continent arguably most affected by climate change, it is heartening to see that there is an opportunity, by tapping into Africa’s abundant natural/renewable sources for more sustainable energy, to derive economic and developmental benefit from the global drivers behind it.

By placing a market value on activities that can reduce GHG emissions, the carbon market is increasingly being used as a tool to finance this transformation.

Climate change is a driver for change through which new value can be realised for businesses or institutions in Africa—thus benefitting local economies and people.

For those that contribute to climate change through the direct or indirect emission of GHGs, they can act to reduce these emissions and pay for the costs in part by generating emissions reduction credits that are tradable assets.

Reducing the carbon footprint for businesses is of course part of good corporate citizenship, but if non-obligatory reductions can be monetized at the same time, it is more likely that such actions can be realized more quickly and scaled-up. Likewise, for small-scale activities implemented by SMEs, such as decentralized waste management, carbon credits can provide additional revenue streams far into the future, thereby increasing the viability and sustainability of business models.

What is the Carbon Market?

Carbon market is basically a spectrum of systems that are regulated in different countries or jurisdictions for trading green house gas pollution rights.

These rights – called allowances or permits — are the commodity that’s globally traded and give the bearer the right to emit an equivalent amount of CO2 emissions. Carbon credits are similar to permits, but are fundamentally different in that they are generated over time, (i.e., once a project gets implemented and the reductions are audited).

In many markets, these carbon credits can be used in lieu of allowances for compliance to targets that have been placed on industrial facilities or sovereign countries.

Although the Secretariat of the United Nations Climate Change Framework Convention on Climate Change (UNFCCC) is responsible for maintaining a global registry or clearing house for many types of carbon units, various regulatory bodies at the national and regional level (e.g., the EU) oversee and monitor transactions in this market.

Similarly, while there are a number of major exchanges where carbon allowances and credits trade in real time, there is no central exchange, nor a single unitary carbon market price. Rather, prices are determined in different market segments as a function of supply and demand as with other traded commodities.

A surrogate benchmark price for carbon is typically an allowance in the European Trading Scheme, as this is the largest market segment by volume and monetary value. Carbon credits traded under the Clean Development Mechanism of the Kyoto Protocol generally trade at a discount to the European allowance price.

In principle there are four main market segments:

1) The Clean Development Mechanism (CDM), is a project-based, offset system that came into effect under the Kyoto Protocol.

It has the objective of reducing the global cost of GHG mitigation by opening up the market for those countries with legally binding emission reduction targets to gains from trade with countries that do not have legally binding targets, while simultaneously rewarding new voluntary actions in those developing countries that reduce emissions.

Thus, carbon credits can be purchased from projects developed in non-industrialised nations by industrialised countries. Importantly, carbon credits cannot be generated for emission reduction activities as a result of laws or legislation, nor can they typically be generated from the result of designing and implementing new domestic policy measures.

The CDM has helped to attract and leverage new sources of both foreign and domestic investment to help developing countries green their industries and infrastructure. As an addition source of revenue, carbon credits can, in some cases, improve the bankability of various projects, principally in the energy, waste, and infrastructure sectors. To a lesser degree, the CDM has also been used by some countries to promote sustainable forestry and agricultural activities.

2) Joint Implementation (JI), which permits the same activity as CDM, but only between developed countries.

Both of these mechanisms allow industrialised countries to achieve their targets by purchasing carbon credits outside of their country’s borders. However, only CDM allows them to purchase credits from developing countries.

3) Emissions trading concern the trading of allowance rights to emit GHGs, which can only happen between industrialised country governments, as they buy and sell the rights to pollute up to their own limits or assigned amounts.

4) The Voluntary carbon market, which follows a similar project cycle to the JI and CDM, with the main difference that the credits are not uniformly issued or regulated by the UN, and are typically sold in volumes that appeal to retail clients seeking a smaller number of reductions to offset their footprints.

How is Africa Fairing

Loan scheme and methodological guidelines adopted at the African Carbon Forum in Addis Ababa in 2015 was a major step towards assimilating Africa’s entry into carbon markets, with East Africa billed to play a leading role.

The move is designed to allow more African countries to adopt the Clean Development Mechanism (CDM), introduced by the United Nations Framework Convention on Climate Change (UNFCCC), which involves implementing emissions reductions projects and earning sellable carbon credits.

This has been adopted by many developing countries, but so far Africa has been lagging behind as a result of the lack of methodology. Of the registered 3,927 CDM projects across the world, only 84, just over two per cent, are in Africa.

East Africa seems to be the preferred destination for carbon investors, offering real opportunities to renewable energy businesses in the region. Seven of the nineteen carbon sequestration projects in Africa are based in Kenya, Uganda and Tanzania.

Carbon credits have become big business, with richer countries offsetting their pollution by paying developing economies to launch clean and renewable energy projects, as well as planting trees.

Tackling climate change, it can also be of economic benefit to developing nations. The World Bank says that the carbon market can earn poorer nations more than $25 billion every year. Numerous companies also have the potential to earn carbon credits through reducing their emissions.

Companies who deal with cooking stoves, domestic biogas and green charcoal can earn credits, as can those involved with small-scale hydroelectricity, LED lighting, solar water heaters and water purification and industrial companies in the cement, biodiesel and sugar sectors.

Some firms are taking advantage of this. Kenyan firm East African Portland Cement began a project in 2010 that would enable it to sell carbon emissions for $1.7 million annually, while KenGen and Mumias Sugar Company are also engaged in carbon trading. Other that these cases , the general uptake in Africa has been minimal at best.

The low global carbon price may have contributed in making entering carbon markets less attractive to African countries. Prior to the financial crisis projections that the price of a carbon credit would range from €30-€40 per ton of emissions by 2030, yet the crisis means that carbon credits are currently worth about €4 per ton.

Lack of methodologies was also holding African factories back, according to experts. The introduction of the standardised methodology will help such factories to measure their emissions reductions. When they know the amount of emissions that they reduced, they can participate in the carbon market.

The cost of setting up the required infrastructure was also debilitating, hence the decision to introduce the loan scheme. Developers will be able to use the loans to build up their projects before demonstrating their ideas to investors and carbon credit buyers.

The United Nations Environmental Programme (UNEP) is also working on a scheme to calculate how much carbon trees and soils actually absorb.

According to UNEP estimation, 100million carbon credits would earn African economies an estimated $1.2 billion each year. But the problem is not many Africans are aware that such an opportunity exists.

Fortunately, there are some groups that have noticed the opportunity and taken it up. More than 48,000 Kenyan farmers are selling carbon credits in the United States through The International Small Group and Tree Planting Programme (Tist).

The new regulations are likely to make it easier for CDM projects to take off in Africa.

Many experts believe that Africa is the next big theatre for carbon finance as there as an acute shortage of supply and great demand in Europe. It is high time African government and its citizens take up this great opportunity.