Carbon markets which are trading systems in which carbon credits are sold and bought have been gaining attention and buzz in recent times. Currently, progress has been made towards agreeing on the processes and methodologies that countries need to follow to access the carbon markets. And there are many opportunities – not least the benefits that will accrue by diverting a share of the proceeds to support the most vulnerable countries to adapt to climate change.
However, there are also serious concerns including issues related to double-counting of GHG emission reductions, human rights abuses, and green-washing (in which companies falsely market their green credentials, for example, misrepresentations of climate-neutral products or services); which is why the Paris Agreement negotiations on this topic have been so complex and protracted.
In order to better understand the carbon market status quo vis-à-vis Africa, Capital’s Metasebia Teshome reached out to Jean Paul Adam, Director of Technology, Climate Change and Natural Resource Management division of United Nations Economic Commission for Africa, for in-depth insights on the matter. Excerpts;
Capital: What are carbon markets and why are they important?
Jean Paul Adam: By simple definition, carbon markets are trading systems in which carbon credits are sold and bought. One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided.
First, under the Kyoto protocol and then after the Paris agreement there was a provision for countries or developers to trade carbon credits as long as they contributed towards reducing emissions globally. Now, the hope is that because negotiations are still happening under the Paris agreement, that we will have a global market for carbon credit. But we are not there yet until we have this global market thus we use what are called voluntary markets, meaning that companies are not forced to pay for example, for carbon credits but when they have the opportunity to do so they can buy carbon credits as a means of reducing their overall carbon footprint.
There are a lot of challenges with the implementation of carbon markets because there are some people who try to cheat but if it is done well, it’s a very good tool because in the same kind of projects you can reduce emissions which help alleviate burdens globally. You can also invest in a way that can help people’s lives. For example, you could invest in solar panels to provide energy to a village; and you can provide also in some cases protection to the environment by say rehabilitating forests. And all of these bring benefits which are not only in terms of the climate resilience, but benefits also that are felt by people who are living in those areas.
Capital: What kind of opportunity does Africa have and how much can Africa make from these carbon markets?
Jean Paul Adam: It is still something that is relatively new to Africa. Of course in developed countries such as those in Europe it has become a norm, where a lot of European companies are actually forced by rules within the European Union to buy carbon credits.
Now this could also translate to Africa and drive huge potential since there are companies who are good examples for the carbon markets. For example, in Africa there are projects where there is investment in clean cooking solutions and we know many places in Africa where people have to cut trees to cook their food. So in this instance, we can mobilize carbon credits by getting an investor to invest in alternative solutions. So it might be like different types of cooking stoves, which will end up reducing the number of trees cut and we can leverage that deforestation reduction to positively contribute towards reducing carbon globally.
So one can use this type of project to then claim carbon credits which can get payments and the payments can then be used as investment loop for such projects, again and again. Of course that is just but one example, and we are looking to help African countries develop. For instance, if we take a country like Ethiopia that is doing a lot in terms of green legacy and planting trees in a very large scale fashion, we can leverage this to integrate to the generation of carbon credits and therefore get more money to invest in these types of activities which are very important. They’re not only important because they reduce carbon but also because they improve the quality of life in the communities. When you plant trees, you reduce the risk of flooding, you reduce the risk of drought, and you improve the agricultural productivity on the soil. There are many co benefits that go with the type of initiative that Ethiopia is doing through the green legacy.
Capital: As is often said, carbon markets are new and complex. How do you see the readiness of African countries and governments who are now eagerly talking about improving green investment?
Jean Paul Adam: So green investment and carbon markets in a way go together. Because carbon markets are a way of getting additional resources to having green investments and in the context that we are now in, many investors maybe see Africa as risky. This might be because we are just bouncing back from a pandemic and Africa was seen as riskier grounds even before the pandemic, which then just piled risk during the pandemic.
Also interest rates have gone up in America as well as Europe. So investors might have opted to place their money in those countries where the interest rates have gone up. This thus resulted in less investment coming into Africa.
Carbon markets can be a way that we can incentivize investments into sectors where we really need investment. So what needs to be done is not easy as there are many things that are intertwined, making the situation complex.
Like for instance, the UN wants to support countries through the national frameworks. So some countries like Ethiopia who already have green investment plans can be supported in projects linked towards carbon markets to generate additional money. And in some cases, there are also investors that are looking into different projects and they can connect with potential areas where they may wish to invest. What we are trying to make sure is that African countries have the capacity so that they can really benefit from the carbon markets and that the money generated is not only taken by the investor but shared between the investor and the community.
Capital: There are debates that in low income countries especially African countries, that it is a challenge to participate in the market competition and pricing. Why do these challenges exist and how can they be alleviated?
Jean Paul Adam: There are different reasons for the challenges, the main challenge being that we do not have experience on these markets. So therefore we are not designing projects in a way which is easy to access those markets, but the fact remains that in every design of the project we must inculcate carbon markets effectiveness.
So for example we all know when we plant a tree we are reducing emissions because trees absorb carbon. But we need to make sure that we have the technology and also the knowledge to not only plant trees but to show that this particular species of tree is contributing to carbon sequestration because this type of tree can absorb X amount of carbon whilst contributing towards reducing erosion. And that also helps in further carbon sequestration. It contributes towards improving the ecosystem which also helps and so all of these capacity elements we have to reinforce in African countries.
The second element is around the regulation of carbon markets. So many countries have developed carbon registries and these are essentially the institutions that register when a carbon credit is issued. And those institutions have to have standards. For example in UNECA, we supported the countries of the Congo Basin to develop a registry for the whole region. So this means that in theory they will be able to use this common standard for that region. There are other countries that are interested in doing national registries or regional registries which is one of the things that we have to build for countries to be able to access carbon markets.
Capital: What is the UNECA doing in relation to climate change issues as well as carbon markets?
Jean Paul Adam: There is an initiative which was launched at COP 27 called the African carbon markets initiative. This initiative is aimed at sensitizing the private sector to the opportunities for investment in carbon markets in Africa. So countries that are participating in that initiative, are putting forward their projects and then investors like big banks and so on are looking at the opportunity to invest through those mechanisms. That’s one way.
Secondly, we have supported the Congo Basin climate commission and there are 16 countries in the Congo Basin who have developed their regional registry for carbon credits. This is to have the capacity for regulation of carbon markets at country level and the regional level.
And then thirdly, we are providing advice and some guidance for countries that are asking us for help individually on what is the opportunity for development of carbon markets in that country, what maybe they need to do in terms of the development of the registry, capacity building and so on. So these are essentially the three ways that we are participating in supporting carbon markets.
And then the new area is how we can help to develop carbon markets at a continental African approach, not just individually and by this we want to use the African continental free trade area (AFCFTA) and we are thus working very closely with the African Union Commission to achieve this.
So for example, what we don’t want is what we call a race to the bottom where people maybe get a little bit of money for their carbon credits but it has very small impact and therefore it reduces the value of carbon credits in Africa. What we want is through the AFCFTA to have a common understanding that we want to have high value on our carbon credits. So it means not just doing any project because there are many different types of carbon credits but we want to do projects which are high value. And when we talk of the high value we don’t just mean in the overall amount of high value but in terms of the impact in the community. We want to make sure that we invest in the African priorities. For example agriculture, food production, energy; we invest in the things that we need and not in the things that maybe matter just to investors.
Sometimes there are some projects on investment in carbon markets where they will say let us create a park. It might be very good if you can link it to tourism and then develop ecotourism. But if you’re just creating a park and the park just stays there and there is no money being generated what is the value for the community? So we have to make sure that African priorities are developed in these carbon markets. And that is not just the priority of the investor. It has to be common. The investor needs to get something but we have to make sure that we have our priorities and this is where the AFCFTA is very important.
Capital: What is your observation from the Cop27 as there are arguments that it was not successful as expected especially in finance mobilization? What’s your expectation from the coming Cop28?
Jean Paul Adam: Cops are very difficult because you have to have 193 countries agreeing. And we all know that there has not been enough support for example for Africa. We are not getting in the required finance. But even the promises that were made a long time ago, the promise for 100 billion was made back in Copenhagen 2009 and we have still not achieved that financial mark.
On Cop 27, yes, there was no strong progress on finance but they were progress made on other things particularly the establishment of a fund on loss and damage. This is a very important positive development because after loss and damage as we all know Africa is hit more by disasters, thus such initiatives are beneficial to the continent. If we take the example of Ethiopia, we have been having now for a few years, droughts-floods-droughts-floods, and each time we have a drought it is complimented with a flood. Where do we get resources to deal with this? Countries are still struggling because of the pandemic economy. And when you have these droughts you have flood this is difficult to get money to invest. And there has not been any money coming from developing partners.
At Cop27, there was an agreement to set up a fund on loss and damage. So when these events happen, they will be quick forms of finance to help support countries challenged by that. But yes, Cop 27 did not go far enough as we did not achieve the 100 billion, which also is not enough. The study that was done by the UN last year showed we need $1 trillion for the world by 2030. Not all of the trillion is grant money. Some of it will be grant some of it will be loans and some of it will be private sector investment.
Nonetheless, we have to focus on that investment since for example now we all know that where there is war a lot of money is going to go towards war but not into energy. So rich countries are buying weapons but not enough is going into energy. So we have to make sure that in Cop28 that is not the case. The good news is that the government of the United Arab Emirates will be hosting and have said they want to focus on the finance results at COP 28 and we hope that there will be new commitments on finance. And this includes also the further development of the carbon markets. The carbon markets should not be seen as a replacement for funding that has been promised. But it is a way of getting more money because we need so much investment.
Capital: How can carbon markets be achievable in a world where carbon market finance mobilization for climate related action is very difficult for low emitting countries?
Jean Paul Adam: I think the first thing that needs to be very clear is that we are not trying to encourage carbon markets as a replacement for financing which has been promised. The carbon markets should be an opportunity for additional money. It is a way also to help the private sector to come in. So for example, for the private sector maybe they will look at green legacy and they will say it’s difficult for us to fund the green legacy. Because how do we make money? But if they can claim carbon credits, then maybe it becomes interesting to invest in tree planting. It means that even anyone can get additional money from the private sector to do activities which in the past maybe were seen as costly and not something easy for the private sector to invest in. So the development of carbon markets should be seen as a way to get additional money, if we design the projects well. The idea is also to make sure that the money is not only held by investors or developers but that it is really invested in projects on the ground that brings benefit to people.
Capital: Experts argue that Africa should no longer rely on the other world but must instead be able to take tangible steps to generate its own finance tool. What are your thoughts on these? Is it achievable?
Jean Paul Adam: This is something that the African Union and the United Nations we are working closely together on. Carbon markets are one way because if you have a very good structure for carbon markets you are not dependent on any government. If you have a good structure for carbon markets you have your project. You have a private sector investor and then that private sector investor can claim credits either internationally or may go to very strong existing markets in the European Union for example. And we hope as well that we can further develop markets within Africa. And so the development of carbon markets is one way to really improve the amount of money that we generate within the continent which cannot be reinvested in climate resilience, which is not dependent on donors.