Why greening Africa’s financial sector is a developmental imperative 

Frustration at the global community’s inadequate response to the climate crisis is fuelling scrutiny of all parts of the system to identify where there are pressure points and consequently, the opportunity to create breakthroughs.

Alongside the calls to raise taxes on fossil fuel players, there has also been a spate of media reports spotlighting companies accused of greenwashing – raising capital through carbon credit schemes that deliver no verifiable impact on the ground. The scrutiny is important for the development of the sector yet there is a risk that media focus on a few examples without representing the vast majority of companies using carbon as it was intended, as part of a broader effort to reduce their carbon footprint and offset what cannot yet be abated.

Carbon is an emerging asset class designed to create a market-based incentive for environmentally sustainable behaviour change at the global level – so building understanding of how it works and assessing its impact is important. Sustained scrutiny of carbon offsetting in the media and on social media over the past few months – part of a broader questioning of the value of ESG – has catalysed a process of reflection. There is widespread recognition of the need to restore trust and confidence in the integrity of carbon credits programmes when making sustainability and impact claims to investors, consumers, communities and governments.

“There is no development of Africa without power” – Mo Ibrahim

The recasting of Mark Carney’s Taskforce for Scaling Voluntary Carbon Markets into the Integrity Council for the Voluntary Carbon Market and its call in July for public consultation on the proposed new Core Carbon Principles is therefore a welcome step forward.

These developments can be game-changing for Africa. A globally respected carbon credit framework would create a pathway for Africa to reduce GHG emissions, finance the transition to renewable energy, support the protection of natural capital – with direct impacts on food security, public health and biodiversity – and boost economic development.

Africa’s natural capital potential is massive – and almost entirely untapped.

The Congo Basin forests alone absorb approximately 1.2 billion tonnes of CO2 every year, while it is estimated that large-scale natural and land-based assets, including peatlands, soil and mangroves (which all store between two and four times as much carbon as forests), can enable African countries to meet 30 per cent of the world’s sequestration needs by 2050. UNECA projects that through nature-based carbon removal, Africa can generate between $15 and $82 billion annually, depending on the price of carbon. FSD Africa’s ‘Capital Markets Impact Report’ emphasises that green, climate-change related projects present a US$3 trillion investment opportunity in Africa by 2030, with 75 per cent of the investment expected from the private sector.

There is however significant work to be done to realise this potential. Today, Africa accounts for a paltry 2 per cent of trading in the global carbon market, currently worth around $84 billion, according to the World Bank. Of that 2 per cent, South Africa and North Africa enjoy the largest portion of the projects under the Clean Development Mechanism (CDM), the main carbon market resulting from the Kyoto Protocol, with the rest of Africa contributing 0.6 per cent.

There are currently no emissions trading schemes (ETS) in operation across Africa, although South Africa has had a carbon tax in place since June 2019, and some countries (e.g. Botswana, Ivory Coast, Senegal, Morocco) are considering implementing ETS and/or carbon taxes.

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For Africa to build thriving, diversified green markets, several things need to be in place: strong and sustained political will, the creation or reform of relevant policy and regulations, effective regulatory oversight, the establishment of national registries to verify and record the credits, access to data and technology to create accurate carbon measurement models and participants with robust technical expertise to ensure their projects comply with the latest guidelines.

Other factors – such as carbon pricing – are a challenge and act as a significant brake on participation. Establishing a transparent, accessible market with fair value for carbon (current prices range between $10 and $100 per tCO2e) would be a significant milestone in enabling everyone to participate on a level playing field.
Another core factor to address is route to market. The number of CDM projects in Africa has increased by approximately 150 between 2010-2021 so the market is growing fast but the absence of local green markets means most African carbon projects – from clean cooking solutions to renewable energy, tree-planting or wetlands conservation – have to go through exchanges in Asia or Europe to sell credits.

It’s time to build our own infrastructure to monetise our natural capital, and to do this on fair terms. Africa can’t wait for handouts, and we shouldn’t need to. Establishing the foundations for a transparent and efficient carbon market in Africa will unlock a new quantum of capital flows. We can build on the AfCFTA and lean into the power of regional integration to scale continental-level climate finance infrastructure, building on each of our strengths – and create strong linkages with global green markets.

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There are encouraging signs of progress. In April 2021, Gabon applied to issue 187 million carbon credits – the largest issuance ever recorded – 50per cent of which will be sold on the offsets market. The credits are estimated at a value of $291 million, based on their vintage. The urgency of creating our own carbon financing infrastructure so we don’t lose value in transaction costs is increasing rapidly.

The Nairobi International Financial Centre is collaborating with Air Carbon Exchange and other partners to establish a regional exchange and build out the carbon trading ecosystem. It will create a direct route for high quality African carbon credit projects to sell directly into the international markets.

As the volume of credits traded in Africa rises, and trust and confidence in this asset class deepens, the continent’s natural capital can become our passport to reset our role in the world, from climate victim to climate leader.

Oscar Njuguna is acting CEO at the Nairobi International Financial Centre 

This article was originally published on The African Climate Conversation platform hosted by British International Investment, the UK’s development finance institution – a global leader in providing climate finance to African nations. The platform can be found at www.bii.co.uk/african-climate-conversation