Odion Ibadin, Ifeoma Malo
Image source: Sustainable Economy Nigeria
According to the National Aeronautics and Space Administration , at the rise of the industrial era human activities have increased atmospheric concentrations of CO2 by about 50%. To tackle this, political authorities from nations across the globe adopted the Kyoto Protocol, which committed to reducing greenhouse gasses by implementing a strategy called carbon trading.
The Protocol was adopted in December, 1997 and called for 37 industrialized economies to reduce their GHG emissions between 2008 and 2012 to levels 5.2% lower than the baseline in 1990. The Protocol however, only binds developed countries, as they are largely responsible for the high levels of greenhouse gasses in the atmosphere and three market-based mechanisms were established. Emissions Trading which countries that emit less than they are allowed to can sell this amount to industrialized countries that produce more than they should. The Clean Development Mechanism and the Joint Implementation mechanism where countries can invest in an emission-reducing project and gain credit points.
The Paris Agreement is a legally binding international treaty, adopted as part of COP 21 in December 2015, to limit the rise in global temperatures to 1.5–2°C by 2030. It came into force in November 2016. Currently, it has 194 signatories.
The agreement consolidated long-term, international goals to tackle the climate crisis, including increasing adaptation and resilience to climate change, and aligning financial flows with low-carbon and sustainable development. However, the details on implementing this global pact were left unclear.
In 2015, a structured framework for carbon markets was put in action. under Article 6 of The Paris Agreement. According to the Environmental Defence Fund (EDF), if implemented properly, international emissions trading could nearly double emissions reductions between 2020 and 2035.
What are Carbon Markets?
Simply put, 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. The Carbon Market was created to discourage polluters from emitting more carbon into the atmosphere. Just like any other trading market, a carbon market is a system in which carbon credits are either purchased or sold by regulated entities, mainly companies. Hence, this approach to reducing carbon emissions centers on putting a price on carbon. Determining monetary value to carbon could potentially create responsibility within polluting companies for emissions that were previously not tracked.
What are the types of Carbon Market and How does the Carbon Market work?
There are two types of carbon market, Voluntary Carbon Market or Compliance/Mandatory Carbon Market. Compliance Markets are created as a result of any national, regional and/or international policy or regulatory requirement. An example of a compliance market will be emission trading systems (ETS) operating with the “Cap and Trade” Principle. This means that a regulator, in most cases the government, fixes an upper limit on emissions allowed for polluters. The government then issues a limited number of permits to these polluters to cap the amount of carbon they are allowed to emit in a period of time. Each entity is allotted a specific allowance of carbon it can emit and polluters who exceed their emission have to buy emission rights from others through an auction/trade process.
In addition, the government can impose a levy on certain industries that use coal, oil and natural gasses. for the volume of CO2 they emit, this is referred to as Carbon Tax. Unlike the cap and trade principle that requires some form of trading, this is imposed and as a result these industries will be compelled to. reduce the level of pollution and find greener alternatives that improves the environment.
Voluntary Market refers to the issuance, buying and selling of carbon credits, on a voluntary basis between national and international participants. The supply of voluntary carbon credits comes from private entities that develop carbon projects or governments that develop programs certified by carbon standards that generate emission reductions and removals. These projects can have benefits such as biodiversity protection, pollution prevention, public-health improvements, and job creation. The demand arises from private entities that want to compensate for their carbon footprints, enhance their corporation with corporate sustainability targets and other actors aiming to trade credits at a higher price to make a profit.
The difference between the Voluntary and Compliance Market is that the voluntary carbon market uses a project-based system in which there is no finite supply of allowances and hence new projects can be created. while compliance markets operate a cap-and-trade system where organizations are given a certain amount of allowances. The cap represents a finite supply of allowance as such, new ones can not. be created.
Why are Carbon Markets waving in?
The simple answer is Carbon Finance. Carbon financing creates climate systems that make it possible to measure carbon and incentivizes both firms and individuals to reduce their carbon footprint. Carbon finance is a key tool for successful implementation of our National Determined Contributions (NDCs) and under Article 6 of the Paris Agreement it allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs. This is why global interest in the Carbon Market is. growing as countries intend to use the market system to reduce greenhouse gas emissions.
Nonetheless, while carbon financing has been praised for being an effective tool in reducing carbon emissions, some argue that the challenges lie in deploying it. The common challenges include issues of double counting, lack of integrity and transparency. Double counting occurs when two parties claim the same carbon removal or emission reduction. For example, if a developing country reduced its carbon emissions by 1 metric tonne through an energy efficient scheme, sold its reduction to a developed country, but also counted the reduction in its own target, it would lead to double counting. Furthermore, political and corporate corruption could lead to a collapse of the carbon market.
Where does Africa stand in the Carbon Market?
Africa accounts for 2% of the trading in the global carbon market, of that margin, South Africa and North Africa enjoy the largest portions of projects under the Clean Development Mechanism, the main carbon market from the Kyoto Protocol with the rest of Africa contributing a trifiling 0.6%. It has been suggested that one of the reasons why the African Carbon Market is less attractive to big investors relates to how the continent generates electricity. Access to electricity is a major challenge in Africa with as little as 5% of some countries’ population enjoying access to grid electricity.
According to The World Bank, the 47 countries in Sub Saharan Africa with a combined population. of 800 million people generate as much power as Spain with a population of 45 million. Hence, the lack of carbon-reduction investment opportunities in the power sector and the limited number of carbon-intensive industries outside Northern Africa and South Africa suggest that the rest of the continent may not be well positioned to influence debate around carbon markets.
The types of projects that will benefit the livelihood of Africans are capital intensive and as a result, given that there are limited opportunities for expanding the carbon market through the CDM, Africa is shifting her attention to projects that can be delivered through the voluntary market.
Moreover, COP27 saw the dawn of The African Carbon Market Initiative which was inaugurated on the 8th of November, 2022. The aim of the initiative is to support carbon credit production and increase job creation in Africa. Multiple African nations including Kenya, Malawi, Gabon, Nigeria and Togo announced their commitment to scaling voluntary carbon markets at the event. Carbon credit buyers and financiers, such as Exchange Trading Group, Nando’s, and Standard Chartered also announced plans to set up an Advance Market Commitment (AMC) worth hundreds of millions of dollars for high-integrity African carbon credits. Furthermore, Ivan Duque, former President of Colombia, and David Antonioli, CEO of Verra, announced the creation of a new consortium, the Nature Framework Development Group, which aims to develop a market leading nature/biodiversity credit.
It is evident that for the African economies, there are alot of opportunities in the Carbon Market to be explored that will unlock massive climate finance for their mitigation efforts and combat of climate issues, even though Africa currently produces only a scaled-down percentage of its carbon credit potential.
Odion Ibadin is Junior Associate, Environment and Climate Change at Clean Technology Hub. She is the lead on the Carbon Portfolio.
Ifeoma Malo is Co-founder/CEO of Clean Technology Hub.