Leveraging Carbon Markets for Private Sector Investment

According to the Climate Policy Initiative research group, in 2022 about 51% of the global climate financing was provided by the private sector. In Africa and other developing nations, private sector contribution is however quite low. IRENA estimates that Africa requires about $213.4 billion from the private sector to close its climate financing gap by 2030. 

The private sector is increasingly becoming the main driver of climate action. According to the Climate Policy Initiative research group, in 2022 about 51% of the global climate financing was provided by the private sector. In Africa and other developing nations, private sector contribution is however quite low. In Nigeria for instance, only 23% of the total climate finance committed in 2020 was from the private sector. This level of investment is not enough. 

The public sector alone cannot meet the continent's climate financing needs. IRENA estimates that Africa requires about $213.4 billion from the private sector to close its climate financing gap by 2030. Also, conventional financial instruments, like concessional debt and grants, are not enough, especially at the scale needed. While the continent’s more mature markets, like South Africa and Kenya, have established and utilised complex capital market instruments like green bonds and asset securities, less developed financial markets have trouble attracting private sector capital. There is a need for innovative financial structures and instruments that can attract and mobilise private sector financing. 

The value of carbon markets

Carbon pricing mechanisms have the potential to catalyse private sector investment on the continent. Carbon pricing mechanisms provide a financial incentive for reducing greenhouse gas (GHG) emissions. Carbon pricing mechanisms like Emissions Trading Systems (ETS) and crediting mechanisms such as voluntary carbon markets (VCMs) provide new sources of revenue for clean energy project developers, forestry conservative efforts and governments. 

In 2021, the global VCM was valued at $2 billion. In Africa the value of retired carbon credits that year was less than 2 percent of the global market —$123 million. This is changing as more African countries increase their participation in the global carbon market. Last June, at an auction in Kenya, Saudi Arabian corporations purchased over 2.2 million tonnes of carbon credits (at $6.27 per metric tonne of carbon credits). International companies including Netflix, Apple, Air France-KLM, and Delta Air Lines are also participants in Kenya’s voluntary carbon market.

The demand for carbon credits to offset carbon emissions by large firms is expected to increase globally. Companies will need carbon credits to meet their ambitious net-zero targets and pledges. VCMs will help to directly drive private capital flow into Africa. VCMs are also an opportunity for clean energy and climate action projects in Africa to generate additional income. This additional revenue increases profitability and can help de-risk projects, allowing developers to raise much-needed private-sector financing. As VCMs grow to include more corporations, the price of carbon credit would also rise, improving the feasibility of clean energy projects and allowing developers to attract more private capital. 

The development of carbon markets also helps countries to establish and strengthen their local monitoring, reporting and verification frameworks and regulations. This enabling environment reduces the risk of doing business and can help lower the cost of private-sector financing. 
Setting the stage

According to McKinsey, Africa currently generates only about two per cent of its maximum annual carbon credit potential. Sustainable Energy for All notes that only five countries—Kenya, Zimbabwe, DRC, Ethiopia, and Uganda—account for about 65 per cent of all of the continent’s carbon credit issuance over the past half-decade. 
More countries need to realise their potential and fully take advantage of carbon pricing mechanisms. To do so, countries must establish the adequate frameworks needed. VCMs on the continent face significant challenges including the lack of standardisation on emissions quantifying and reporting which can lead to a risk of double counting credits. These challenges affect the quality and reliability of carbon credits sold in these markets, significantly hampering their sale. 

African governments need to create an enabling environment for carbon markets to thrive.  Governments should standardise carbon verification methodologies and build the capacity of project stakeholders. This ensures that local developers and companies can participate in the global VCM. There is also a need to train and support companies to understand the appropriate legal resources required to enter into global carbon crediting agreements and partnerships. Governments concerned about projects’ sustainability can incentivise companies by providing subsidies based on participation in carbon markets. 

For markets to scale and perform much larger carbon credit transactions, especially at the scale needed for African nations, the challenges highlighted need to be resolved. African governments must be innovative in leveraging carbon credits. However, countries should also do so quickly to ensure that they can take advantage of the global private sector drive to net zero. 

*Image credit: Alan Murray-Rust, licensed under CCBY 2.0

 

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