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Post-COP27: Whither African agenda? (3)

Global Carbon Market Hits $800 Billion Despite Dwindling Trade Volumes

Africa aims for larger pie of global voluntary carbon market despite rules delay

Global carbon market rules did not get much traction, however, as even what little progress there was in talks turned out to be controversial. The allowance that could be granted companies to claim the same carbon offsets as the host countries of the climate-mitigation projects issuing them, raises concerns about greenwashing, for instance, since such double-counting will be counterproductive to climate mitigation goals.

Even so, African delegates launched the African Carbon Market Initiative (ACMI) at COP27, which is aimed at growing the voluntary carbon market on the continent to 300 MtCO2e in credits retirements by 2030 from 22 MtCO2e (out of about 39 MtCO2e issued) in 2021. Africa has the potential to generate as much as 2,400 MtCO2e in carbon credits retirements per annum, according to ACMI estimates, which underlies its goal of 1.5-2.5 GtCO2e in carbon credits retirements per annum by 2050.

African carbon credits, which grew at a compound annual growth rate of 36% in 2016-21, are still far below potential at just US$123m in retirement value

In the aftermath, Africa could earn as much as US$100bn per annum from its carbon market by 2050, which is as much as what rich countries promised in climate financing for developing countries every year. This is a pertinent point. Having failed to meet the US$100bn per annum target by 2020, rich countries have a moral obligation to facilitate innovative financing mechanisms like carbon credits that could fill the financing gap without requiring much outlay on their part.

African carbon credits, which grew at a compound annual growth rate of 36% in 2016-21, are still far below potential at just US$123m in retirement value, according to ACMI, which reckons the continent is currently generating just about 2% of its carbon credit potential.

Even so, the region’s carbon market is greatly underwhelming its potential owing to myriad constraints that are largely underpinned by a dearth of local expertise and institutions across the carbon market value chain.

Capital and regulation are huge constraints too. As current carbon market standards, methodologies and rules do not reflect the African context, the region’s entities are not able to issue as much carbon credits as they could or at valuations that reflect their climate action impact.

One of the goals of the ACMI is to increase the issuance of African-origin carbon credits by addressing these challenges, as well as develop a rich pipeline of demand through advance market commitments, whereby emitters commit to buying offsets in advance.

International development partners like the European Union and the United States, which should ideally be interested in ways that enable African countries carry some of the weight of their climate financing burden, could certainly help address some of the constraints and challenges hindering the development of the African carbon market.

Debt-for-climate swaps on the table

Even before the win on a loss and damage fund, African insurers launched a US$14bn climate risk facility at COP27 that will cover 1.4 billion people in vulnerable communities across the continent affected by climate disasters. There are other financing mechanisms, that with international help, will give African governments, firms and institutions similar agency in climate action.

A just-transition roundtable of heads of state along the sidelines of COP27 underlined that “innovative financial mechanisms such as debt swaps, concessional loans and debt reduction frameworks should be developed and leveraged” for the purpose. African countries had mooted debt-for-climate swaps ahead of the conference, whereby external debt will be forgiven in exchange for the foregone debt servicing payments being used for climate adaptation projects by the respective African governments.

Seychelles is a continental pioneer in this regard, whereby some of its external debt were effectively written off via a 2015 debt-for-nature swap, requiring it to use the debt payments foregone by the creditors to protect its marine assets, which it has done successfully thus far.

Debt-for-climate swaps are just one of three key climate financing mechanisms in the gift of Africa’s rich partners. Grants and debt restructurings are arguably more effective for financing climate action. But as grants have underwhelmed, and debt restructurings have attained greater complexity, with pushback by creditors in tandem, debt-for-climate swaps seem like a more optimal route since they do not require new cash outlays by creditors and yet enable incremental investments in climate action.

The South African US$8.5bn international climate financing package that was finally sealed ahead of COP27, which has less than 5% in grants, is a case in point. There is clearly a diminishing appetite for donations by rich countries, which are increasingly cash-strapped themselves; that is, even for something as important as climate action.

With grants not forthcoming as required, African countries need to be eased of some of their external debt of more than US$700bn in order to free up fiscal space for achieving their nationally determined contributions.

Next steps

Europe has an opportunity to be Africa’s champion for a just energy transition with action after its excellent show of support for the continent at COP27. It should fulfill all of its climate financing commitments towards Africa and facilitate alternative climate financing mechanisms for the continent’s climate action programmes, especially carbon credits and debt-for-climate swaps.

The European Union should support the process of growing Africa’s voluntary carbon market via the ACMI and provide the financial and technical assistance that the initiative would need to succeed. If well-structured, debt-for-climate swaps will not only increase the ability of subject African countries to deliver on their nationally determined contributions, but also reduce their indebtedness to sustainable levels in tandem. Europe should also take the lead in the arrangements on the run up to COP28 in November 2023 towards establishing the loss and damage fund as forcefully as it did at COP27.

Edited article was first published by the Italian Institute for International Political Studies (ISPI) in Milan, Italy. See link viz. https://www.ispionline.it/en/publication/post-cop27-whither-african-agenda-113480