• Friday, November 22, 2024
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Reforming climate finance for Africa’s energy transition

Reforming climate finance for Africa’s energy transition

As world leaders prepare for the 2024 UN Climate Change Conference (UNFCCC COP29) in Baku, Azerbaijan, Africa faces a pivotal point in its pursuit of sustainable development. The climate conference presents an opportunity to address the structural limitations within the international financial architecture that challenge Africa’s progress toward sustainable energy. Central to this task is the urgent need for accessible climate finance, a dependable financing mechanism that developed nations have long committed to supporting.

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Africa’s situation is complex. Although the continent contributes less than 4 percent of global greenhouse gas emissions, it remains the most vulnerable to climate impacts. Economies across Africa, such as Nigeria, Egypt, South Africa, Tanzania, and Senegal, grapple with the dual burdens of achieving economic growth and responding to climate risks, pressures intensified by a global financial system designed without developing nations in mind. The African Development Bank’s African Economic Outlook 2024 report highlights these dynamics, stressing that Africa’s financing gap for achieving the Sustainable Development Goals (SDGs) is projected to reach $402 billion annually by 2030.

Climate finance has become a critical issue, with support from the global North remaining below expected levels. COP15 established a $100 billion annual climate finance goal to assist developing countries in tackling climate challenges, a target that has yet to be fully realised. This shortfall places Africa in a precarious position, as the continent requires significant resources to build climate resilience and enable energy transitions without compromising economic stability. Currently, Africa’s climate finance flows represent less than 11% of the annual need, limiting its capacity to invest in resilient infrastructure, renewable energy, and sustainable development.

Global climate finance must be restructured. For African nations to engage in a sustainable energy transition, financing mechanisms must prioritise adaptation alongside mitigation. International financial institutions must recognise the continent’s distinct needs, reform lending terms, and develop innovative financing models. Otherwise, Africa will remain trapped in a cycle of climate vulnerability and constrained growth, widening the development gap.

As Africa navigates this financing impasse, the continent’s rich natural gas reserves present both an opportunity and a dilemma. The African Climate Foundation’s recent report emphasises the role of natural gas as a bridge fuel in Africa’s energy mix, particularly as an alternative to high-emission fuels like diesel and coal. Africa’s reliance on natural gas, however, also introduces significant transition risk. As global decarbonisation accelerates, demand for fossil fuels, including natural gas, may diminish in a few decades, potentially devaluing investments in gas infrastructure. This poses a unique challenge for African nations that, due to limited access to finance, are often forced to prioritise short-term energy security over long-term sustainability.

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The concept of “transition risk” is sobering for African economies. Unlike developed nations with diversified financial and energy resources, many African economies are locked into pathways that expose them to economic vulnerability as the global energy landscape shifts. For emerging producers, the financial risks are profound: they face the threat of stranded assets as global demand wanes under decarbonisation mandates. Developing these resources requires billions in investment, yet those funds could be at risk if global climate policies make gas assets obsolete.

Nigeria’s ongoing push for compressed natural gas (CNG) provides a model worth considering. Through the Presidential Initiative on CNG, Nigeria has invested in building CNG infrastructure to support cleaner fuel alternatives for transportation. While still heavily fossil-based, CNG offers immediate economic benefits by reducing dependence on imported fuels and lowering emissions. Dangote’s recent investments in CNG infrastructure underscore the private sector’s potential role in this transition, yet they also raise questions about the scalability of such investments across the continent.

CNG alone is not a panacea. Scaling this model across Africa requires more than infrastructure; it demands comprehensive policies that include subsidies, incentives for private investment, and a firm commitment to scaling renewable energy. Furthermore, African nations should be cautious about locking themselves into long-term fossil fuel dependencies that may not be sustainable as global climate policy tightens.

Africa’s dependence on external financing remains a constraint to its development. The current global financial architecture does not appear to reflect Africa’s interests, often enforcing debt-based financing and high interest rates that deepen fiscal vulnerabilities. As the African Economic Outlook stresses, Africa’s average debt-to-GDP ratio has stabilised at approximately 60 percent, a concerning figure that highlights the continent’s limited fiscal space. Reforms in the global financial system must focus on creating a fair, inclusive, and transparent framework that allows Africa to finance its transition without compounding its debt burden.

Multilateral development banks and international financial institutions should develop new financing tools tailored for Africa’s transition, such as concessional loans for climate adaptation and development. Carbon credit markets could be expanded to channel funds into Africa, providing a dual benefit of compensating for emissions reductions while promoting sustainable projects. Additionally, the reallocation of Special Drawing Rights (SDRs) from advanced economies to developing countries could provide African nations with the liquidity they need to finance climate initiatives.

COP29 offers African leaders a platform to advocate for meaningful reforms in climate finance. It is imperative that Africa’s interests be at the forefront of these discussions. Climate finance commitments should be enforceable, predictable, and substantial enough to address both the immediate impacts of climate change and the structural challenges of transitioning to cleaner energy sources. COP29 must also address the concept of “transition risk” and ensure that African nations are not penalised for global decarbonisation trends driven by the developed world.

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Africa’s climate crisis extends beyond environmental concerns; it is an economic and social challenge that will define the continent’s future. To navigate this uncertain path, African nations require more than promises. They need genuine partnerships, structural reforms, and the financial means to drive sustainable growth. A reimagined global financial system is essential for Africa to achieve a just energy transition, protecting both its people and its economic aspirations.

 

Olapeju Ibekwe, CEO, Sterling One Foundation, is a leader in sustainability, women empowerment, and social impact, committed to advancing equitable growth and climate resilience across Africa.

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