Carbon Market & Article 6 of Paris Agreement as Africa’s New Black Gold

Joseph Owolabi

It has becoming increasing clear to stakeholders that achieving a net-zero future will involve a combination of tradition approaches – commitment to energy efficiency, deployment of renewables and access to mitigation projects outside of their own value chain.

Article 6, of The Paris Agreement, introduce a system for voluntary international cooperation between countries to reduce emissions to meet their nationally determined contributions (NDC or pledges). If implemented appropriately, Article 6 could provide significant incentives for countries to increase their climate ambitions, reduce the cost of curtailing emissions and accelerate the move towards net zero.

In Africa, with abundance of nature-based solutions (NBS) for carbon capture and great uptake of renewable energy projects, this presents economic opportunities for poverty alleviation, foreign direct investments and sustainable development.

Carbon markets: what are they?

Carbon markets are largely categorised into two groups – voluntary and compliance schemes. Although reduction in carbon emission is the widely recognised approach to achieving net-zero future, in certain cases it is impracticable to significantly reduce carbon emissions – at least in the short term. Strategic energy transition has been postulated as realistic approach for traditional industries such as extractive industries, aviation, maritime and manufacturing sectors.

Voluntary markets

For companies in these sectors and countries that are regarded as the manufactory hubs, supply chain destinations of the world or mining destinations (e.g. China, South Africa, Australia and Vietnam), voluntary carbon markets (VCM) connect the supply of carbon credits with demand from investors and organisations with requirement to reduce their carbon footprints.

VCM refer to the issuance, buying and selling of carbon credits on a voluntary basis. The current supply of voluntary carbon credits comes mostly from private entities that develop carbon projects or governments that develop programs certified by carbon standards that generate emissions reductions and/or removals. Examples include improved forest management and avoided forest conversion activities in the US, renewable projects in India and China to forest conservation and cookstove programs in Brazil, Cambodia, Kenya and Zimbabwe.

VCM is growing rapidly, with India, China and U.S. being the most popular locations for offset buyers. According to Bain & Co, only two African countries – Kenya and Zimbabwe, appear on the list of top 10 countries for retired carbon credits between 2020-2022, with two percent and three percent of retired credits respectively. These credits are largely from forest conservation and cookstove credits. The top 2 markets on the list – US and India have percentage of retired credits at 22 percent and 19 percent respectively. This statistic highlights enormous opportunity for Africa, with huge potential for credits in renewable energy projects which form the bulk for other markets (such as China and India), in this innovative market. Private individuals (or corporations with sustainability targets) that want to compensate for their carbon footprints transact with sellers or market actors who aim to trade credits at a higher price to make profit.

Compliance/Cap-and-trade schemes

Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement. In cap-and-trade schemes (or emissions trading systems, ETS), companies trade pollution permits (allowances) which allow them to emit one tonne of CO2e. In principle for every 1t CO2e a company emits, it must return one permit back to the regulator. The European Union’s ETS is a good example, where polluters that exceed their permitted emissions must buy permits from others with permits available for sale. Other examples include the California cap-and-trade and China’s ETS. Many more national and sub-national ETS are now operating or under development.

Opportunities

Global interest in carbon markets have spiked recently, fuelled by Articles 6 of the Paris Agreement which enables the use of such market mechanisms and, in particular, the awareness that 83 percent of NDCs state the intent to make use of international mechanisms to reduce GHG emissions.

African Carbon Market Initiative (ACMI)

ACMI was inaugurated on the 8 November, 2022 at COP 27, with the aim to support the growth of carbon credit production and create jobs in Africa through voluntary carbon markets. ACMI’s ambition is produce 300 million carbon credits annually by 2030, and 1.5 billion credits annually by 2050; unlock 6 billion in revenue by 2030 and over 120 billion by 2050 and support 30 million jobs by 2030 and over 110 million jobs by 2050. Underpinning this wealth creation initiative is the equitable distribution of revenue and transparency in dealings with local communities.

A year later, the UAE Carbon Alliance and the UAE Independent Climate Change Accelerators signed a non-binding letter of intent with ACMI to pledge an indicative intended purchase of $450 million in African carbon credits by 2030. Other major carbon credit buyers and financiers, such as Exchange Trading Group, Nando’s and Standard Chartered have also announced plans to set up advanced market commitment (AMC) of hundreds of millions of dollars for high-integrity African carbon credits.

Way forward

Seven African countries – Kenya, Gabon, Malawi, Mozambique, Togo, Burundi, Rwanda and Nigeria have signed up to accelerate their county’s participation in the global carbon markets. Each of these countries are now developing country activation plans. For example, President Tinubu of Nigeria hosted a high-level meeting with stakeholders and investors where he unveiled the Nigeria’s Carbon Market Activation Plan at COP 28.

The blueprint aims to establish frameworks and policies for an efficient and sustainable carbon ecosystem valued at $2.5 billion. The government intends to use carbon markets to finance the Electric Buses Rollout Programme as a pilot.  Another country making considerable progress is Rwanda. The country launched its National Carbon Market Framework towards a greener and more sustainable future on the sidelines of the UN Climate Change Conference (COP 28) in Dubai. The framework underscores Rwanda’s bold vision to be climate resilient and carbon neutral by 2050. The country signed cooperation agreements with Singapore and Kuwait towards the implementation of its carbon markets. 

Challenges

Despite the many opportunities for economic leapfrogging that carbon market presents to developing markets including Africa. Carbon markets are not without challenges. The major threat for carbon markets under Article 6 is the risk of double counting. When one country sells a reduction to another country, it is essential that the reduction is not counted by both countries. Corresponding adjustment should be made to reported emissions to show that some of the achieved reductions have been used by another country. Otherwise, double counting will occur which undermines the integrity of carbon markets. Asides concerns related to the true impact of carbon markets on climate, questions have also been raised regarding the local impact of such markets. Lack of detailed rules for (and mandatory) consulting local communities before emission reduction projects are implemented and/or grievance mechanisms governed by an independent body also adversely impact the delivery of sustainable development goals.

Owolabi, is a subject matter expert on carbon markets adoption and climate finance. He is CEO at Rubicola Consulting, with offices in Australia and Africa. He served as officer and global president for ACCA between 2020-2023.