Carbon markets offer a promising tool for mitigating emissions and driving the world to a sustainable future. Carbon markets are aligned with key international agreements such as the Kyoto Protocol (1997) and the Paris Agreement (2015). They provide nations and entities with a flexible framework for the exchange of carbon credits. Carbon credits are traded internationally and locally, creating a dynamic ecosystem. Countries operating below emission limits can sell surplus credits to those exceeding their thresholds, thus fostering financial benefits from sustainable practices. Companies within a country can engage in trading to meet individual reduction targets, incentivizing active emissions’ management.
The inception of carbon markets can be traced back to two seminal events that laid the foundation for a transformative approach to addressing climate change: the Kyoto Protocol (1997), the first international treaty that introduced global carbon trading, and the European Union Emissions Trading System (EU ETS) in 2005, the world’s first cap-and-trade system for greenhouse gas emissions. The Paris Agreement of 2015 further solidified the role of carbon markets in climate action, marking a new era of global collaboration on climate issues.
Carbon Market Mechanisms
The Kyoto Protocol implemented three key market mechanisms. One was the Emissions Trading System (ETS). The ETS operated on the cap-and-trade principle, setting a regulatory cap on emissions in specific sectors. Countries under ETS did not sign direct agreements; instead, the system functioned as a regional or national regulatory framework. Countries were automatically subject to its provisions based on their membership in specific regions or blocs. Alternatively, they could choose to implement their own national ETS, allowing for tailored solutions and effective collaboration in the global effort to combat climate change.
The second was the Clean Development Mechanism (CDM) that enabled developed countries to invest in emission reduction projects in developing nations. This collaboration generated carbon credits known as Certified Emission Reductions (CERs) and offered financial support for sustainable development. CDM operated through bilateral agreements between host countries (developing), responsible for identifying and developing emission reduction projects and investor countries (developed), providing financial and technological assistance.
The third was the Joint Implementation (JI) mechanism, which allowed one developed country (host country) to identify a project to reduce greenhouse gas emissions, while another developed country (investor country) provided financial and technological support for implementation. The project generated certified emission reductions (CERs) verified by independent entities, allowing the investor country to claim the reductions toward its Kyoto Protocol targets.
Despite laying the groundwork for international cooperation and emission reduction goals, the Kyoto Protocol Mechanisms faced challenges, with major emitters not ratifying the agreement and other countries raising concerns about its effectiveness. In response, a series of deliberations and negotiations ensued, leading to the formulation and acceptance of the Paris Agreement in 2015.
Article 6 of the Paris Agreement outlines the framework for cooperative approaches to climate action, including market mechanisms. It specifies three main approaches: Sustainable development mechanism (SDM), Internationally transferred mitigation outcomes (ITMOs), and non-market approaches. The SDM aims to promote sustainable development activities that contribute to emission reductions, particularly in developing countries. Unlike the mechanisms under the Kyoto Protocol, the SDM is not limited to emissions trading; it focuses on generating Sustainable Development Outcomes (SDOs) that go beyond mere emission reductions.
Internationally Transferred Mitigation Outcomes (ITMOs) symbolize quantified greenhouse gas emission reductions achieved in one country, contributing to another country’s emission targets. Projects in one country reduce emissions, verified, and quantified by international standards, converting into tradable ITMOs. Issued by designated authorities or recognized registries under the Paris Agreement, ITMOs can be traded bilaterally or through authorized marketplaces. Buyer countries can include the ITMOs in emission reduction inventories for compliance, with both parties maintaining transparent records to prevent double counting.
Non-market approaches prioritize collaboration, capacity building, and knowledge sharing in addressing climate change, especially in developing countries. This includes technology transfer, disseminating clean technologies, and enhancing best practices. Capacity building aims to improve institutional and technical capabilities. Policy dialogue and exchange focus on sharing experiences to guide effective climate regulations. Research and development involve joint efforts to innovate clean technologies and enhance climate science. Education and awareness initiatives foster understanding and collective action on climate change through public campaigns, knowledge sharing, and community engagement.
While Joint Implementation and the CDM are inactive for new projects, the ETS, such as the European Union Emissions Trading System (EU ETS), operates independently of the Paris Agreement, targeting emissions from power plants and industrial facilities. With projects under the Kyoto Protocol not automatically eligible under the Paris Agreement, Article 6 allows Parties to draw insights when developing their cooperative approaches. The Paris Agreement necessitates a transition from the Kyoto Protocol framework. To operationalize this, the rulebook is being finalized, expected by January 2024. It will provide detailed guidelines for implementing the Agreement, including accounting rules, reporting requirements, and procedures for ITMOs and the SDM, potentially linking to existing CDM projects or Certified Emission Reductions (CERs).
Carbon Markets Characteristics and Performance in Africa
Carbon markets are categorized into Voluntary and Compliance markets. Compliance markets, governed by agreements such as the Kyoto Protocol, enforce mandatory emission reduction targets through mechanisms such as emissions trading. Examples include the European Union Emissions Trading System (EU ETS) and the California-Quebec Cap-and-Trade Programme. Voluntary Carbon Markets (VCM) operate beyond legal obligations, allowing voluntary engagement by individuals and businesses. VCMs, like the Verified Carbon Standard[1] and the Gold Standard,[2] offer diverse project types, fostering flexibility and innovation. Rigorous standards and registries maintain transparency and accountability, ensuring the credibility of carbon credits.
The development of carbon markets in Africa is supported by essential tools such as the Verified Carbon Standard (VCS) and Gold Standard, ensuring quality offsets. Project Development Protocols (PDPs), verification processes, online platforms such as the Africa Carbon Exchange (AFCX), and monitoring systems contribute to transparency and credibility. Emerging tools, including International Transferred Mitigation Outcomes (ITMOs) and blockchain technology, hold promise for increased market growth and efficiency, shaping a greener and more sustainable future for Africa.
In Sub-Saharan Africa, approximately 65 per cent of carbon credits issued are in the Voluntary Carbon Markets concentrated in five countries: Kenya, Zimbabwe, the Democratic Republic of the Congo (DRC), Ethiopia, and Uganda.[3] South Africa, an exception, operates within compliance markets, utilizing a national carbon tax and cap-and-trade system. Countries such as Madagascar, Angola, Nigeria, Sudan, and Tanzania, despite their significant carbon credit potential, have faced limited engagement due to a mismatch between project activities and their carbon credit potential. Between 2016 and 2021, African countries accounted for only approximately 11 per cent of the total global carbon credits issued, with only 2 per cent of its maximum annual capacity for carbon credits tapped. In the period, the demand for carbon credits originating from Africa grew by 36 per cent.[4] This surge in demand signals a substantial opportunity for transformative economic and developmental advancements for the continent.
Recognizing the considerable untapped potential and the opportunity for diverse developmental impacts in Africa, a coalition of African leaders, carbon market experts, and broader climate advocates established the Africa Carbon Markets Initiative (ACMI) during COP 27 in 2022. The initiative collaborates with key entities such as the Global Energy Alliance for People and Planet (GEAPP), Sustainable Energy for All (SEforALL), and the United Nations Economic Commission for Africa (UNECA), with support from the UN Climate Change High-Level Champions. ACMI’s main objective is to assist African governments, communities, project developers, and other stakeholders in significantly amplifying the supply and demand of high-integrity African carbon credits.
While ACMI’s tangible achievements in carbon credit generation and economic impact are still unfolding, the initiative has laid a robust foundation for future success. ACMI has boosted awareness and momentum for carbon markets in Africa, garnering support from influential stakeholders such as the Global Energy Alliance and the Rockefeller Foundation. The initiative has actively spurred discussions and engagement on African carbon markets, involving policy makers, businesses, communities, and experts.
In addition, ACMI supports market infrastructure and enhances capacity through partnerships with organizations such as AFCX and Xpan Val. The commitment to capacity building is demonstrated through technical assistance programmes, workshops, and empowering stakeholders with necessary skills for carbon market participation. ACMI plays a crucial role in policy development, fostering transparency, market integrity, and environmental outcomes in African nations. Through collaboration with policy makers, it stimulates carbon project growth, attracts international investments, and identifies promising countries in the voluntary carbon market.
With ACMI’s focus on driving economic development through support for energy access, clean energy transition, forest protection, agricultural improvement, and new income sources, successful implementation of these objectives holds the promise of a transformative impact, bringing holistic and sustainable development to both the environment and the socio-economic landscape of the continent.
Constraints to Carbon Market Development in Africa
A major obstacle facing carbon markets in Africa is the scarcity of climate data and insufficient analytical capabilities across the continent. For example, lack of accurate information on critical factors such as deforestation rates, renewable energy potential, and greenhouse gas emissions impedes the identification of viable carbon offset projects. Additionally, data scarcity obstructs project feasibility assessments, effective intervention design, and the quantification of potential carbon reductions. Further, limited availability of data complicates the verification of actual carbon credits generated by projects, making it difficult to rigorously monitor progress. Consequently, this raises concerns about project effectiveness and transparency, making it difficult for carbon buyers to assess the credibility and impact of offset projects and justify investor support in the region.
Another constraint is limited oversight and accountability in the industry. The absence of robust mechanisms for monitoring and enforcement of standards across many African countries creates opportunities for unethical practices, such as misrepresentation of emission reduction claims, inaccurate reporting, and greenwashing, undermining the overall market integrity. The consequence is a loss of trust within the market and diminished credibility for carbon offset projects, deterring both domestic and international investors. Further, lack of stringent monitoring poses a risk of sub-optimal projects that may fall short of delivering the expected environmental benefits.
Limited awareness and understanding of carbon markets among policy makers, businesses, and communities is also another key constraint to growth in carbon market in Africa.[5] This hampers the adoption and implementation of carbon market initiatives, as stakeholders may not fully comprehend the potential benefits or mechanisms involved. The presence of inconsistent or under-developed legal frameworks further indicates a broader deficiency in comprehensive understanding and engagement at the policy level. Inadequate legal structures may impede the establishment of clear regulations, standards, and incentives necessary for the successful operation of carbon markets, hindering the creation of an enabling environment.
Governance complexities also pose significant challenges to carbon markets in Africa. In terms of land tenure, unclear ownership rights and fragmented systems hinder the determination of carbon rights, impacting project development and raising concerns about potential land grabs. The absence of clear community ownership models and power imbalances lead to disenfranchisement and opposition to projects. Corruption compounds these issues, with weak enforcement allowing for fraudulent practices and diversion of benefits. The lack of transparency in decision-making adds complexity, hindering the successful implementation and integrity of African carbon markets.
Going forward
To foster a conducive environment for the carbon market in Africa, policy makers must champion the creation of regional collaboration platforms. Embracing strategic policy measures to address existing constraints, African nations can establish the foundation for a thriving and resilient carbon market that aligns with both environmental and developmental objectives. These proactive approaches play a crucial role in climate change mitigation, sustainable development, and economic growth across the continent.
[1] The Verified Carbon Standard (VCS) Programme is a leading global greenhouse gas (GHG) crediting initiative, directing funding towards emissions reduction and removal activities, enhancing livelihoods, and preserving nature.
[2] The Gold Standard, established in 2003, is a reputable standard for climate and development initiatives. It seeks to quantify, certify, and maximize the impact of these interventions, aligning with the United Nations’ Sustainable Development Goals (SDGs) and promoting sustainable development globally.
[3] https://africacarbonmarkets.org/acmis-narrative-on-african-carbon-markets/
[4] https://climatechampions.unfccc.int/africa-carbon-markets-initiative/
[5] https://www.goldstandard.org/blog-item/africa-can-harness-global-carbon-markets-advance-climate-and-development-goals
Author: Esther Irungu
