Issue 120 • 7 September 2007

Carbon credits offer huge potential, but not yet a significant flow of funds for most countries

Africa is maintaining but not increasing its small share of a carbon finance market that the UN predicts could reach $100bn/yr by 2050.

There has for some time been a line of thought that carbon trading could be a key to attracting new investment into Africa, helping the continent to achieve the type of social and environmental progress envisaged under the Millennium Development Goals adopted by the United Nations in 2001 as key targets for the developing world.

“Africa has the potential to be one of the most important suppliers of emission reduction credits of any region in the developing world,” said EcoSecurities South Africa’s Henk Sa.

His company had brokered a portfolio of more than 15m African carbon credits by mid-2007, over 7m of these in East and West Africa, for projects covering a variety of emission reduction technologies, including the production and use of bioethanol as a substitute for fossil fuels, hydroelectricity, natural gas power and solar water heaters.

Analysts have long pointed to Nigeria, where associated gas flaring remains an issue despite persistent commitments to eradicate it, as a key example of how pollution reduction can be monetised. It is forecast that one project, the 120MW gas-fired Aba power project, will displace some 1.2m tonnes of CO2 emissions from less efficient diesel generators.

An illustration of what can be done came in 2006, when the World Bank’s Community Development Carbon Fund agreed to buy emission reductions at the 35MW Olkaria II geothermal expansion project in Kenya. This will displace electricity equivalent to 150,000t/yr of carbon that would otherwise have been produced by fossil fuel-powered plants.

However, Africa’s carbon credits market is “currently lagging behind in comparison with India, China and South American countries,” said Sa.

Only 3% of CDMs in 2006

This view is backed by a recent World Bank report which estimated that Africa generated just 3% of the 2006 trade in carbon emission reduction credits within the Clean Development Mechanism (CDM) market, which was set up by the UN with the aim of reducing greenhouse gases in the atmosphere.

According to the State and Trends of the Carbon Market Report 2007, published by the World Bank, the overall market tripled to a transactional volume of $30bn in 2006. The report noted that 30m tonnes of carbon emissions reductions originating from Africa were transacted on the primary CDM market from 2003 to 2006, nearly two-thirds of this originating from either South Africa or North Africa.

On the positive side, most African countries have set up a designated national authority (DNA) under the CDM. Markets such as Angola, Tanzania and Zambia are pursuing small-scale CDM opportunities in areas such as the landfill, mining, cement and pulp sectors, while the World Bank’s carbon finance portfolio includes two Ugandan power projects.

But many countries have “thin energy and industrial sectors with limited opportunities to reduce carbon emissions” relative to countries such as China and India, said Africa specialist Karan Capoor. It was a very telling statistic that by end-October 2006, only 19 sub-Saharan schemes were in the CDM project pipeline, out of 1,274 projects for all developing countries.

Wider eligibility

To be more relevant across Africa, said the World Bank report, the CDM should encourage a “broader eligibility” for clean energy choices.

In medium-sized economies such as Uganda or Zambia, where just 10% or so of the populations have access to the power grid, “a clean, grid-connected electricity project… has to demonstrate under CDM rules that it displaces ‘carbon-intensive’ electricity on its grid; the fact that it derives mainly power from clean hydro sources is seen as a reason for it not to receive credits,” the report underscored.

It suggested that regional electricity projects now on the drawing board could enable clean hydro “to be generated where the resources are” and transmitted to high-demand countries such as South Africa.

One strategy at EcoSecurities has been to forge links with local organisations so that its efforts are directed to sectors which are considered a priority in the region. Last November EcoSecurities signed a co-operation agreement with Standard Bank to work together to identify potential projects in a variety of sectors on the continent and to provide carbon credit advisory services, finance projects, and broker and buy carbon credits.