Carbon markets: big opportunities for Africa, if we lean in to make it work

Carbon markets – What is happening?

COP29 outcomes created a UN-governed market, and a baseline that will be used for many future market and rule initiatives.

• COP29 operationalised two key mechanisms of Paris Treaty Article 6: (i) Bilateral trading- Article 6.2- governing country-to-country carbon trading, which is already being implemented in some contexts; and (ii) centralised UN market- Article 6.4- establishing the Paris Agreement Crediting Mechanism (PACM), a global market for UN-backed carbon credits.
• Specifically, the UN Advisory Body adopted two sets of standards:
  • Standards for credit methodologies: These outline requirements for transparency, measurability, baseline criteria, and additionality for credits traded in the UN-backed market.
  • Standards for emissions removal and reduction projects: These address monitoring, accounting, and measures to prevent or mediate reversals for projects with reversal risks under the PACM.
• Many details still require further clarification – which speaks to both the additional work, the potential risks, and the opportunities for Africa. Nevertheless, the creation of UN-backed market mechanisms is widely seen as an important boost to the credibility of carbon markets.
• Beyond an anticipated growth in carbon trading, experts predict that the minimum standards set by the PACM will become a baseline for quality and integrity of carbon credits globally, and will shape the development of future methodologies and rules across voluntary and compliance mechanisms

The value of compliance instruments is already more than 1,30 the VCM’s, with COP outcomes expected to boost the former

• In traded volume, the Voluntary Carbon Market, after a record size of nearly $ 2 billion in 2022, dropped to less than $ 0.7 bn in 2023 (in line with historic evolution).
• Meanwhile, the total traded value of credits and allowances under compliance instruments rose to $ 949 billion in 20232

Opportunities for Africa – What is in it for us?

In addition to climate benefits, carbon projects have the potential to generate economic, and social benefits for African communities

• By definition, carbon projects yield a climate impact: they avoid new emissions (for example, by reducing deforestation), reduce current emissions (for example, by introducing clean cooking solutions, or remove carbon (for example, by planting trees).
• Whether or not this climate impact can help the host country achieve its NDC, depends on the status of the credit. If the host country decides to authorise the credit (grant it a corresponding adjustment – see explanation in the next section), then it can no longer count it towards its NDC. The host country would do that to benefit in different ways, and ideally uses this to attract interventions it wants done for socio-economic reasons, but cannot afford itself (see other benefits below).
• Apart from climate impacts, carbon project can yield other benefits:
  • They can create jobs or improved livelihoods. For example, African nature-based removal solutions alone could support 88 – 167 million jobs and livelihoods. Most jobs are likely to be in the implementation of certain (labour-intense) interventions, yet there is potential across the entire value chain, creating demand pull for new “green” skills in, amongst others, verification and monitoring.
  • They can help reduce imports, thereby strengthening trade balance and currency, and reduce product costs. For example, blends of biochar and bio-fertilisers, co-financed with carbon revenue, have been proven to be as good as or better than chemical fertiliser (which is often imported) in some settings – and at a lower (pre-subsidy) wholesale price
  • They can resolve social or health problems, often by making the ‘green’ solution more affordable thanks to carbon co-finance:
    • Clean cooking solutions reduce indoor air pollution (which is estimated to cause 600,000 avoidable deaths per year in Africa), and free up time currently spent on gathering firewood.
    • Adoption of electric transport options can reduce dangerous levels of air pollution, especially in urban environments.
    • The opportunity to earn carbon credits from controlled waste treatment can improve overall waste collection and recycling, cleaning up urban environments and waterways (as wastestreams can become financially viable).
    • Thanks to carbon credits, sustainable water and sanitation programmes may increase access to clean water.
    • Thanks to co-finance from carbon credits, new renewable energy generation can help to address energy poverty.
  • They can improve soil health and improve agricultural yields – especially when undertaken in concert to make sure improved soil does not wash away and is used optimally.
    • Intercropping of specific trees in agricultural land (such as faidherbia in maize fields) can improve nutrient retention, improving plant yields – and carbon revenue from the trees can help strengthen the business case of this intervention.
    • The application of biochar (a carbon removal intervention) can improve soil health and improve yields.
    • The application of enhanced rock weathering (paid for through carbon credits) can reduce soil acidity, and thus help to improve yields and may be a substitute for liming (which has no auxiliary revenue stream and thus tends to be more expensive).
    • Carbon-co-financed renewably-powered irrigation systems can make irrigation available for more farmers, addressing soil erosion and improving nutrient absorption and retention.
  • They can ensure nature and biodiversity are protected, by providing an alternative mode of income for communities (who otherwise might need to clear new land to sustain themselves).
  • They can contribute to the development and scaling of new climate-smart products needed in the local market, such as bio-based building materials. In many cases, such innovations need to reach larger scale to become more cost effective and carbon revenue can assist towards that.
  • They can introduce new technologies and solutions, driving new economic sectors through tech transfer (such as direct air capture).
• Carbon projects are economic activities in and of themselves and contribute to the tax base (independent of any government levies), and bring (foreign) investment.

Whether this potential materialises, depends on rules and buyer choices, requiring action to make carbon markets work for Africa

• For a project to generate carbon revenue, it needs to comply with a predetermined methodology and meet buyer demand.
• Many interventions do not have a methodology (yet) and it takes real time and effort to develop these and get them accepted by registries (who issue the credits).
• African carbon credit activity has been heavily shaped by 2 categories and may not be meeting buyer needs very effectively:
  • Cumulatively, over 40% of all African carbon credits generated for sale in VCM, were REDD+ (avoided deforestation) and another 36% were linked to the provision of clean cookstoves.
  • REDD+ has come under severe scrutiny, with a substantial drop in demand and project activity. REDD+ credits have gone from being 63% of African-generated credits in 2019 to a mere 5% in 2023. Over the same period, clean cookstove credits steadily grew from 16% to 65% of African credits.
  • Nearly half of all carbon credits generated in Africa for sale in VCM, have not yet been retired. This means no ‘final buyer’ has bought them to use them to make a claim – they are either unsold, or remain with a broker for reselling signalling limited final buyer demand for African credits.
• Buyer preferences are shifting with a rapidly increasing focus on removals which creates opportunities and challenges for Africa.
  • Extensive press coverage on issues with credits (both systemically and incidentally) has hit buyer confidence – particularly with REDD+
  • A combination of issues/ scandals, evolving perspectives on the validity of certain claims, and associated norms and rules (such as SBTi and the incoming EU Green Claims Directive) has shifted buyer focus more and more towards removals, with still some interest in emission reduction (such as clean cookstoves), but a truly waning interest in emission avoidance (such as REDD+).
  • This trend is expected to continue in the (rapidly growing) set of compliance mechanisms and markets, and is reflected in early Article 6.2 buyer interest, and in regulation such as the EU Removals Certification.
  • Whilst Africa does have great potential to offer high-quality, high-integrity removals (across nature-based, hybrid, and engineered solutions), it also has a high potential and need for carbon finance in avoidance. Its low current emission levels limit the potential for emission reduction – and a lot of interventions support “green growth” (e.g., providing people with renewable power or renewably-powered irrigation where they did not have power or mechanised irrigation before) rather than displacing a high-emission alternative (which is what a transition would be). It is exactly the emission avoidance category which is most shunned by buyers.
• These carbon market trends call for proactive engagement by African stakeholders to both ensure the availability of relevant methodologies, and acceptance of African solutions by buyers (in the rules and preferences) to make carbon markets work for Africa. The next section explains the key priorities here.
• Of the examples mentioned above, the following are based on removals-driven credits (and more likely to be favoured by buyers going forward): nature restoration and expansion, trees in agricultural land, biochar, engineered removal (like direct air capture, DAC), enhanced rock weathering – and a portion of the climate impact of bio-based building materials.

To accelerate green industrialisation, Africa must be able to benefit from measures around embedded carbon pricing

• One sizeable set of economic opportunities for Africa, lies in green manufacturing and green industrialisation. To a limited degree, this requires transitioning existing industrial activity to greener alternatives – but the real opportunity lies in new green-from-the-start industrial and manufacturing capacity.
• Since in many cases the “green” alternative still carries a higher cost than the option with high embedded emission, regulation or pricing is needed to level the playing field. For most cases and industrial processes, there are no methodologies for carbon credit generation – and that seems not to be the route most taken to close the ‘green gap’.
• Instead, a growing set of instruments, with the EU’s CBAM being the first and most prominent, is coming to the fore, to put a price on embedded carbon of products.
• Africa’s intrinsic competitiveness lies in its potential to produce products with low embedded carbon, yet the realisation thereof depends on whether Africa can comply with the (reporting) rules and will be recognised as low carbon.
• This is separate from carbon market rules – yet important to drive Africa’s growth and investment.

What will it take? Implications and priorities for African governments: taking agency

Africa must (1) get ready to engage, (2) learn from early engagement, (3) maximise Africa’s opportunities in the current set-up, and (4) shape the future rules of the game in line with its potential

African stakeholders (regulators, project developers, and communities alike) ideally both capture current demand and actively evolve the market for better climate and developmental outcomes. In order to achieve that, they should (A) operate from a sound understanding of buyer concerns and needs (see topic 2 below), (B) innovate to meet these expectations with a superior African offer (see topics 1 and 3 below), and (C) simultaneously work towards further evolving the market towards higher prices, higher expectations on quality, integrity, and transparency (in a way that allows Africa to capture a sizeable market share in that market – see topic 4 below).

1. Getting ready to engage

• To attract carbon projects and investment, African governments need to develop a suitable enabling environment, which includes both general investor attractiveness and Article-6 compliant carbon market policies and regulation that enable credits from projects in African countries to be traded under Article 6 mechanisms.
• Key regulatory priorities include:
  • Developing transparent and efficient systems to oversee market activities.
  • Defining clear rules for granting corresponding adjustments (CA), including defining a white list of eligible project types.
  • Setting fair and predictable tax regimes that balance revenue generation with market competitiveness, and
  • Establishing transparent, equitable revenue distribution and benefit sharing systems that uphold carbon credit integrity through measurable social and environmental outcomes.
• In doing so, African governments must align with existing global standards (e.g., Paris Agreement Article 6.4, ICVCM Core Carbon Principles).
• As this is a lot of work and will take time, African countries should prioritise projects and approaches that can accelerate Africa’s increased participation in carbon markets. This includes, for example, fast-tracking specific projects already close to meeting new standards, facilitating regional Centres of Excellence (e.g., East African Alliance, West African Alliance) and leveraging public-private partnerships (PPPs) to co-develop pilot projects that meet standards from the outset.
• When defining criteria for white lists (for CAs), countries must understand and distribute value appropriately:
  • The climate impact of projects that will receive a CA (also known as “authorised” credits), can no longer count towards the achievement of the country’s own NDC.
  • Authorised credits attract higher prices and in exchange for giving up the ability to count it towards its own NDC, the country should see a benefit. This can include:
    • Interventions that solve a challenge for communities that the government has no means/ capacity to resolve: e.g., provide climate-smart agricultural inputs to very remote communities. Here, the socio-economic/ developmental impact is valuable to the country, and this tends to result in higher cost to operate (e.g., to reach the more remote communities), and the higher carbon revenue of the authorised credit helps make the project financially viable.
    • The growth of country capacity in a particular economic activity that the country wants to expand. This can include being the “first location for X”, becoming an industry location standard attracting subsequent investment and activity, training in specific skills, and/ or technology transfer (which can be required in exchange for the authorisation).
    • A particularly high, explicit, and transparently regulated transfer of benefits to host communities.
  • Because of the economic value of authorisation, countries should find processes that help realise a transparent and fair distribution of this value that attracts investment and activities the country wants to support and expand, in a way that communities benefit appropriately

2. Learning from early engagement:

• The experience from early engagement with these new markets will help set priorities and refine African policies and regulation – and vice versa. The benefits from early experience also help justify the effort of setting policy, regulation, and institutions to engage. It can also build Africa’s “brand” as a potential provider of solutions (in turns attracting more buyer interest).
• Therefore, ideally, countries lean into well-structured opportunities for engagement, prioritising and fast-tracking Article 6.2 and 6.4 transactions to prove Africa’s ability to meet compliance standards. In addition to proving Africa’s ability, MoUs and early deals will also help African countries build a deep understanding of buyer needs and preferences, which helps both set priorities, shape appropriate policy and regulatory responses, and help identify African priorities for rules improvement.
• Concurrent engagement with deals, global and buyer rules, and Africa’s rules allows African countries to focus their efforts on what will realise the biggest climate and developmental impact with fit-for-purpose levels of regulation and bureaucracy.

3. Maximising Africa’s opportunities in the current set-up

• In addition to prioritising the most promising buyers (in inclination to engage, size, and signalling value) and interventions, as articulated in 1 and 2 above, Africa can begin to nudge towards rule improvements, whilst capturing maximum value in the current markets.
• One mechanism can be to introduce minimum price floors to prevent undervaluation, while ensuring national ownership and control over carbon assets.
• Another will be to leverage co-benefits as a competitive advantage: Position social, economic, and environmental co-benefits as integral outcomes of African carbon projects, enhancing their appeal to buyers seeking high-impact credits (as committed to in the Nairobi Declaration – see rules-based next steps under 4 below).
• In parallel, many global actors are currently looking for new partnerships, and for ways to support developing countries in their carbon market development. Now is the right time to advocate for dedicated funding to support infrastructure development, capacity building, and project pipeline acceleration, as well as financial support to invest in African institutional capacity and regulatory oversight to enhance transparency, enforce compliance / standards, and build long-term market confidence.
• In this process, Africa should utilise AU, AfCFTA, and regional economic blocs to harmonise policies, pool technical expertise, and improve Africa’s collective bargaining position in global markets. It will help “rise the tide that lifts all boats” and create market conditions under which African solutions can thrive.

4. Shaping the future “rules of the game” in line with Afri potential:

• Many rules are still being defined further. As standards continue to evolve, African countries must ensure that the emerging standards reflect African priorities and strengthen Africa’s intrinsic competitive advantage.
  1. A key priority is inclusion of high-quality, high-integrity emission avoidance, and Nature Based Solutions (NBS), which represent a substantial part of Africa’s current project portfolio and its potential. However, the likely stringent requirements for additionality and permanence/durability risk sidelining these categories under Article 6, underscoring the need for proactive engagement to safeguard their inclusion6.
  2. A second priority is leading global innovation on rigour around socio-economic cobenefits of carbon projects. Africa not only has unique potential to realise these in its carbon projects, but also a strong developmental need for these benefits – and upholding similar (or even higher) rigour on transparency and measurement of cobenefits as is applied to carbon, can give African projects a unique competitive advantage, especially in a global market where at least some of the buyers are keen to not just avoid negative side-effects, but realise these synergistic inputs. This focus is not new for Africa: the AU explicitly commits to this in the Nairobi Declaration, and this aligns with a coalition of project developers from the Global South writing to the Science Based Target initiative (SBTi) to ask that they allow the use of credits against scope 3 targets because of the benefits projects deliver.
• Beyond these topical approaches, African countries will also need to engage with specific jurisdiction as they define their regulation, including their eligibility criteria, seeking market access for African credits in all markets and instruments. This should be based on strong quality and integrity performance, backed by transparent evidence, and a proactive role from Africa and a seat at the table as rules are shaped. Priority instruments and jurisdictions will be the EU Removals Certification (the incoming ‘liquid currency’ in the EU ETS as allowances are phased out), ICVCM Core Carbon Principles (CCP), ISO Net Zero Standards, and any new SBTi standards.

1. More information about the outcomes can be found in this Reuters article, and this Brunswick perspective. The latter also includes an overview of responses to these developments.
2. https://www.reuters.com/markets/commodities/global-carbon-markets-value-hit-record-949-bln-last-year-lseg-2024-02-12/ , noting that the vast majority of this (770 billion euros) or 87%, is the EU ETS, which is not accessible for African credits
3. Importantly though, 8 leading methodologies in this space, jointly responsible for 1/3 of all VCM credits, failed to obtain the ICVCM Core Carbon Principles (CCP) label because of insufficient additionality – see https://www.climatechangenews.com/2024/08/07/renewableenergy-carbon-credits-rejected-by-high-integrity-scheme/
4. All quantitative data from the Berkeley Project Database – data on sales into compliance instruments is not available comprehensively, yet can safely be assumed to be rather low because of market access challenges for African credits; and certainly well below Africa’s inherent potential.
5. The exact value here is 47% of African credits not yet retired – as compared to 42% globally. The difference is small, indicating a challenge with the VCM demand in general – not just for Africa.
6. The PACM Supervisory Body (SBM), formerly the 6.4 SB, is tasked with expediting the development of key standards and tools, including those for additionality, non-permanence, and baselines, with a goal to finalise an additionality standard this year. Meanwhile, the Methodological Expert Panel (MEP) will draft methodologies aligned with these standards, likely mandating compliance with SBM tools for demonstrating additionality and managing non-permanence risks.

This work has been developed in partnership with and with support from FSDA