Abstract

The upcoming and promising concept of carbon trading or financing looks like a hopeful developmental option for a lot of developing countries which can create appropriate green ecosystems. Africa is one of these counties. It is seen that through proper policies and favourable negotiations, carbon trading can give a great boost to the economy of Africa. The blog post explores the concept of carbon trading itself, in details, and suggests ways for Africa to make the best out of it.

Introduction

Originally formulated in the 2015 ParisConvention, the concepts of carbon markets and carbon finance are now a source of hope for many developing regions in the world. Before getting into the technical realm, for a layman, the carbon market can be simply described as a trading system of carbon emission rights and permits that allows corporations to expand commercially and the host nationseconomically. Experts have been incredibly optimistic about the success of the whole framework, from an environmental perspective. Analysts working for the Environmental Defence fund claim that it has the potential to “nearly double the emissions reductions that would be achieved using only currentpolicies”. 

The potential is even more immense for places like Africa, where the conditions are highly suitable for a host country in a carbon trading setting. Africa accounts for a minimal 2% of the carbon share in theworld. Moreover, with large proportions of its lands untouched by industrialisation, it can be a great business opportunity for the African continent, something which has been stressed upon by its leaders. The Kenyan President, for that matter, encouraged corporations to make use of the continent as a natural carbon sink andinvest.

The paper seeks to run the reader through the different concepts of carbon trading and focus particularly on Africa’s potential to make use of the same to prosper in terms of development. The legal aspect of the process is also discussed.

What are Carbon Credits

Carbon credit refers to a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another gas. These credits act as compensation for emissions made by entities that in their nature are bound to emit harmful or illegalgases.

The main purpose of these carbon credits is to ensure a reduction of emissions of carbon dioxide and other greenhouse gases from industrial activities to reduce the effects of global warming and harm to the environment.

Greenhouse gas refers to carbon dioxide, methane and nitrous oxide which collectively have a huge impact on our ecosystem once released into the upper atmosphere.

Carbon Market

Theglobal carbon market may be described as a diverse set of systems that are regulated in different countries for trading greenhouse gas emission rights. These rights are categorised into either allowances or permits and they are the commodities that are globally traded and give the bearer the right to emit an equivalent amount of greenhousegases.

In addition to the permits and allowances, the carbon market ecosystem also encompasses carbon credits which are similar to permits but with a slight difference in that carbon credits are generated over time while permits precede the actual emissions.

Classes of the Carbon Market

The global carbon market is classified into four broad categories:

a. Emission trading

Relates to the trading of allowance rights to emit the Greenhouse gases and only happens between industrialised countries, which buy and sell their rights to pollute up to their designated limits.

b. Clean Development Mechanism

This is a project-based offset system that was introduced by the Kyoto Protocol and its main objective is to mitigate the global cost of Greenhouse gases by opening up the market for countries with legally binding emission reduction targets to gain from countries that do not have any legally binding targets. In this model, carbon credits are purchased from projects undertaken in non-industrialized nations for the benefit of industrialised countries.

c. Joint implementation

For this model, carbon credits or rights to emit Greenhouse gases are only developed and traded between industrialised nations. The structure of this particular model is similar to that of a clean development mechanism with a major difference being on the parties trading the rights, this model prohibits industrialised nations from trading withnon-industrialized nations.

d. The voluntary carbon markets

This segment greatly borrows from the 2 previous models as the rights traded are developed by various countries and traded to offset emission limits to be met by the countries purchasing the rights, however, this model ideally works for retail clients who seek a smaller number of reductions to offset their footprints.

In addition, the rights issued under this model are not uniformly issued due to their fairly small sizes and are also not regulated by the United Nations as is the case for the other two market segments.

Carbon Credits in Africa

The continued promotion of the movement to a green economy presents immense opportunities for African economies and various African countries have been poised to take up the growth opportunity offered by thisnew green economy movement.

Countries, companies and the global community are all looking to put in place the policies and legislation needed to catalyse a transition towards a Green Economy which would realise development for all but also keep humanity’s footprint within planetary boundaries while delivering significant social benefits from eradicating poverty to improve local infrastructure.

Laws Related to Carbon Financing in Africa

To understand the Laws related to carbon credits in Africa, it is first important to note that Africa, being a continent, is a huge collection of legal jurisdictions, which means that laws vary from country tocountry.

The general trends promoting carbon trade can be fairly observed in most of the significant countries. This includes Gabon’s recently passed climate law that encourages carbon trading and mandates registering of credits with the United Nations Framework Convention on Climate Change, thereby making the process more regulated.

Kenya’s Finance Minister hinted at putting a legal framework for emissions trading in place soon. Other countries, like South Africa, have also provided allowances for carbon offsetcompanies.

International Overview of Policies relevant to Carbon Credits

The UNFCCC (United Nations Framework Convention on Climate Change) acts as the nodal body in determining the carbon credit policies, although regional law of the countries to apply.

As said before, since the 2015 Paris agreement, Carbon credits have been attracting attention from all over the world. The recent years have seen many carbon trade-related cooperative agreements. This includes China, Korea, Switzerland and, even the EuropeanUnion.

Under the market components of Article 6 [Paris Agreement], the nations who have yet to meet their allowance of carbon emissions would have the option to offer their overabundance as credits to different nations that surpass their carbon emissions. In principle, this would make a financial motivator for nations to cut their emissions quicker, and then channel that savings into money to invest in cheaper and quicker projects for cutting even more emissions.

Amidst this, there are still those who are suspicious of the whole arrangement. The contention is that these carbon credits mechanisms divert the issue from the real threat, that is the climate change that is being masked. Moreover, some have reservations about the transparency in the system, fearing that this is an opportunity for the exploitation of developing countries in the hands ofrich ones.

There is no doubt that these concerns must be addressed moving forward. An ecosystem of trust has to be created and the roles and expectations coming out of any carbon credit must be cleared out and well-defined beforehand. On the question of climate change, the long-term repercussions of the credit system must be analysed by all the stakeholders and the best course of action for the host country must besettled.

Recommendations on how Africa should utilise Carbon Financing to foster Economic Growth

As promising as Africa is in terms of its carbon credit capabilities, there are still some ways to preserve and improve its scope and prospect. These could include:

• Stricter deforestation laws– Africa is home to almost 20% of the world’s remaining forests. It sucks out almost 1.5 billion tons of CO2 every year. Given the fact that its enormous carbon-soaking forests form its main source of attraction for the corporations, it must take steps to retain the huge forests that help the cause. Gabon, the first African country to receive payments for reducing CO2 emissions, has established 13 national parks in recent decades. Similar steps should be taken by other African countries to protect their carbon sinks.
• Appropriate pricing– The African countries participating in carbon trading arrangements must be able to strike a financially favourable agreement with the offshore companies. As Uganda’s finance minister said, “there is a need to redress the imbalance between those responsible for causing the climate crisis and those who will bear its greatest consequences.” It must be made sure that the African countries are being well paid for their contribution to climate preservation and any exploitation by foreign companies must bestopped.
• Facilitating the development of human resources and expertise in the field– Taking advantage of financing choices like the CDM require negotiation and technical abilities among those managing energy and environmental change issues. The governments involved ought to make strategy structures that work with the formation of pools of specialists and involve people who have dealt with CDM projects previously. There must be research organisations tasked with finding out the best international practices in terms of carbon credit and applying them with domestic variations. Professional projects zeroed in on environmentally friendly power projects are a decent approach to building abilities in a maintainable manner, particularly assuming these projects are upheld with financing and showing staff over the long run.
• Work on regional coordination: As the business of carbon credit turns out to be more significant over the years, African countries should facilitate coordination among themselves to track down strategies and dreams which are well suited to the continent as a whole. One example of such cooperation can be seen in the field of sustainable energy, where the nomination was done by Prime Minister Zenawi of Ethiopia to lead a group of African climate experts to take a pan-African stand at the UNFCCC exchanges to be held in Copenhagen in December 2009. Such strategic coordination in the field of carbon credits would allow all African countries to take stock of their powers and weaknesses and growmutually.

Conclusion

Africa stands to greatly gain from carbon trading as seen above. Its leaders, and the citizenry at large, have an incumbent duty of ensuring that they make plans and goals that would help it achieve this immense potential that carbon trading is offering.

Besides this, developed nations from the west and America also have a role to play in helping Africa achieve its potential in carbon trading. These developed nations must ensure that they remunerate the developing nations for any carbon credits that they obtain from them. Additionally, these developed nations should also guide and assist the developing nations with technology and training to enable them to maximise carbon trading.

In essence, carbon trading is a novel noble idea whose actualization would advance the course of humanity and improve our lives significantly.

About the Authors 

Mr. Daniel Munsiro {LLL(Hons) Kenyatta University, Postgrad. Dip (KSL)} is a Lawyer in Nairobi. 

Vedant Bisht is a 2nd-year student at National Law School of India University, Bengaluru, and is an Associate Editor at IJPIEL.

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Jhalak Srivastav and Akanksha Goel 

Senior Editor: Gaurang Mandavkar 

Associate Editor: Vedant Bisht

Junior Editor: Vedant Bisht

Preferred Method of Citation  

Daniel Munsiro and Vedant Bisht, “Carbon Financing and its Potential to foster Economic Development in Africa” (IJPIEL, 18 April 2022) 

<https://ijpiel.com/index.php/2022/04/18/carbon-financing-and-its-potential-to-foster-economic-development-in-africa/>