The carbon market is a financial system aimed at reducing greenhouse gas (GHG) emissions. This market assigns a monetary value to each metric ton of GHG emissions, enabling companies and countries to buy or sell the rights to emit these gases. The market is divided into two, the compliance carbon market (CCM) and the voluntary carbon market (VCM).
The voluntary carbon market enables private parties to buy and sell carbon credits representing the avoidance, reduction, or removal of GHGs from the atmosphere. Key market participants include project developers who generate credits and issue them for sale. End purchasers, typically companies or institutions seeking to offset their emissions, and various intermediaries such as brokers, traders, and retailers, provide liquidity, distribution, and other services. Additionally, there are standard-developing bodies and registries that set minimum requirements for the creation and issuance of credits. Third parties also play a role in conducting related due diligence or auditing, either to support the issuance or subsequent trading of credits.
The VCM has managed to provide financing for numerous sustainable projects in developing and emerging countries. Traditionally, these countries have struggled to attract private investment due to factors such as perceived risk, lack of bankable projects, high cost of capital, foreign exchange fluctuations, and elevated debt levels.
For companies, particularly those in hard-to-abate sectors, achieving net-zero emissions is a formidable challenge without investing in carbon credits. Collectively, these sectors—comprising steel, cement, aviation, shipping, and road freight—account for 25% of today’s global carbon emissions. However, they possess the potential to increase emissions by 50% through 2050, given growth projections. Hard-to-abate sectors typically involve long-lived capital assets, like industrial plants, which are both expensive and resistant to modification.
The Africa Carbon Markets Initiative (ACMI), launched at COP 27 in Sharm el-Sheikh, Egypt, in November 2022, represents an endeavor to significantly enhance Africa’s involvement in the VCM. The initiative aims to foster the expansion of carbon credit production, generate employment opportunities in Africa, and concurrently safeguard biodiversity.
ACMI’s overarching goal is to drive the growth of voluntary carbon markets, with the ambition of producing 300 million carbon credits annually by 2030 and 1.5 billion credits annually by 2050. In addition, the initiative aspires to unlock USD 6 billion in revenue by 2030 and exceed USD 120 billion by 2050. It further aims to bolster job creation by supporting 30 million jobs by 2030 and surpassing 110 million jobs by 2050. ACMI’s strategic vision involves sending a compelling demand signal for carbon credits, spanning diverse project categories, particularly those with untapped potential across Africa.
The African voluntary carbon markets are experiencing growth, slightly outpacing global markets with a CAGR of 36% from 2016 to 2021, compared to 31% for the global markets. However, the potential for climate finance through carbon markets remains largely untapped. Over the past 5 years, approximately 65% of issued credits originated from just five countries: Kenya, Zimbabwe, the Democratic Republic of Congo (DRC), Ethiopia, and Uganda. Furthermore, a disparity exists between project activity and the potential for carbon credits across different countries, as certain nations with substantial credit potential have demonstrated low levels of activity.
Kenya holds the largest market share, accounting for 24% of the carbon market in Africa. Between 2016 and 2021, Kenya issued approximately 26MtCO2e of carbon offsets, surpassing all other African nations. It is estimated that Kenya possesses the capability to sequester, reduce, or avoid around 30 metric tons of carbon dioxide equivalent per year. By utilizing an average price of USD 20 per ton, Kenya could mobilize up to USD 600 million annually from regulatory compliance and voluntary carbon market projects by 2030.
Kenya has emerged as an industry leader in the carbon market, not only within Africa but also on a global scale, demonstrating significant advancements in its carbon offset exports. In the year 2023, Kenya achieved a remarkable milestone by selling over 2.2 million tonnes of Carbon Credits through the Nairobi Auction. 16 Saudi Arabian firms, including prominent names such as Aramco, Saudi Airlines, and the Saudi Electricity Company, participated in this auction, collectively purchasing credits at a rate of USD 6.27 per metric tonne, underscoring their commitment to addressing carbon emissions.
The achievement marked the largest transaction of its kind worldwide, highlighting Kenya’s prominence in the global carbon market. The Nairobi Auction witnessed the participation of numerous delegates not only from Kenya but also from neighboring countries such as Rwanda, Egypt, and South Africa. This event served as a platform for knowledge exchange and collaboration, nurturing a sense of shared responsibility in addressing carbon emissions and their environmental impact.
Building on this momentum, from September 4th to 6th, 2023, Kenya will host the Africa Climate Summit. This summit offers a unique opportunity for African leadership to highlight progress, exchange perspectives, and align on common priorities for global discussions. For Kenya, the event is a crucial platform to showcase its leadership in tackling climate change challenges, share innovative approaches to mitigation and adaptation, and foster collaboration among African nations. Furthermore, the summit is set to draw international attention, investment, and partnerships, thereby boosting Kenya’s economic growth and solidifying its position as a responsible global participant actively shaping a more sustainable future for the African continent and beyond.
Author: Victor O. Nyakinda