Africa seeks pathways into untapped carbon trade market

When African environmentalists, leading financiers, investors and company executives flew to Nairobi on Tuesday last week for a Continental carbon trading forum, they had only one mission.

To craft strategies to help them tap into the multi-billion dollar global carbon trade business which has for years now remained a preserve of only few African companies and a cash-cow for firms in developing nations.

And perhaps to show their dissatisfaction with the lag that has seen them miss out of billions of shillings in new revenues, local project developers, buyers, service providers, national Clean Development Mechanism (CDM) representatives and various other private and public sector players held a similar meeting a fortnight ago.

This is the reality facing most African nations and companies with an eye at benefiting from the trade created by the Kyoto protocol in 2005 meant to ensure the biggest polluters—mainly the most industrialised nations—shoulder the cost of implementing environment—friendly projects in developing nations.

This is in the form of carbon credits to offset their emissions.

Each carbon credit is equivalent to one tonne of carbon dioxide emitted.

The global carbon trading market, which rewards projects that help reduce emission of carbon dioxide into the atmosphere, is now estimated to be worth Sh12.5 trillion ($170 billion), according to industry data provider, Carbin Point, but only a very small fraction of this money, estimated at two per cent, is coming to Africa.

“Africa has benefited the least,” said Mr Lawrence Lenayapa, the permanent secretary in the Ministry of Environment.

“We must come up with fresh strategies to boost participation if Africa is to benefit.”

But despite the opportunity which has opened up a fresh income stream for many companies globally, a raft of challenges continue to dog African players from the benefits.

Experts say lack of expertise to develop projects that help reduce carbon dioxide emissions, poor project choice, political and currency risks and legal loopholes continue to frustrate African countries from the full benefits of the trade.

As such, UN agencies say Africa accounts for less than four per cent of about 2,000 green projects registered to date in 58 countries, with the lion’s share of the projects located in Asia Pacific, followed by Latin America and the Caribbean.

“As a continent, Africa bears the brunt of climate change in spite of accounting for a very small proportion of green house gas emissions, ” said President Kibaki during the opening of the conference.

“There is yet to be adequate political will to address the problem of climate change.”

According to President Kibaki, although forests reduce substantial carbon dioxide from the atmosphere, trading in forest carbon is only through voluntary markets.

“This is an disadvantage for us because the carbon credits from voluntary markets are lower than obligatory markets and are not guaranteed.”

“Negotiators and scholars must use scientific evidence that shows the real value of forests in carbon reduction with a view to building a strong case for binding CDM markets.”

Companies have opportunities to develop carbon emission reduction projects from their existing operations by, for example, reducing use of fossil fuel to run their machines and vehicles, reducing staff travel by using video conferencing, redesigning their buildings to use less electricity for lighting and air conditioning.

But in Kenya, only a few projects have been identified to benefit from the global carbon fund, including one forest conservation plan by the Greenbelt movement, and electricity generation by Mumias Sugar Company, KenGen (three projects), and the Lake Turkana Wind Power Project.

The latter recently received a grant from a facility run by United Nations Environment Programme, Standard Bank, and the German government.

“African governments must promote awareness and train investors on the issues surrounding carbon trade which is a complex process,” said Mr Peter Oduol, the CEO of Bioearth Services.

“This way, the dollars will begin trickling in,” he said.

Carbon financing experts say companies should design projects that can stand on their own as businesses and seek earnings from carbon market as an extra income.

“We are not getting enough projects in Kenya. People are aware, but the proposals they present are poorly done,” said Tom Owino, of JP Morgan Climate Care, which helps corporate and non-profit organisations earn from the carbon market.

Proposals that are coming from Kenyan companies are requests for money to finance the intended projects with owners hoping to raise all the project money from the organisation which will buy the emission reductions.

This is not supposed to be the case, Mr Owino said, because the serious project proposals must have part or all of the financing requirements.

The proposal must also be accompanied by a good business plan that can raise the appetite of banks to finance the project.

Banks in Kenya are yet to start active financing of carbon trading projects partly because of lack of skills needed to evaluate risks of financing such projects.

The global carbon market involves sale of what are known as Carbon Emission Reduction (CER) units, with one unit being made up of one tonne of carbon dioxide that a project has succeeded in preventing from being released into the atmosphere.

One CER costs $10 or Sh760 based on Wednesday’s exchange rate. But this price changes depending on the players involved.

Dr Ayub Macharia, a director at National Environment Management Authority (Nema), urged investors eyeing the business to think up carbon-reducing projects and then seek financing from banks and other financiers like private equity firms.

The issue of access to financing has itself been blamed for the slow uptake of projects in Africa.

“There is a perception that green projects are very expensive. That is not true. Some need capital of $100,000 or less. These are sums commercial banks can loan and gain from, given the liquid nature of carbon trade,” Mr Tsuma Charo, the CEO of Carbon Asset, said.

Analysts said in addition to direct revenue, projects for carbon market are usually labour intensive, especially those that involve agriculture, therefore, help to create employment opportunities.

It remains to be seen whether local banks will open their doors to investors in green projects once more of them get official approval from Nema, the sector’s regulator.

Standard Bank of South Africa, with operations in 17 African countries is positioning itself in the business of saving the earth.

In October last year, the bank joined hands with UNEP to roll out Africa Carbon Asset Development (ACAD), a programme that will provide funds to push through at least 10 projects in Africa by the end of this year.

Geoff Sinclair, head of carbon sales and trading at Standard Bank, reckons the ACAD facility with UNEP is an example of how the bank is pioneering green financing in Africa through the deployment of local, market specific solutions and partnerships.

“We are committed to growing carbon literacy amongst bank managers and credit officers not only in our own organisation, but in other banks across the continent,” Said Mr Sinclair.

Given that carbon trade is an emerging opportunity, some African countries, including Kenya, are yet to craft comprehensive laws to regulate the new industry.

Dr Macharia reckons that there are no specific laws governing green projects, adding that fragments of regulations close to addressing the gap are found in various ministries, including the ministry of agriculture, forestry, and environment.

A parliamentary committee formed a few years back is yet to write up a law that will consolidate and harmonise regulation of the green business.

Stakeholders note that effective laws will help develop the sector.

Last year, a meeting on developing the green business in South Africa found that mitigating risks is key to boosting the trade.

The threats, among others, were identified as political and currency risks.

Preventing these risks and involving the public and private sector in projects is seen as key in boosting investor confidence.

But even as the continent lays the groundwork for future carbon trade, fears abound over its viability.

The Kyoto protocol lapses at the end of next year.

A new deal to replace it has proved elusive, despite several international conferences.

The meeting in Copenhagen, last year, failed to reach a legally binding agreement.

The impasse has been attributed to China and US, the top polluters in the world in that order.

According to analysts, China has grown tremendously in the recent past and agreeing to carbon emission caps will slow its bid to catch up with its rivals in the western world economically.

“The main fear in China is that carbon caps will interfere with its development agenda,” Oduol said.

The US, on the other hand, fears that agreeing to carbon caps will result in a slippery slope towards ceding its global economic dominance to China, besides worsening the domestic economic problems set off by the financial crisis.

Jane Watiri of the Green Earth Trust, which is helping organisations design carbon market projects and guide them how to earn from those projects, said there is a huge pool of investors ready to finance viable projects that make business sense.

“From our experience, financing a carbon trading project is not a problem. The only problem is getting a project that is viable or a project proposal that makes business sense,” said Ms Watiri.

Mr Charo says African countries should isolate themselves from China and other climate hard-liners at the international level.

Last month, Yu Qingtai, China’s special representative on Climate Change Negotiations, said there is little hope of reaching an agreement on how to tackle global warming.

“There may be some adjustments and shifts in the positions and tactics of the various sides, but I personally believe that on some core issues, the positions of the major parties will not undergo any substantive changes,” he was quoted by Reuters at a meeting in Beijing on China’s climate change policies.

Another round of climate talks is due in December in Mexico to build on the Copenhagen process.

Additional reporting by Steve Mbogo.