Africa needs carbon markets

This blog was originally published in Project Syndicate.

World leaders have mounted a resolute response to the war in Ukraine, the consequences of which are being felt far beyond the warzone. They must start showing the same resolve in the fight against climate change, which threatens to cause far greater damage. We already know what this demands: a shift to a net-zero or low-carbon economy, powered by renewable energy. Building effective carbon markets in which African countries are active participants would go a long way toward advancing this goal.

While Africa accounts for the smallest share of greenhouse-gas emissions globally, its fast-growing economies, bold development ambitions, and rapidly growing population mean that its energy use will drastically increase in the coming decades. Ensuring that the continent’s development trajectory aligns with a just energy transition is thus essential to achieving global climate goals.

It will be expensive. In Sub-Saharan Africa alone, the net-zero transition will cost an estimated $1.7 trillion by 2030. Official development assistance – which was in decline even before the COVID-19 pandemic put added pressure on donor-country budgets – simply cannot be expected to cover these costs. Innovative new climate finance is needed.

That is where reliable, efficient carbon markets come in. Carbon markets unlock funding for the net-zero transition by imposing caps on the emissions countries or companies can emit. If an emitter wants to exceed the established limit, it must purchase permits or credits generated from emissions-reduction projects.

Carbon markets have gained significant traction in recent years, with roughly 23% of global emissions now covered by some form of carbon pricing. The value of traded carbon dioxide permits soared by 164% in 2021, reaching a record $851 billion.

But the global carbon market remains chaotic and volatile. The price can range from less than $10 per ton of CO2 equivalent to more than $100 per tCO2e. Changing climate goals and policies, economic hardship and uncertainty fueled by crises like the COVID-19 pandemic and the war in Ukraine, rising oil and gas prices, and growing speculation in the carbon market all fuel volatility.

Unpredictable prices make it impossible for lower-income African countries, which have limited funds and technical capacity, to participate in the carbon market on fair terms. As a result, all of Africa has largely been left on the sidelines of global carbon markets.

This is untenable – and not only because of Africa’s expected future energy consumption. African ecosystems store enormous amounts of carbon. Trees in the Congo Basin soak up about 1.2 billion tons of CO2 each year, and Africa’s highest mountain forests can store more carbon per hectare than even the Amazon.

This is far more than previously assumed, highlighting the need for better mechanisms for calculating the amount of carbon stored in forests and soils. (Organic carbon stored in soil equals roughly three times the amount found in living plants.)

But Africa largely lacks the skills and technologies needed to perform such calculations, which would enable Africa to monetize its forest- and land-restoration projects, and other climate-mitigation initiatives. Moreover, low and unpredictable carbon prices could not produce enough funding to cover the cost of acquiring the necessary capacity. Africa needs more robust climate-financing facilities, underpinned by government-to-government (G2G), cross-regional collaboration in carbon markets.

Such cooperation has already proved effective elsewhere. Since its launch in 2005, the European Union Emissions Trading System (ETS) has grown to cover almost half of European emissions. The EU has also helped China to develop its own ETS, which began trading last year. And both the EU and China are working to link their carbon markets with those of regional neighbors – the EU with Switzerland, and China with Southeast Asian countries – thereby reducing fragmentation and bolstering effectiveness.

European countries must launch similar carbon-market collaboration with their African counterparts. To some extent, this is already happening: Rwanda and Sweden are in the early stages of negotiating G2G climate-financing facilities. But more must be done, with large European emitters channeling investment, based on a premium carbon price, into a climate fund for Africa.

This approach would create certainty and protect all sides from price volatility, thereby enabling participating African countries to finance clean-energy transitions while generating large carbon offsets for European companies. Such a facility could help finance, for example, Rwanda’s ambitious effort to reduce carbon emissions by 38% by 2030 (compared to business as usual) – a goal that will cost around $11 billion to reach.

Rwanda has already proved its ability to translate such financing into progress. Investments in the country’s national green fund, FONERWA, have been used to restore more than 100,000 hectares of degraded ecosystems, create more than 176,000 decent jobs, and provide over 88,000 households with access to renewable off-grid energy, among other projects.

A G2G climate-financing facility could foster the growth of innovative clean-energy companies, create more good jobs in sustainable sectors, keep carbon stored in the ground, and enable Africa to develop its technical capacity. For high-emitting countries, G2G carbon markets offer a means of meeting the climate commitments made under the 2015 Paris climate agreement without relying on an aid-focused approach. That makes them essential to averting a climate catastrophe.