Durando Ndongsok, Managing Director, S2 Services Ltd

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Subjects of Interest

  • Africa
  • Development Finance
  • Entreprenuership
  • Sustainable Development

The right price for carbon 13 Nov 2015

The 21st Conference of Parties (COP-21) to the United Nations Framework Convention on Climate Change (UNFCCC) is taking place in Paris from November 30 to December 11, 2015. There is a lot of hope that during these two weeks of intense discussions on climate change, a decision in the form of a binding agreement will be taken as countries of the world come together to fight global warming.

Since COP15 in Copenhagen a few years back, expectations always seem to mount before the annual climate conferences and then collapse shortly after with much disappointment. The problem has always been the big egos of world leaders and multinationals who give more priorities to their domestic economic development at the detriment of the global environment. Nevertheless, the COP has done very well in creating new mechanisms for regional and national governments as well as corporate entities to invest in projects and programmes that reduce emissions even as others use the funding to adapt to the adverse effects of climate change.

Unfortunately, the adoption of these mechanisms has not been very effective. We should expect that countries would go to the COPs to give report on progress made in reducing emissions, but there has not been a clear roadmap on climate finance, the backbone for mobilising funding for climate mitigation and adaptation.

Although almost all countries agree that setting up a framework to transparently trade/exchange greenhouse gas (GHG) emissions in projects where reducing emissions is efficient and cost-effective to places where emissions cannot easily be reduced is a major key to fighting climate change, the disagreement between countries has always been on what a universal mechanism would look like. For instance, many developing countries have not contributed significantly to climate change. Therefore, they argue that they don't have to take binding emission reduction measures.

Africa contributes less than 4% of greenhouse gas emissions in the world. This is why Africa does not make binding commitments. Rather, many of the mechanisms find their way to Africa in the “common but differentiated” global agenda to fight climate change. Africa is arguably the region with the lowest cost for greenhouse gas abatement. In a well-organised carbon finance market, developed countries will support Africa in developing a cleaner development path and the world will benefit from the GHG reductions associated with this.

Going into COP21 in Paris, the key for Africa will be to secure an important increase in the carbon price to a level that can reinvigorate the appetite of green investors to come to Africa and power sustainable development.

Understanding carbon finance

Simply put, carbon finance is a set of financial mechanisms put in place to finance projects and programmes that aim at reducing greenhouse gas emissions into the atmosphere. The carbon comes from the fact that carbon dioxide (CO2) is the reference for measuring global warming potential. Global-warming potential (GWP) measures how much energy the emissions of one ton of a gas will absorb over a period of time, relative to the emissions of one ton of carbon dioxide. The measure was developed to allow comparisons of the global warming impacts of different gases. Carbon dioxide has a GWP of one and all other greenhouse gases are converted into CO2. For example, methane, which is another GHG has a global warming potential of 21 compared to carbon dioxide, i.e. one ton of methane pollute 21 times more than one ton of carbon dioxide. Nitrous oxide (N2O) also has a GWP of 320.

Carbon finance aims at reducing GHGs in an “efficient and cost-effective” way. By setting up different mechanisms, the UNFCCC hopes to give opportunities to all parties to the convention to meet the objectives of the convention, which is reduction of GHG emissions.

Selected carbon finance instruments interesting for Africa

The Clean Development Mechanism (CDM) is one of the first three carbon finance mechanisms that emerged from Kyoto, Japan, in what is now famously known as Kyoto Protocol at COP3 in 1997. The CDM is a project-based mechanism where emission reductions from a single project are certified through a set of well designed guidelines and can be sold to developed countries through an emissions trading scheme.

The Nationally Appropriate Mitigation Action (NAMA) was first discussed at COP13 in 2007 in Bali, Indonesia. Unlike the project-based CDM, the NAMA is a programme developed to facilitate country-wide carbon resilient development of a sector (and not a single project). The NAMA is developed by putting in place (or improving) a mix of policies and financial instruments in a given sector considering existing policies in a country. A good NAMA in Nigeria can be a programmed phase out of the use of incandescent lamps throughout the country. This seems very easy, but implementing it will require tough policies to be put in place and monitored across the country. At the same time, appealing incentives would have to be given to sellers of incandescent lamps as well as to households that will be requested to purchase Light-emitting Diode (LED) lamps and/or Compact Fluorescent Lamp (CFL) that are more expensive, but last longer.

Reducing Emissions from Deforestation and Forest Degradation (REDD+), simply put, can be considered as NAMA in the forestry sector. Under REDD+, a set of policies are put in place to protect the destruction of forest and hence increase the sinking of the carbon. The REDD+ mechanism is built under five pillars, namely:
i.    reducing emission from deforestation,
ii.    reducing emissions from forest degradation
iii.    conservation of forest carbon stocks
iv.    sustainable management of forests and
v.    enhancement of forest carbon stocks.

A single REDD+ programme can address just one pillar or a combination of many pillars, with the complexity increasing when many pillars are included in a single programme.

All these mechanisms have one thing in common: emission reductions can be Monitored, Reported and Verified by any party that wishes to do so. There are many guidelines associated with the Monitoring, Reporting and Verification (MRV) to make sure claimed emission reductions are real and verifiable to maintain environmental integrity.

These mechanisms cover mostly avenues for reducing GHG emissions and provide opportunities for doing so in Africa and elsewhere. Making those mechanisms work by giving a price on reduced emissions is what is more important today for Africa than creating yet another mechanism.

Carbon finance and sustainable development of Africa

Apart from greenhouse gas emission reductions associated with carbon finance instruments, Africa is the region where any ton of carbon dioxide reduced contributes directly to sustainable development that can be measured. A ton of CO2 reduced in China is most likely associated with the chemical hydroflourocarbon-23 (HFC-23). Reducing HFC-23 emissions require very little investment for extremely high volume of Certified Emission Reductions. The HFC-23 has a global-warming potential of 11,700, meaning each ton of HFC-23 reduced can be converted into 11,700 Certified Emission Reductions. In Africa, emission reductions are based on projects like improved cooking stoves to replace three stones stoves, renewable energy for people using kerosene and diesel generators, or waste management through composite or modern landfill sites. All of these projects are directly associated with economic development and social wellbeing of the disadvantaged populations.

An improved cooking stove project helps households to reduce indoor air pollution and hence safeguard their health. Also, less time is spent searching for wood, less money is spent to buy wood for cooking, while cooking time in some instances is also considerably reduced.

Studies show that rural off-grid populations spend 10-20% of their significantly low revenues for lighting and charging phone batteries. A study done by SNV Cameroon has shown that with clean energy and phone recharging sources, off-grid populations can reduce their living cost from around $100 to just $15 per year. And with better lighting, children improve their scores at school, while economic and social activities can take place at night.

Giving a price to carbon in Paris

Under CDM, transactions are done through buying Certified Emission Reductions (CERs) from clean projects. CERs prices hit EUR20 per CER in 2008 before crashing to less than EUR 0.5 since 2012. As a result, the appetite for investors to develop and finance clean projects has tremendously reduced.

Sale of CERs for a project was considered as “icing on the cake,” since the project already has its conventional revenue stream (for example, a renewable energy project gets revenue from the sale of energy before getting carbon revenue in addition). However, for many projects in Africa, this icing on the cake is so important that it can determine the decision of an investor to implement a clean project. For example, a 10MW hydro project in Nigeria will generate around 55,000 CERs per year (considering the project is running 11 months per year with one month for maintenance). At the current price of CERs, this project will generate less than EUR30,000 per year. This is not enough to cover even costs associated with the development of the carbon component. If a price of EUR10 is given per CER, this project will generate more than EUR 500,000 per year, which would be very attractive for investors.

With a perfect knowledge of CDM, NAMA and REDD+ – the three mechanisms that can make an impact in Africa – what Africa needs going to Paris is for a good price to be set for those carbon credits that attract more green investors to the continent, not new mechanisms that will create more confusion.