June 7, 2023

Harmonizing Progress: Empowering Africa's Sustainable Development through Voluntary Carbon Markets

Harmonizing Progress: Empowering Africa's Sustainable Development through Voluntary Carbon Markets

The Africa Carbon Market Initiative was recently launched during COP 27 by Sustainable Energy for All (SEforALL) and The Global Energy Alliance for People and Planet (GEAPP). Its purpose is to harness the potential of voluntary carbon markets to support the development and financing of green and resilient infrastructures, preserve natural carbon sinks, and drive job creation in African countries. This initiative has gained significant momentum, with diverse stakeholders including businesses, governments, academics, NGOs, and environmental leaders collaborating to address key challenges and unlock the full potential of voluntary carbon markets in achieving net-zero greenhouse gas emissions targets.

Voluntary carbon markets, distinct from compliance carbon markets such as cap-and-trade or tax systems, have been in existence for a decade. Recently, there has been a renewed focus on addressing critical issues within these markets. The collective efforts have aimed to overcome obstacles and enable voluntary carbon markets to serve as powerful tools for advancing the global decarbonization agenda.

The underlying objective of voluntary carbon markets is to incentivize society to assign a value to the external cost associated with removing one metric ton of CO2 equivalent from the atmosphere. Numerous markets exist to achieve this, utilizing approaches ranging from leveraging nature's resources to purpose-built engineering solutions, or a combination thereof.

Voluntary carbon markets hold promise as risk management and hedging instruments in the coming decades, given their potential to play a significant role in driving decarbonization efforts. However, three key uncertainties must be addressed to achieve net-zero goals:

  1. The pace of the transition, including the cost and reliability parity of viable green technologies, as well as consumers' adoption of sustainable products.
  2. Local and global political frictions that can impact the trajectory of decarbonization efforts.
  3. Residual emissions from processes that cannot be fully decarbonized.

To meet the increasing demand from governments, businesses, and citizens committed to net-zero targets, voluntary carbon markets must prioritize integrity. It is crucial to ensure that one metric ton of CO2 equivalent marketed in these markets represents the permanent removal or long-term sequestration of one metric ton of CO2 equivalent.

Unfortunately, the majority of currently available carbon credits in liquid supply fail to meet this standard, which is reflected in their low trading price (approximately $2 per metric ton of CO2 equivalent). However, there are reasons for optimism. By refining market design, standardizing instruments, enhancing transparency and verifiability, incremental progress can pave the way for a robust aggregated market capable of delivering significant benefits on par with compliance carbon markets.

The cost structure of voluntary carbon credits can be categorized into two components:

  1. Development and implementation costs of carbon removal solutions (capital expenditure).
  2. Costs associated with maintenance, transparency, and verifiability (operating expenditure).

The relative proportion of these cost components varies depending on the carbon removal solution and the maturity of research, development, and deployment techniques.

BloombergNEF models provide insights into possible supply, demand, and price scenarios for carbon offsets. They outline three potential trajectories:

  1. Voluntary Market Scenario: This assumes a continuation of the offset market as it exists today, with demand driven by corporations committed to sustainability goals. In this scenario, demand is projected to reach 1 billion metric tons of CO2 equivalent by 2030 and 5.2 billion metric tons by 2050, equivalent to 10% of current global emissions. All types of supply, including emission avoidance measures like clean energy and avoided deforestation, are permitted.
  2. Removal Scenario: This scenario restricts supply to removal offsets, such as reforestation and nascent technologies like direct air capture, to achieve net-zero goals. Corporations drive activity but are limited to offsets that store or sequester carbon, rather than avoiding emissions. This scenario highlights the potential supply shortfall in a removal-only market, particularly in the early stages when technology-based removal options are limited, resulting in offsets being a niche and luxury product.
  3. Hybrid Scenario: This scenario envisions a gradual evolution of the offset market, starting with the current voluntary market and transitioning to a removal-only market for corporations. Eventually, by mid-century, it becomes a removal-only market primarily for countries, facilitated by a global carbon market that allows the buying and selling of verifiable emission reductions. While this scenario offers an ideal outcome for all parties involved, it requires significant market developments in the coming years and represents a substantial shift from current pricing levels.

Given Africa's unique context and abundant natural resources, it is essential to position and build capabilities that align with both removal and hybrid scenarios. This approach ensures active contribution to developing tailored solutions at the necessary scale. Solutions such as land management, biochar production, afforestation/reforestation, and others have the potential to engage local communities effectively. Building trust, providing appropriate education and training support, adapting methodologies to match community readiness, and offering co-benefits aligned with community needs are vital for consistent progress in the years ahead.

Furthermore, the cost burden of nature-based solutions largely depends on the availability of transparent, independently verifiable, and repeatable emission data. Blockchain technology has emerged as a promising solution, significantly reducing the cost of securely computing decentralized consensus on data validity. Initiatives like the Climate Action Data Trust/Climate Warehouse, developed by the World Bank, IETA, and the Singapore Government, serve as decentralized metadata layers for cross-border carbon offset accounting.

Embracing decentralized infrastructure and architectures in the fight against climate change can yield significant benefits. It allows for efficiency arbitrage, accelerating the implementation of tools and solutions. While success is not guaranteed, evidence suggests a high probability of achieving expected societal value by deploying and de-risking decentralized solutions.

It is encouraging to witness the growth of decentralized and open-source projects such as the Open Forest Protocol and Carbon Plan. These initiatives aim to provide free or low-cost, robust, and high-quality measurement, verification, and reporting systems. Such systems play a critical role in reducing barriers to entry for all participants committed to climate action, contributing to a just transition.

In conclusion, the Africa Carbon Market Initiative and the development of voluntary carbon markets offer significant opportunities for Africa's sustainable development. By addressing challenges, ensuring integrity, and leveraging decentralized solutions, we can harness the potential of these markets to accelerate the journey towards net-zero emissions and create a more sustainable future.