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Is COP29’s Carbon Markets Agreement a Game Changer for Africa?

Despite the tension surrounding its climate finance agreement (refer to page 28), COP29 achieved a noteworthy milestone regarding carbon markets. Advocates believe this agreement will significantly enhance projects aimed at tackling climate change by either removing carbon from the atmosphere or preventing its release altogether.

“Once operational, these carbon markets will assist countries in executing their climate strategies more swiftly and cost-effectively, thereby reducing emissions,” stated UN climate chief Simon Stiell. “We still have a long way to go to halve emissions this decade, but achievements in carbon markets at COP29 will aid us in returning to that trajectory.”

Article 6 of the Paris Agreement has been a contentious topic for nearly ten years in climate negotiations. The idea that countries should voluntarily collaborate using carbon credits to meet climate objectives was established in 2015. However, finalizing the practical mechanisms for implementation has been a laborious endeavor.

Nevertheless, COP29 was able to declare a significant breakthrough on the summit’s first day, with an agreement concerning the operationalization of one of its crucial components, Article 6.4. This includes adopting standards for the methodologies that quantify the emissions reductions or removals resulting from carbon credit projects, ensuring that projects utilize methodologies that yield verifiable outcomes.

This was soon followed by an agreement on Article 6.2, which facilitates the transfer of carbon credits between nations. For instance, Norway might acquire carbon credits from a project in Kenya, which would then count towards Norway’s climate target goals—known as the Nationally Determined Contribution—that it submits to the UN.

Africa stands to gain significantly. The continent possesses vast potential to expand projects aimed at carbon removal, especially through tree planting and initiatives that prevent emissions by safeguarding carbon-absorbing habitats.

The African Carbon Markets Initiative projects that Africa could generate $120 billion annually by 2050 through carbon credit sales. Nevertheless, despite overcoming the Article 6 challenge, obstacles remain in converting this potential into tangible progress.

‘Fundamental transformation’

The deal is deemed a “complete game changer,” according to Luke Leslie, CEO of carbon markets investor Key Carbon. He explains to African Business that this agreement lays the groundwork for a fundamental shift in the voluntary carbon market. Currently, this market relies solely on voluntary credit purchases by corporations, which have experienced fluctuating demand amidst various scandals that have eroded trust.

With the establishment of an international framework for regulating carbon credit standards, Leslie anticipates a shift towards a compliance-driven market. For instance, companies may be motivated to purchase credits to reduce their exposure to carbon taxes being enforced in different jurisdictions.

Leslie indicates that the Article 6 agreement sends a “huge demand signal” likely to stimulate a surge in credit purchases. This could be akin to how buyers of physical commodities secure supply contracts well in advance.

He asserts that this represents a “once-in-a-generation opportunity” for nations like Madagascar. Despite facing widespread deforestation recently, he notes that Madagascar ranks among the most cost-effective places globally to initiate a reforestation project, positioning it favorably to attract investments from carbon credit project developers.

A silver bullet?

While nearly all developers and investors in carbon markets have welcomed the Article 6 agreement, many remain cautious about predicting an immediate market boom.

Nick Marshall, co-founder and head of carbon at TASC, an Africa-focused carbon project developer, acknowledges that the Article 6 agreement is a “fantastic signal” that will eventually stimulate credit demand. He points out that the aviation industry has largely avoided the voluntary carbon marketplace until now.

However, with frameworks and mechanisms in place, he feels “quite optimistic” about airlines being encouraged to buy credits from proactive countries like Zambia, which has made strides in establishing frameworks for carbon credit sales.

Storm Patel, TASC’s commercial director, indicates that the company could multiply its project scale in Zambia two to three times “if there were established policy certainty and clear guidelines and offtakers through these 6.2 mechanisms.”

Yet, Marshall warns that the Article 6 deal will not bring about instant changes “overnight.”

He remarks that there is “still a long way” to implement the Article 6.4 mechanism. While the Article 6.4 agreement outlines requirements for carbon credit methodologies, the actual process of approving methodologies that adhere to these requirements is still pending. The timeline for establishing a “Paris Agreement Crediting Mechanism,” which would allow emissions reductions to be credited for sale to companies in other nations, remains uncertain.

Johnson Penn, CEO of EcoLinks, which aims to develop carbon credit projects in countries such as Rwanda and Ghana, also believes the Article 6 agreement is not a “silver bullet” for the carbon market. Though he regards the finalization of the agreement in Baku as “very good,” he stresses that additional efforts are necessary before Africa can take advantage of a surge in demand.

In fact, Penn notes that preparations for bilateral agreements regarding carbon credit transfers were already underway prior to COP29. While he is “cautiously optimistic” about the deal’s potential positive effects, he admits that it remains ambiguous whether or when a wave of Article 6.2 agreements will emerge.

Easier in Asia

During COP29, Singapore announced several Article 6.2 agreements, including one with Zambia. However, Penn observes that only a few other countries have shown a strong interest in purchasing credits through this mechanism. The narrative thus far in the carbon markets has been “more talk than action,” in his view. For example, South Korea, where EcoLinks is located, has entered into multiple memoranda of understanding with other governments regarding carbon credit purchases but has been slow to turn these MoUs into actual agreements.

Penn cautions that African governments need to take steps to ensure they benefit from upcoming market advancements. Presently, he asserts that “larger projects” are much more feasible in Southeast Asian markets compared to most African nations.

He highlights Rwanda as a standout example in Africa for providing a “very supportive” environment for securing credit deals. However, due to its small size and high population density, the country lacks the capacity for extensive carbon removal projects.

Conversely, in Ghana, Penn notes that obtaining letters of authorization for carbon projects has been a challenging process, characterized by “lengthy and unnecessary procedures.” His message to governments is to prioritize competitiveness in order to attract investment.

“If you aspire for the carbon markets to scale as swiftly as you hope, it is vital to have efficient processes ready for when you establish all the enabling mechanisms for growth in this market,” Penn advises.

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