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UN Carbon “One size fits all”.
But can Mama Africa squeeze in?

How can African governments fast-track their application of CDM projects despite a lack of necessary administrative skills? Why is the process so expensive? Should companies with smaller projects trade in the potentially riskier voluntary market?

These were but a few of the questions raised at Carbon Markets Africa, an international conference held in Cape Town from 10-11 November, in which representatives from government, local municipalities, private companies and carbon traders from across Africa (and abroad) were given the stage to voice Africa’s concerns and victories with carbon trading and CDM projects.

While government representatives from Swaziland, Zimbabwe and undoubtedly many smaller African DNAs attending the conference struggled to understand the practical application of the ‘carbon-jargon’ playing out in front of them (where CERs met VERs under ERPAs and so on), likewise established carbon companies struggled to negotiate the bigger risks and rewards of carbon trading in “risky” Africa.

As a result, Carbon Markets Africa divulged a wide range of opinions, concerns and discussions on how best to fast-track Africa’s current contribution of 3% to the world’s CDM projects. From this, a number of key points were established – most important of which was the declaration that Africa cannot hope to achieve success in a (carbon) trading environment suited for the developed West.

It seems the “one size fits all” blanket policies of the United Nations Framework Convention on Climate Change (UNFCCC) do not fit Africa at all.

Financing CDM projects

Carbon trading has become an important utility market and, as a result, not immune to the global financial crisis. While the market jumped from US$50 billion in 2007 to US$91 billion in 2008, analysts predict that there will only be a slight increase in 2009. “Consequently, project finances underlying projects are in critical decrease,” explained Deven Pillay, CEO of CEF Carbon (and previous Global Head of Carbon for Shell), in the opening session to the conference. Before the costs of envisioning and maintaining a CDM project, substantial funds are necessary for the registration process. Busasa, the landfill gas to electricity project of the Etekhwini Municipality, had to find US$76 000 for their registration – a lot of money to part with on the off-chance that the project might meet be registered.

As if the lack of underlying funds was not a big enough investment barrier, African CDM projects must further pole vault over the fact that Africa sits snugly in the highest risk bracket. “Most banks view investing in Africa as a no-go,” said Devan. The degree of risk in a CDM project is a substantial influence on the amount that the project’s carbon credits can be sold for. Carbon is sold at different prices depending on the project it is sold from – more established projects pose less risk and therefore obtain higher prices for their carbon credits.

More available risk capital is badly needed. There are a number of governments, notably Norway, who are investing much into African projects. The South African government is not in a financial position to do so. While the dti (Department of Trade and Industry) is positioned to assist in investment, Deputy Director: Environment at dti, Marba Visagie, told conference delegates that she was not sure if dti’s plans to help companies free up energy for South Africa will be enough of an incentive for investors. And although the dti can provide tax incentives for energy efficiency, the department has no such incentive for CDM projects. Instead, Visagie suggested that each industries pools arguments together and approaches the SA CDM Industry Association as a united front, because “government won’t listen to individual bodies”.

While the national government appears unapproachable, Derek Morgan of ICLEI (an association of over 1100 local governments from 67 countries committed to sustainable development) urged companies to engage with local municipalities. As he explains, local municipalities own the bulk of infrastructure and have an active role in the supply of electricity, thus proving an important source of CDM projects. “Municipalities own and manage the key opportunities,” said Morgan. “Most municipalities have aimed to increase energy efficiency by 10% in response to the Eskom saga and this has yet to be realised as CDM projects.”

But once again, financing municipal CDM projects might prove tricky as local government laws inhibit the ‘ring fencing’ of funds for one specific purpose or project, as funds are instead distributed ad hoc to the municipal division most in need. This means that not all income from a CDM can be put back into the project as requested.

Simplify the rules already!

Even if you get the right finances and consultants, the stats are disappointing: While India, China and Brazil combined contribute 75% of the world’s CDM projects, Africa only contributes 3%. And while 900 projects are expected to be registered this year, Africa will only have 7 of these.

And yet, Africa has more land mass and potential than India, China and Brazil combined. As an important reservoir of soil and terrestrial carbon, as well as the host of 20% of the world’s forest carbon and a large share of the world’s agricultural carbon, Africa could play an incredibly important sequestration role. Africa further harbours huge potential for low-carbon energy – 160GW to be precise.

Marcel Alers (Principal Technical Advisor, United Nations Development Programme - UNDP) went so far as to say that sub-Saharan Africa alone has the potential for over 3200 clean energy projects. “The most promising categories of projects in Africa are energy efficiency, renewable (such as biomass, biogas and landfill gas) and manure management,” added Johan van den Berg, CEO of CDM Africa Climate Solutions.

So why aren’t we realising these abundant opportunities? The answer is both in the financial risks already noted and in the ‘institutional risks’ – the miles of red tape that a company has to get through in order to get accreditation. As van den Berg claims, “The supply chain is simply getting longer and longer, [to the extent that] people perceive CDM accreditation as impossible, especially with the skills shortages in Africa.”

The conference made it clear that African governments are not generating the right kind of project environment either, as most have no collection of baseline statistics or the appropriate regulatory framework, let alone the skills to implement and guide projects in their region. Over and above this, CDM projects are typically developed over four to five years – in which time, the recognised methods and tools to measure emissions are continually changing, forming an impossible moving target each year. “Eventually, the outcome is not worth it,” says van den Berg.

The answer? Leave the present cumbersome CDM model for the rest of the world to fight over. For Africa, replace CDM with a simpler model – one especially suited for sub-Saharan Africa in particular. “We need a practical, simple framework,” posed Robert Ashdown (Climate Change Principal Consultant, Merchantec Capital). “The definition of what is sustainable development changes from county to country, position to position. And so we get lost in academic debate and lose focus.” For example, the definition of a forest in current CDM methodologies is not applicable to grasslands or South Africa’s Karoo. Thus simple semantics make a number of otherwise-promising projects null and void.

“Stop playing the victim here in Africa”

However, there is a fine line between making the CDM model simpler and killing the integrity of the system. The various procedures for registration and approval of CDM projects are in place for a reason – to take away from the CDM system is to take away from the environment we are trying to protect, after all.

But will creating a dual-track CDM process (one for Africa and one for the rest of the world) really solve the problem? As UN representative Marcel Alers commented, it is not always a question of the process killing the project in Africa. “Sometimes, it’s a case of other project factors killing the project; factors that people don’t want to talk about,” said Alers. If his comments were vague in any way, Chair of the CDM Executive Board, Lex de Jonge, clarified any doubts when he urged conference delegates and Africa large to “stop playing the victim here”. He went on to say that “The reality is that CDM is hard, you need to deal with this. I don’t think that Africa is any different from the rest of the world, apart from the investment climate.”

And besides, do we really have the time to formulate a second, simpler version of CDM? Not only are we already fighting the clock to slow climate change, but South Africans are facing a speedily growing threat from the rest of Africa for external investors. With 17 registered projects, South Africa is currently seen as the only market for external investors, but because we cannot get the present system running fast enough, investors are starting to looking elsewhere. Although none of South Africa’s neighbouring countries have any certified CDM projects, Egypt already has 6 – and the number is growing. Any further stalling on South Africa’s behalf and we will have lost essential external investment.

After all, CDM projects remain essential to Africa as a source of additional revenue, rural development and poverty alleviation. Essentially, they could provide win-win opportunities: mitigating climate change while improving development, particularly through food security and access to electricity.

Voluntary or CDM?

As the saying goes, “If the shoe doesn’t fit, must we change the foot?” Perhaps the answer for Africa doesn’t lie in ‘another foot’, but instead in a whole new shoe. This takes the form of the voluntary markets.

The difference between the CDM and voluntary markets has often been referred to as the difference between the a la carte and buffet menu. Where CDM markets are strictly regulated and only include larger, more expensive carbon projects, voluntary markets are flexible and thus showcase a greater range of carbon projects. For this reason, a growing number of smaller South African projects are choosing to go voluntary rather than embroil themselves in the costly red tape of the CDM market. This includes pre-CDM projects that are trading on the voluntary market while waiting to become CDM certified.

Almost half of the world’s VERs (or Verified Emission Reductions) are from renewable energy projects – of which biomass makes up 3%. However, despite the high number of small applicable VER projects in Africa, Africa makes up only 1% of the VER market. This might just show that it is in fact harder to play in the VER market than the compliance market. After all, VER traders must carry “the burden of proof” – with no third party regulatory body (such as the CDM Executive Board) in place, VER projects have to go the further mile to prove that they are a worthwhile investment.

As a result, the price of VERs can range from US$1 to US$47 per credit – depending on the certification of the seller. Regardless, there are real buyers for those small projects on the voluntary market producing less than 5000 tonnes a year. “Credible projects based on approved carbon trading formulas will attract investment,” said Anton Cartwright of PACE (Promoting Access to Carbon Equity), a company that deals specifically in this carbon production margin.

VERs may be more viable than CERs, due to the over the top requirements of the UNFCCC, and they also meet the real needs of real people – for example, providing solar energy to a few township houses.

All roads lead to Copenhagen

Perhaps Africa needs to put its head down and soldier on through CDM chaos until it conquer the skills and finances necessary to become the pivotal carbon market the continent should be.

Perhaps Africa has every right to play the victim and demand a simpler evaluation and accreditation methodology. After all, Africa is one of the most vulnerable regions to the impact of climate change and yet contributes only a small percentage of the world’s carbon footprint.

Regardless of the path we choose, “The only outcome we can contemplate is success” (van den Berg, CDM Africa Climate Solutions). By promoting dialogue on the problems and opinions of carbon certification and trading throughout Africa, the Carbon Markets Africa conference was instrumental in formulating an African opinion on carbon markets and the subsequent rate of climate change for Copenhagen 2010, in which a new international climate change agreement will be reached.

Back to November 09 Issue