Africa, the CDM conundrum

OneCarbon | Clean Development Mechanism

Africa is the continent that will be hardest hit by climate change, but currently benefits least from the Clean Development Mechanism (CDM). Around 2% of the registered CDM projects in the world are located in Africa, the world’s second-largest and second most-populous continent.

In October 2008, 27 projects were registered in Africa, compared to 25 CDM projects in Chile alone. In addition to this continental deficit, a regional skew can be observed. More than half of the registered projects on the African continent are located in South Africa, while North Africa accounts for around 37%. The 50 countries of Sub-Saharan Africa, barring South Africa, house 10% of worldwide population, but have seen only three projects registered.

Why is Africa lagging behind?

There has been much debate about why CDM has not kicked off yet in Africa – the main reasons include lack of awareness, policy and infrastructure planning, and also limited financing because projects are too small and African countries are seen as too risky an investment, when compared to some of the larger (and wealthier) developing countries. Another source of the discrepancy may be the type of projects that have been popular thus far. Africa has an enormous potential for biomass and forestry projects, but forestry has not seen much uptake in CDM, with just one project registered worldwide. The United Nations Environment Programme (UNEP), the World Bank, the European Commission and the African Development Bank have been investing millions into capacity building activities in Africa, whether this will pay off in the longer term remains to be seen.

There is much debate over solutions. Propositions include mobilising the local private sector, bundling projects, bringing in more funding, using more creative and intelligent market-led solutions or setting up country-specific targets under a new formulation of the CDM. On the road to Copenhagen in 2009, where the governments of the world will decide on the structure, scope and shape of the post-2012 climate change regime, it has already been decided that the CDM will continue, however the scenarios are diverse and include a range of potential sectors and regions. Africa, particularly the Least Developed Countries, will be the region most certain to see some form of flexible mechanism such as CDM, at least from a policy side of things. But will there be any projects?

Market push

Two potential solutions may already be on the way – both the voluntary market in emissions reductions, and the development of so-called Base of the Pyramid projects. These can work outside of the confines of traditional CDM constraints to kick-start project-development opportunities.

The voluntary carbon market is rapidly developing in parallel to the Kyoto compliance market. Historically, this market focused on forestry projects aiming to offset GHG emissions of individuals, events and small companies for social responsibility and image purposes. However, this market has shifted and is now, like the CDM, focusing on industrial and energy-related projects. A number of standards have been developed, comparable to the requirements of the CDM, that show voluntary credits are bona fide, but remove some of the constraints that can make approval for CDM projects near impossible in Africa. At the same time, some standards, such as the Gold Standard, even require additional socio-economical benefits, improving the social value of carbon investments in host countries.

Many project developers in Africa are starting to put their money on the voluntary market as an alternative to the deficient African CDM market. And probably rightly so; developing credible carbon credits under one of the standards that follow the basic CDM rules is a way to bypass some of the important barriers related to CDM development in Africa, such as lack of policy infrastructure and Host Country Approval. There is no lack of demand for Voluntary Emission Reductions (VERs), the carbon credits related to voluntary market projects. Demand is doubling or tripling yearly. Corporates and governments alike in Europe and the United States are increasingly spending money on carbon offsets for Corporate Social Responsibility reasons, quite apart from their compliance needs.

The voluntary market offers more than just immediate delivery of VERs from a project in Africa. Voluntary market buyers tend to buy current vintage annually rather than years ahead, and never the same type of project. As a result, the voluntary market could well diversify and expand to new countries and innovative technologies. African-based projects are in principle ideally fit for the CSR driven voluntary market. Over time, new project types and technologies developed successfully in the voluntary market may be picked up by the compliance market. The United Nations Framework Convention on Climate Change (UNFCCC) could assess success stories and approve the associated methodologies. Eventually, the voluntary route could trigger the CDM market in Africa by stimulating innovation and project diversification.

From the bottom, up

According to World Bank statistics, no more than 25% of African households have access to modern energy and an estimated 500 million Africans do not have access to electricity. Like programmatic CDM, so-called Base of the Pyramid projects provide a large number of small-scale changes to make a large carbon difference. The basic idea is selling energy efficient or renewable energy products to consumers in survival markets (the four billion people living on less than $3,260 a year) that have limited or no access to the grid. Typical types of projects involve retail domestic products, such as energy efficient woodstoves and lamps. Various projects have already been started.

Carbon credits can play an essential role in providing affordable solutions for local communities with limited purchasing power in these poor African markets. As expected, early market entrants have encountered some challenges, including a limited success rate and initial long lead-times to get projects started. Many have been unable to overcome challenges in terms of return on investment, lack of distribution networks, and methodology issues such as monitoring and there is now a huge list of failed products. However, there is huge untapped market potential, and projects are slowly being realised. With innovative low priced and culturally-acceptable products, and the backing of sound carbon-finance, success is certainly possible.

The future holds…

The voluntary market and Base of the Pyramid projects do have the potential to provide some sort of kick-start while governments work on post-2012 scenarios to make CDM in Africa attractive to compliance buyers. The road ahead may prove a bumpy and windy one. However, Africa is one of the most likely regions to see an international carbon regime contribute to sustainable developments post 2012. It also has a large potential market, taking into account the energy deficit on the continent for millions of African households. Through the joint efforts of governmental and nongovernmental organisations, and involving the private sector, the CDM may well see the light in Africa.

By Max Horstink, with the contribution of Ecofys.

W: www.onecarbon.com