28 November 2011

Unclean Development Mechanism: How African Carbon Markets are Failing

The following article was published as part of a debate hosted by the Heinrich Boell Stiftung. To read it in context, click here

Stories of the carbon market’s potential to mobilise billions of dollars in investment for projects to reduce emissions and contribute to sustainable development in the developing world tend to rely on aggregate figures about the value of the global carbon market, which was US$142 billion in 2010. There is a major discrepancy between this headline value and Clean Development Mechanism (CDM) financial flows, however, and this gap has continued to increase. In 2010, the “primary trade” in CDM offsets was worth $1.5 billion, its lowest level since the Kyoto Protocol entered into force in 2005. This is generally taken as an estimate of how much money goes to projects, although a recently leaked World Bank report suggests that the actual financial flows may be five times lower ($300 million) if the real purchase prices of credits are used instead of estimates.

The geographical scope of the CDM is also highly uneven, with over 80 per cent of registered CDM projects (and almost 86 per cent of credits issued) in the Asia-Pacific region. By contrast, Africa hosts 1.9 per cent of projects, issuing 1.3 per cent of credits, according to data from UNEP Risoe. These regional figures mask significant discrepancies between countries as well as regions. The majority of credits issued in Africa so far have gone to Egypt, but South Africa has the largest number of registered projects (19). By contrast, the rest of Sub-Saharan Africa hosts just 31 projects, amounting to 0.9 per cent of the total projects globally and just 0.005 per cent of credits issued to date.

On the north coast of Egypt, Africa’s largest fertilizer factory generates more carbon offsets than the rest of the continent combined, which are sold to coal-fired power stations in Germany’s industrial heartland to help them avoid cutting their greenhouse gas emissions. In 2010, the Abu Qir factory made an estimated US$25 million profit from these offset sales, while the power stations avoided 3 million metric tonnes of carbon dioxide reductions.

The story of Abu Qir is a snapshot of how the carbon offset market under the UN’s CDM has worked to date. Most credits are generated by industrial gas reduction projects, using cheap end-of-pipe technologies that generate far more money from the sale of carbon credits than they cost to buy and run. The largest buyers of these credits, in turn, are European energy producers keen to extend the lifespan of their coal-based power plants.

The fact that such a high proportion of Africa’s credits come from one factory illustrates just how marginal Africa is to the carbon market, and that the carbon market has been largely irrelevant to the continent's efforts to tackle climate change.

Project developers point to a lack of capacity in African states, but the main explanation for these disparities is economic. The largest global investors direct their efforts to the most profitable projects. Economies of scale invariably point to the larger projects, and since offsets represent “avoided emissions”, these involve heavy industries or power sector projects in countries where grid energy already register significant greenhouse gas emissions. Such project opportunities rarely exist in sub-Saharan Africa, which is not dirty enough or does not consume enough to compete successfully within the CDM.

This picture is clearly borne out in projections of how the scheme is likely to look by 2020. African projects already in the CDM pipeline would issue fewer than four per cent of credits by 2020. Almost half of these would come from a handful of gas-flaring projects in the Niger Delta, which looks set to overtake Egypt as the country with the highest number of credits by the end of the decade. The economic fundamentals limiting African involvement in the CDM as it is currently structured remain firmly intact, with project developers gravitating towards large-scale extractives and the industrial sector.

Various rule changes are on the table in Durban, which could exacerbate this trend. The inclusion of Carbon Capture and Storage (CCS) could depress offset prices that have already fallen so low as to be the “world’s worst performing commodity”, according to Reuters. The early beneficiaries would be in South Africa, where Sasol is looking at the possibility for its gas-to-liquids/coal-to-liquids plants; and in Algeria, where BP, Sonatrach and Statoil run the world’s largest onshore CCS demonstration project on their gas fields.

The other major changes could affect agriculture and forestry projects, which advocates for increasing the use of CDM in sub-Saharan Africa have identified as the sectors with the greatest “potential”. The World Bank is hoping to expand CDM to cover carbon storage in the soil as part of its proposals for “climate smart agriculture,” its version of the agricultural deal that the South African presidency hopes to be Durban’s main legacy. The World Bank claims that soil carbon storage will see small holder farmers “benefiting from significant payments for emission reductions.” However, its flagship pilot project in Kenya would see over 40 per cent of the costs spent on monitoring and registering the project, with $1.05 million spent on these “transaction costs”, leaving just over $1 per year for each farmer involved.

This cost profile is fairly typical of agricultural projects, which fetch far lower than average offset prices due to issuance uncertainties, and restrictions imposed on these project types due to difficulties in accounting for forest and agricultural carbon. As a result, the cards in this sector are also stacked in favour of agribusiness, which have better economies of scale. For example, the largest of a handful of CDM “reforestation” projects proposed (but not yet approved) would see the replacement of grasslands in Ghana with large-scale biodiesel monoculture plantations. In response, campaigners suggest that the inclusion of agriculture, forests and soil carbon in the CDM could lead to a “triple lose” for farmers, leaving them dependent on unpredictable carbon prices, increasingly vulnerable to land grabs, and left shouldering the burden of a climate crisis that they did not create.

In summary, the CDM is not failing Africa because of the inertia of policy makers and the CDM Executive Board. The CDM is failing in Africa because the economics of carbon markets create regional imbalances and favour large projects – subsidising the extractives sector and heavy industry, which are generally highly polluting and socially harmful. These same dynamics, if extended to agriculture, would favour agribusiness over small farmers. Various capacity-building initiatives are under way but these cannot alter the market fundamentals, and serve to merely divert scarce public resources away from directly addressing climate change.

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