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Clean Development Mechanism
With the adoption of the Kyoto Protocol in 1997 came a new international regime, managed by the United Nations Framework Convention on Climate Change (UNFCCC), dedicated to coordinating global action on climate change. The UN established greenhouse gas emission reduction targets for industrialized countries, and at a subsequent meeting a set of three flexible market-based mechanisms were developed to enable these countries to reduce their emissions in more cost-efficient ways.
Of the newly established market-based mechanisms, the Clean Development Mechanism (CDM) was of direct relevance to Africa, as it established a system whereby emission reduction targets in industrialised countries could be in part met by purchase of ‘credits’ from environmentally sustainable projects in developing countries.
In this system, environmentally ‘clean’ projects in developing countries certify the amount of greenhouse gas emissions they reduce and then sell this certified reduction (also known as a ‘credit’ or ‘offset’) to industrialised countries. Global emissions reductions are achieved, while developing countries earn money for environmentally clean actions such as developing renewable energy resources or adopting sustainable land management practices.
The carbon credit is a market instrument that can be bought and sold like any other. The market for primary (project-based) CDM carbon credits has grown to nearly $7 billion globally, and represents a major vehicle for developing countries seeking to finance the shift to a low-carbon economic trajectory.
Emerging in parallel to the CDM ‘compliance’ market has been a voluntary carbon offset market. Buyers in the voluntary market are from both developed and developing countries and can be organizations, governments, individuals, companies, and any other entity. In this arena the purchase of credits is not to ensure compliance with a regulatory obligation, but is driven largely by corporate social responsibility and branding initiatives (such as marketing a company as ‘carbon neutral’) or by individual purchases of credits to offset personal behaviour (such as air travel).
The quality of voluntary emission reductions is an important issue. In response to early concerns about the lack of independent verification of voluntary offset projects (such as what exists for the CDM UN-based verification process), project developers have now embraced a range of tools and methodological standards to prove the legitimacy of their credits. These include the Voluntary Carbon Standard (VCS), Chicago Climate Exchange (CCX), CarbonFix, Plan Vivo, VER+ and Gold Standard, as well as some developed with emphasis on community and biodiversity co-benefits, such as the Climate, Community & Biodiversity Standard (CCBS).
These voluntary certification methodologies are important for Africa in several key respects. Foremost, they include methods for certifying emissions reductions within the agriculture, forestry and other land use (AFOLU) sectors, which are of most relevance to the African setting but for the most part have been excluded from the CDM. Furthermore, some of these methodologies are seen as testing grounds for potential future compliance methods – a sort of parallel track that enables participation in markets without having to wait for a lengthy UN approval process.
The voluntary markets have seen enormous growth in the past several years, doubling from 2007 to 2008 when they reached over $700 million (New Energy Finance). Although 2009 saw a slowdown from the global financial crisis, demand for voluntary credits is on the rise again.
Unfortunately, Africa has seen but a sliver of these revenues. Africa’s participation in the carbon markets sits at a mere 2% of worldwide CDM project activity and only 1% of voluntary carbon market activity – a huge shortfall considering the potential benefits of carbon offset revenue for sustainable development on the continent.
The World Bank, in its 2009 annual report State and Trends of the Carbon Market, emphasized the huge potential for carbon finance to contribute to development of critically important agricultural and energy infrastructure in Africa. Agricultural and land-use based emissions constitute a major percentage of overall African mitigation (and thereby credit-worthy) opportunities – and that’s even before considering the substantial effects of sustainable land management on food security, climate change adaptation and economic development. And funding for Africa’s energy infrastructure needs faces an annual gap of approximately $30 billion; clearly a sustainable clean technology financing stream such as a thriving carbon market could reap massive economy-wide benefits.
The process to generate carbon credits involves a number of stakeholders and can be long, complicated and expensive. While voluntary methodologies are typically less stringent than compliance methodologies, the process is nevertheless complex for both. Each project must generate emission reductions that can be monitored, verified and registered. As carbon credits are in effect virtual commodities, strict processes and standards must be adhered to in order to ensure market confidence that credits are legitimate. ACCE, in collaboration with its partners, can assist potential project owners with tailored assistance to develop carbon credits.