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Trading Carbon : December - January 2011
With this year's high-level climate negotiations being held in the South African city of Durban, the spotlight will be shining brightly on the role the carbon market can play in the world's poorest continent. So far, the Clean Development Mechanism (CDM), the primary flexibility mechanism designed to cut emissions in developing countries under the 1997 Kyoto Protocol, has had a limited impact on Africa. But, with a raft of policy changes coming into force in the third phase (2013--2020) of Europe's emissions trading scheme (ETS) -- the main market for Certified Emission Reductions (CERs -- CDM credits) -- there are growing hopes that projects in the continent could boom. As of late November, 74 projects, or just 2 percent of the 3,581 schemes registered by the UN, were located in Africa (see figure 1). Of these projects, just 17 were located in African countries that come under the Least Developed Country (LDC) umbrella of the world's poorest countries. "There has been a perfect storm of negative factors in the past, with CDM projects taking so long to come to fr uition and a lack of real understanding about how it all works," said Bill Farmer, founder of project developer the Uganda Carbon Bureau (UCB), on the slow progress of CDM in Africa. "A lot of the UN documents are extremely wordy and in the past some (Africa-based) developers have been overwhelmed and intimidated by the language," he added. The fact that there are fewer opportunities to make large- scale emission reductions in most African countries has also tempered project developers' appetites for investment in the region. With many African countries already relying on renewable generation for their electricity, traditional CDM projects involving wind and hydro generation have not been suitable, said Paul Soffe, associate director at project developer EcoSecurities. "Due to an absence of heavy industry, it is hard to generate emission reductions with classic types of CDM projects. For example, with a green grid adding more hydroelectricity resource generates very few emission reductions," he said. In terms of the volume of CERs, the highest yielding projects in the CDM have been those destroying industrial gases. Just 23 of these projects have accounted for about 65 per cent of the 775 million CERs issued by the UN, so far, with none of them located in Africa. However, changes to the eligibility criteria of these credits mean that compliance buyers will no longer be able to bank on their plentiful supply in the third phase of Europe's ETS. From May 1, 2013, credits generated by HFC 23 or nitrous oxide (N2O) adipic acid projects, will not be eligible for use in the EU ETS. The 27-member state bloc will also dismiss the use of any credits coming from projects registered after 2012 from all but LDCs unless new bilateral deals between the EU and other regions can be reached. Africa plays host to 33 of the 48 countries that currently hold LDC status, a figure that is likely to boost the number of CDM projects in the continent, developers said. "Once the CDM focus switches to LDC's then there will have to be concerted efforts to address how to make the CDM work more effectively in these countries," Soffe noted. 13 COVER STORY Figures on the early stage pipeline of CDM projects also back up this suggestion, with the number of schemes located in Africa for pre-registration rising to 8 per cent from the 2 percent of registered projects (see figure 2). The advent of programmatic CDM (PoAs), which groups several small emission reductions initiatives together, has been one initiative that has made getting projects off the ground in Africa more viable, according to Geoff Sinclair head of carbon finance and trading at Standard Bank. "PoAs are specifically appropriate for Africa because of the nature of the projects. They are usually smaller initiatives, where registering them under the regular CDM would be too difficult," he said. Standard Bank has been involved in several programmatic schemes in Africa. Late last year, it agreed to buy up to 700,000 CERs from a project distributing energy efficient lightbulbs in Tanzania. It also joined forces with carbon trading platform CarbonSoft to distribute solar lamps under programmatic CDM projects to several regions, including countries in South, East and West Africa. The bank has also agreed to buy up to 2 million CERs from a project pioneering the use of solar water heaters in rural communities in South Africa, which is not an LDC. Farmer's UBC has also used the programmatic model to get its Africa-based cleaner fuel cookstove projects off the ground. "When PoAs became viable it was a real watershed moment for us, and was exactly what Africa needed to get engaged with the CDM," he said. Programmatic projects are designed to be ramped up, with more similar emission reductions, termed CPAs, added to the schemes over time. However, the handful registered by the UN, so far, are only expected to generate small numbers of CERs. Some observers argue that the real potential for large- scale emission reductions in Africa lie in the as yet untapped forestry sector. REUTERS/ERIC THAYER Africa Asia South America Other 2% 1% 82% 16% Figure 1. Registered CDM projects by region PoAs are specifically appropriate for Africa because of the nature of the projects Geoff Sinclair, Standard Bank Dec 2011/Jan 2012 SOURCE: THOMSON REUTERS POINT CARBON