The 165 countries that a decade ago ratified the Kyoto Protocol, an anti-global warming initiative to which the U.S., sadly, is not a signator, are meeting this week in Nairobi to discuss how to further reduce carbon dioxide emissions. The Center for American Progress believes one key way to do that is through the development of carbon emissions trading markets in the world’s poorest countries.
In September, the Center launched an initiative to help Africa’s least developed countries build the infrastructure necessary for these nations to combat global warming and fight poverty. The reason: These countries need to swiftly join this promising new global carbon emissions trading market place, which was given a massive boost in February last year when the mandates under the Kyoto Protocol came into effect.
This new trading system is increasing capital flows to the developing world for clean energy and climate change-related activities. In less than two years, this new financial market place has demonstrated there is profit to be made in trading carbon emission credits. This market grew to nearly $22 billion in the first nine months of 2006—more than double the value recorded in 2005, according to the World Bank’s October market update.
That’s why the Center partnered up with greenhouse gas emissions asset manager Natsource LLC and the law firm Alston & Bird LLP to create a model to boost trading of these new financial instruments in the world’s poorest countries, which today are missing out on these new markets. The roadmap we and our partners plan to develop for carbon management in Africa will include an assessment of the legal, policy, and infrastructure mechanisms needed to reduce market barriers for trading these instruments in these countries. For Africa’s poorest nations, joining this market place couldn’t be more timely.
Climate Change in Africa
Even though Africa produces little more than three percent of global greenhouse gas emissions, the continent will be the most severely effected by global warming. A UN report released earlier this week confirms the findings of numerous studies before it, forecasting that the continent will suffer extreme environmental upheavals as a result of rising temperatures, rising sea levels, and variations in precipitation. Here’s a snapshot:
- An estimated 30 percent of Africa’s coastal infrastructure will be lost to rising seas by 2080.
- As much as 40 percent of species’ habitats may be altogether destroyed.
- Arable land, 65 percent of which is already wrecked by degradation and drought, is expected to further decline, worsening already serious food shortages and intensifying hunger and malnutrition.
- In sub-Saharan Africa, where 70 percent of the people are farmers, crop yields are expected to fall by 20 percent.
- Rainfall is predicted to decline by 10 percent by 2050. By 2025, 480 million people in Africa could be living in water-stressed areas.
Between 260 million and 320 million additional people worldwide are likely to find themselves living in malaria-infested areas by 2080. Because drought encourages the spread of diseases such as malaria and dengue fever, and floods encourage the spread of water-borne infections, the range of effects of climate change will have broad consequences for public health, especially in regions already prone to these diseases.
In light of these projections, it is exciting that topping the UN’s agenda in Nairobi is the issue of climate vulnerability and the need to provide additional support to poor countries to help them adapt to these mounting environmental pressures. The estimated $60 billion to $90 billion per year needed to meet these challenges, however, leaves much to be done. And that’s where carbon emissions trading markets could make a difference.
The Kyoto Protocol: Putting a Price Tag on Pollution
The 1997 Kyoto Protocol serves as the international framework for managing climate change. Through the Protocol, industrialized countries such as the U.K., the European Union, Russia, and Japan have agreed to mandated cutbacks in emissions. As a way to meet these targets, they can trade emission reduction credits on international markets. If an energy utilities company in a participating country, for example, makes reductions below its baseline, it can sell that surplus as carbon credits to a buyer that may have failed to meet its goal.
The program, called a “cap-and-trade” model, seeks to stabilize atmospheric concentrations of greenhouse gases without stunting economic growth by encouraging energy efficiency and emissions reductions through the carbon credit market. The agreement which came into effect in February 2005 has spurred this new market, which is expanding rapidly as world leaders become increasingly aware of the detrimental impact of climate change and the need for emissions regulations. Experts predict billions of dollars worth of daily trading in carbon emission credits in the coming years as this market matures. Environmental policy has never looked so exciting to the business community.
Market Access for the Developing World
A principal market facility for trading these carbon emissions credits is the Clean Development Mechanism. As part of the UN framework, the CDM was set up to bridge the wide disparity in environmental regulation and policy between developed and developing countries. It permits countries that have committed to reducing their emissions to meet those targets by investing in projects that generate emissions reductions and offsets them in developing countries.
The CDM is designed to achieve two key objectives: reduce and offset greenhouse gas emissions in developing countries to promote the overall objectives of the Kyoto Protocol, and encourage the transfer of clean energy technology and increased capital flows to the developing world for sustainable development. Utilization of the CDM, however, has so far been largely limited to the major emerging economies, especially industry-heavy China, India, Brazil, and Mexico, where cost-effective reductions are abundant. These four countries alone are responsible for 77 percent of total certified emissions reductions generated from CDMs.
Here’s a specific case of how it worked for China. In August this year the CDM closed the largest emissions deal to date, a billion-dollar transaction that involved the installation of a relatively simple and inexpensive piece of technology to refrigerant manufacturing plants in southeast China. The technology incinerates a gaseous waste product thousands of times more harmful to the global climate than carbon dioxide, preventing it from being released into the atmosphere—earning hundreds of millions of carbon emissions credits in the process.
With the world poised to triple its energy consumption by 2050 as China and other rapidly industrializing countries increase economic output, it is highly encouraging that we are seeing some advances in pollution control, efficiency standards, and the generation of clean energy in these rapidly industrializing parts of the world. Yet the marketplace fostered by the CDM has failed to bring any dividend for the world’s poorest countries. Among the 40 poorest countries that have ratified the treaty, only four had confirmed CDM projects as of October this year.
What’s worse, sub-Saharan Africa accounts for only one percent of projects and 0.2 percent of total registered credits through 2012. The upshot: the countries most threatened by climate change are left on the sidelines of what could become an important stream of revenue dedicated to meeting the challenges of global warming.
As global warming grows and strengthens, so is the gap in market-based financing of environmentally sound projects in the least developed countries. The CDM marketplace stands to make a vital contribution precisely because the sorts of emissions reductions projects that are possible in sub-Saharan Africa—where the level of industry and manufacturing is limited—tend to promise a greater sustainable development benefit in sectors that will be hit hard by climate change. Land degradation, for example, is a primary source of greenhouse gas emissions in Africa. Reforestation and afforestation projects, which take carbon out of the atmosphere and hold it in the soil, improve the region’s ability to combat drought and desertification.
With CDM trades projected to meet 20 percent to 30 percent of the demand for Kyoto-compliant credits by 2012, worth as much as $15 billion annually by 2012, the least developed countries that take steps now to build up internal infrastructure and mitigate investment risks stand to gain readily. They could harness this new flow of capital and gain valuable opportunities for technical assistance and investments in low-carbon energy production and their energy infrastructures. But they have to get in on the ground floor to ensure a strong position and send the right signals to investors.
Making Carbon Finance Work for Sustainable Development
For these countries, barriers to entering the carbon emissions market have been three-fold. First, there is a basic lack of potential for inexpensive, “end of pipe” reductions, such as one-time technological interventions that can significantly clean up industrial by-products. Second, host countries lack the capacity to assemble portfolios and attract investors. And third, the above-average risk of investing in unstable political, legal, and economic conditions has dissuaded investors.
But there is an opening for change, in part because of innovative financing vehicles at the World Bank and other risk-reduction instruments, such as the recently announced CDM risk-mitigation insurance established by global reinsurance giant Swiss Re. Additionally, as investment opportunities in major emerging economies are tapped, investors are increasingly looking to new markets.
Still, more resources and support are required to put developing countries on the right track. This is what delegates are discussing at the UN Conference in Nairobi this week. And this is what the new initiative by Center for American Progress, Natsource, and Alston & Bird is all about. Our new initiative seeks to mitigate CDM risk factors and reintegrate a sustainable development imperative into the Clean Development Mechanism.
Drawing on its substantial understanding of the challenges to sustainable development in least developed countries, in addition to its longstanding connections in Africa, the Center possesses the experience, contacts, and resources necessary to drive this effort.
Partnering organization Natsource brings to the commitment extensive experience as a leading global provider of asset management, transaction, and advisory and research services in emissions and renewable energy markets. Partnering law firm Alston & Bird brings to the commitment transactional, technology, and policy expertise in the renewable-energy sector, particularly CDM projects, and will provide strategic counsel to participants.
Our team will work directly with governments that are trying to enter the international carbon markets. Working first with the Government of Ethiopia, the Center will create a model for capacity building, including enhanced planning, business outreach, and institutional structures. Once developed, this model can then be applied in countries throughout the developing world. In the course of developing this pilot project, the Center and partners will:
- Facilitate Ethiopia’’s entry into the global carbon emissions trading market.
- Correct the balance between the dual functions of the CDM in order to link Ethiopia’s planned expansion in renewable energy production to the CDM carbon emissions trading system.
- Identify the steps, instruments, verification, and other procedures that can remove obstacles to market access for the world’s poorest countries.
- Share those findings with other developing countries’ governments.
Phase Two of the program will entail replicating the program in other least developed countries. Helping all of Africa enter the carbon emissions trading marketplace offers the world a tremendous opportunity to combat global warming, fight poverty, and boost investment in clean technologies as this region of the world inevitably embarks on rapid industrialization similar to the developments in Asia and Latin America over the past few decades.
Helping global investors profit from these efforts is the catalyst. The Center and its partners are looking forward to taking these issues head on, working together with Ethiopia and other African countries in the coming years.
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