This year during the most anticipated event for earth and sustainability mindfuls, we hope to achieve global coordination in managing climate change. Even as COP 27 is fast approaching, we are honoured to have a brief open reflection with you Ria-ders with regards to Carbon Offsetting. The open reflections entails:
- What is Carbon Offset
- Carbon Offset Market
- Challenges in accessing the carbon offset market
Just as the name suggests, carbon offset implies a reduction of green house emissions or increasing carbon storage through several means such as land restoration, tree planting exercises etc. This is done in order to compensate for the emissions that occur in other places, hence the term “offset”.
Carbon Offset Market
Today, carbon offset or carbon offset credit if you like is becoming a financial instrument. Before it does, it first need to be certified by financial bodies for it to be recognised. Once that is done, it can go to certain markets where it is given a value because that credit represents an emission reduction of 1 metric tone of CO2. If you purchase 100 credits, that implies an equivalent of 100 metric tonnes of CO2 that you are offsetting. A purchaser of the credit, of which in most cases is a company can claim that they are having on the line reduction towards their own Green House Gas goal.
Surely you can see the potential and the challenges. The carbon offset market is currently growing and is currently valued at about $260 billion a year. One of the main contributors to the growth of this market is the stringent regulations being enacted every day given the dire need to accelerate the fight against climate change.
It is just the other day that the secretary of the United Nations, Antonio Guterres pointed out through a report release that the world is going on the wrong direction in terms of emissions reduction. This implies more pressure for people to act. Are we really going to now go towards the right direction? To be honest, it is still uncertain. However, this is certainly going to have an impact on the two carbon market types: the voluntary market and Compliance market.
What is interesting is that an article from the Financial Times dating 3 years back to 2019 outlined that the most the most popular type of voluntary offset is renewable energy followed by forestry and land use for carbon storage. Looking at the value in terms of millions per tonnes of CO2, forestry at the moment has the biggest financial allocation. This may be attributed to the ease of planting trees as opposed to that of starting a green project, collecting permits etc.
In terms of locations for the voluntary offset market, the USA, China, India are three top countries. That is where the $260 billion seems to be going. Roughly about 22% went to the United States, almost 20% to India, and 13% to China. Remember we are talking about $260 billion. This means that for the United States market, we are talking about more than $50 billion a year.
What is clear is that emerging markets are clearly being left out. For example, Africa. The continent needs more than $100 billion a year to really develop if you consider generation and the transmission part as much as we say $30 billion. So, how are we going to generate this money? It is already clear that the current method of generation is not adequate hence we need to re-strategize. That is where the carbon offsetting firms come in. This firms are looking for projects or places that they can engage and deploy the capital. They are looking for places to trade the carbon for the money.
Why is it difficult for Africa to tap into the Carbon Offset Market?
The potential for the African market in this sector is huge but people do not know enough about this market. You could see that from the locations where the projects are going as mentioned earlier. Another challenge is that the players in this market have selection criteria that needs to be met. They need to have sizeable projects. We do not have the minimum size required per the current market requirement. That means that we need aggregators who can bring these projects together first into one sizeable one that meets the current criteria. Another challenge maybe that the aggregator needs vast knowledge about how the processes and procedures work in order to get certified. We clearly need this in Africa which turns out to be something not easy. Lastly, in our assessment, the rules are clearly not fit for purpose for some regions. They have been designed to embrace certain markets. Some regions may not have the level of sophistication needed but they still possess huge potential.
As we move forward, companies will have to face heavy penalties for not taking sufficient measures to lower their carbon emission. One of the criticisms of carbon offset is that it doesn’t really incentivise firms to prioritise on reducing their carbon emissions. They are simply piggy bagging on someone else to construct those projects and for them, they keep on polluting as they have been doing. It then begs the question whether a firm is going to be building or enabling a project fast enough to offset its current consumption? This may not be sustainable.
At Renewables in Africa, we are strong believers of taking action. We also know that we have to be practical and would love for people to be responsible enough to increase their effort in order to reduce the level of greenhouse gas emissions.