Simply put, Carbon markets are trading systems in which countries, companies, or other entities can buy or sell units of greenhouse-gas emissions (emission reductions) to meet international and national climate targets. These units, often referred to as carbon credits or allowances, are used for several reasons, such as compensating for a company’s residual emissions, or towards a countries NDC.
Carbon markets are generally made up of the Compliance Market and the Voluntary Carbon market (VCM). The VCM - Individuals and companies voluntarily choose to purchase carbon credits that finance projects which avoid or sequester emissions, e.g. nature-based solutions, clean cookstoves, or renewable energies. Compliance market - Government regulations require certain industries to limit their carbon emissions through financial incentives – these can take the form of a tax or an emissions trading system (ETS e.g. the EU ETS), whereby companies can trade emissions credits to comply with these regulations. The third type to consider is International trading of carbon credits through Article 6 - Nations sign bilateral agreements under Article 6 of the Paris Climate Agreement to trade carbon credits (called ITMOs ), where the acquiring country can use the credits towards their climate targets (NDCs).
Carbon markets are crucial in the fight against climate change as they provide economic incentives for reducing emissions. By putting a price on carbon, these markets encourage individuals, businesses, and governments to invest in cleaner technologies and practices. Furthermore, carbon markets can unlock new avenues for green growth, thus helping Africa tap into investments in renewable energy, sustainable agriculture, restoration and conservation, in doing so, creating green jobs and combating energy poverty. Beyond these opportunities, carbon credits also present a scalable option for effective climate finance in Africa that will materially aid decarbonisation on the continent, a crucial task in this decade. They also mitigate the continent’s risk of ‘carbon lock-in,’ (high-emissions energy infrastructure built today that causes society to remain dependent on fossil fuels into the future).
With voluntary carbon credits valued at roughly $2 billion globally and potentially growing 5-50x by 2030, high-integrity carbon markets could provide significant benefits to African people and be a critical source of climate finance for the continent. However, although Africa possesses immense potential for nature-based solutions, it holds only a circa 2% of this potential transformed into carbon credits and African carbon markets still comprise only about 16% of the global credits market.
ACMI’s 2022 Roadmap Report highlighted that Africa has the potential to scale its carbon credit market 19-fold by 2030, supporting up to $6 billion of revenue and 30 million jobs. This will require all actors in African carbon markets to play a more prominent role. More broadly, beyond just Africa, for global carbon markets to unlock 5- to 50-fold growth over the next decade, governments and the private sector will need to: (1) ensure overall credit integrity in the compliance markets, the VCM and international trading schemes, (2) create favourable government regulation, and (3) set increasingly ambitious climate action targets.
Dear colleagues, this is a call for discussion. Please share your thoughts, experience, lessons learned, and related knowledge resources to enrich this discussion and support policy formulation and actions.
Prepared by Daniel James Fisher, under the guidance of Gabriel Labbate from UNEP Climate Change Division