Africa has a fundamental interest in the global reduction of carbon emission. But it also has a practical interest in the development of renewable energy, as its demand for energy already outstrips its generation capacity. Rachel Keeler looks at some of the issues that have hindered the development of carbon credit deals in Kenya.
Loss and Potential for Africa
The UN climate change summit in Copenhagen scheduled for Decemeber 2009 was to finalise a new global treaty outlining how to take the drastic measures scientists say are necessary by 2020 to avoid catastrophic changes in the earth's weather patterns. The treaty would enact new carbon emission reduction targets and replace the Kyoto Protocol that expires in 2012. But the run up to COP-15 has not been encouraging: The Obama administration announced in September that American cap-and-trade legislation may be postponed to 2010, and the UN climate chief has confirmed that hope for a final deal by December is now lost. In the meantime, China – now the world’s largest greenhouse gas producer – grew increasingly bellicose over the summer in its demands to be compensated to the tune of several hundred billion dollars a year for any climate change mitigation it agrees to, while growing also rather fuzzy about how important it believes reducing global warming by 2020 really is.
This is all of great concern to Africa, as the world region officially most affected by environmental fallout from climate change. Kenya has already been hit hard: severe drought has pushed 3.5m people here to the brink of starvation and forced power rationing by drying up the country’s hydroelectric dams. Many of Africa’s agrarian economies are also suffering from desertification, deforestation, erratic rainfall, flooding and parched rivers and lakes. Africa thus has a fundamental interest in the global reduction of carbon emission. But it also has a practical interest in the development of renewable energy – the continent’s growing economies need power, desperately.
Many in the global south, namely China, argue that developing countries who took no part in causing climate change should not be expected to clean up the mess by running their industrialisation programs on expensive green energy. South Africa followed China’s lead last week by declaring that it would not sign any emission reduction targets for itself that might hinder its economic development (South Africa runs its economy largely off coal, making it one of the world’s top 17 polluters). This argument will remain at the heart of Copenhagen negotiations as parties struggle to establish the framework for a treaty that will cap rich country emissions enough to avert disaster, and provide a fair amount of aid to poor countries as they adapt to climate change, while convincing some to move beyond adaptation to mitigation.
Carbon Trading
One favourite method to facilitate this process is the global carbon trading market. It is of growing importance to African countries. Africa faces a future in which it must attempt to catch up on development without using many dirty technologies of the past. Renewables will be an eventual necessity; but they’re still too expensive right now. To address this, the Kyoto Protocol introduced the Clean Development Mechanism (CDM) to offset the costs of developing clean energy in emerging markets. The CDM allows developers to quantify and sell certified carbon emission reductions (CERs, or carbon credits) achieved by their renewable projects in emerging markets to rich countries that cannot meet their legal reduction targets. Unfortunately, very few CDM projects have been developed in Africa. Ironically, the large majority of registered projects are in China (34%), and India (26%). Sub-Saharan Africa claims only 1%, or 20 projects total, 15 of which are in South Africa.
Proponents of renewable energy development in Africa say this will change over the next decade, starting with a post-Kyoto deal that will hopefully come along with a new American cap-and-trade market and more stringent emissions targets for developed states. Without either of these pressures, carbon trading markets have remained unpredictable and underdeveloped. Many financers have been reluctant to structure new deals before 2012, especially in riskier African economies. In December 2008, the UN Framework Convention on Climate Change (UNFCCC) met to determine how to encourage more CDM projects in underrepresented regions, principally Africa. As part of this effort, after 2012 large emerging markets like China, India and Brazil may be transferred to a separate market scheme. And along with discussions to include technology transfer in the new climate change treaty, renewable energy technology is becoming cheaper and more widely available, which should further encourage developers to explore untapped African markets - also rich in renewable resources like wind, solar, biomass and hydropower - for CDM projects.
A small number of developers have already invested in clean energy in Africa; it’s hoped that success in these early projects will clear the way for more to follow. A financing and project development framework is nearly complete for the Lake Turkana Wind Power project in Kenya that will increase Kenya’s power capacity by about 25% once finished. JP Morgan also runs a Climate Care office in Nairobi that sells CERs to individuals and businesses. The office helps develop small carbon offset projects in Africa, but is not placed to finance large-scale endeavors.
Persistent Challenges
Tom Owino, vice president of the Nairobi Climate Care office, says financing and scale have both presented major constraints. The CDM was originally envisioned as a tool to leverage financing up front for renewable projects based on carbon asset values that would be developed down the line. This proved too risky for many investors, and projects continue to face problems securing cash for development. Owino says he has no shortage of demand from western businesses looking for gold standard CERs (those that meet additional sustainable development requirements) in Africa, but a major dearth of viable projects coming on stream. African markets are also small and fragmented, while CDM accreditation is very bureaucratic and creates even higher transaction costs for renewable projects that already face high costs of capital, expensive transmission infrastructure and risks of failure. Most African states lack domestic legislation to govern the trade, and, more importantly, the expertise to structure the deals.
But East Africa in particular has begun attracting more experts in the field. Kenyan Prime Minister Raila Odinga appointed a national taskforce in July to mobilize technical and financial resources for green energy projects. Consultancies have begun popping up like Carbon Africa Ltd, which developed the carbon asset portion of the Turkana wind project. Carbon Africa’s director, Adriaan Tas, says carbon credits retain the potential to increase project income and leverage financing in Africa. In the case of Turkana,carbon credits have been discussed during the Power Purchase Agreement (PPA) negotiations and played a role in negotiating the final tariff.
Prospects
In theory, carbon credits can offer this and other kinds of leverage by increasing the internal rate of return for a project from an average of 10 to 12%, and leverage additional project financing through providing collateral to access debt and improve debt service options. In Africa, governments can play an important role by decreasing uncertainty in this area through PPAs. Access to underlying finance for projects will remain a concern. But a more predictable rise in the global price of carbon credits could also help pique investor interest.
Carbon credit prices are determined in part by project development and delivery risks, which is why investors do not like paying well for carbon credits up front before a project has shown it can succeed. Continued fluctuation of political risk across Africa does not help this situation. Furthermore, the global crisis has reduced global emissions and therefore demand for CERs, while discussion of introducing reforestation schemes to carbon markets could greatly increase supply and drive prices down. This would, in principle, be good news for Africa, which harbours piles of potential in the agroforestry, reforestation and carbon trapping sectors – the World Bank announced this week that Africa could earn annual revenues of almost USD1.5bn through agricultural carbon sequestration.
However, as America enters the market and developed nations greatly increase their reduction targets, higher demand linked to a new climate treaty that introduces policy stability will most likely offset these factors. In 2008 the average carbon credit price was EUR11.46. Analysts predict that figure will round out around EUR15-30 after 2012.
Perspectives
Africa is clearly aware of the importance of renewable energy development and the opportunities for the continent from carbon trading profit. For the first time ever, the African Union has taken a joint position on climate change leading into the COP-15 negotiations. The position requests a reduction in greenhouse gas emissions in rich nations by 40% below 1990 levels by 2020, and 80% by 2050, along with a climate change adaptation fund of USD67bn annually to be delivered by 2020. Some say the move, which separates AU negotiators from the Group of 77 emerging economies (that includes oil goliaths like Saudi Arabia and mass polluters China and India) has elicited favor from the west.
Still, current US targets remain at a paltry 17% reduction from 2005 levels by 2020 (3.5% from 1990), and the AU demands will likely not be reached. But continued commitment to CDM development in Africa is a positive step. A recent World Bank study identified technical potential for 3200 CDM projects in sub-Saharan Africa. Estimates of the global carbon market, valued at USD126bn in 2008, predict a USD3trn trade by 2020.
One area ripe for development in East Africa is cogeneration of energy from biomass waste. Mumias Sugar Company in Kenya is the first to qualify for carbon credits from its conversion of bagasse – the byproduct of sugarcane processing – into electricity. The company lists its 10-year agreement (2009-2019) with the Japanese Carbon Finance Company Ltd under the “Why Invest in Us” section of its website.
Carbon Africa’s Adriaan Tas comments: “Personally I think we are facing an interesting window of opportunity. Especially in Kenya, the interest in renewable energy has picked up a lot… Financers seem to be more keen to invest in projects in Africa and also carbon finance opportunities are on the rise in the region.” However, the costs and constraints may remain underestimated here. Tas adds: “Because of the Turkana project, many people have caught an interest in wind power but they underestimate the cost and complication of developing a project.”
|
Subscribe to this comment's feed
Show/Hide comment form
