High profile events this year will foreground Africa’s role in the struggle against climate change. Global leaders will come together this November at the UN Climate Change Conference COP27 in Egypt, while preliminary ministerial and scientific meetings are being held in the Democratic Republic of Congo (DRC) at pre-COP27 across September and October. In the first days of September, Africa Climate Week 2022 in Gabon also set the stage for discussions ahead.

Across these events, leaders from African countries will continue to make the case that a just transition requires proper attention to the development trajectory of the continent. Critical to this conversation will be the role of climate finance in supporting new economies and revenue streams through sustainable activities, such as protecting and restoring forest cover, and developing green energy sources.

There are substantial regulatory and governance challenges around carbon credits for investors and buyers to navigate, both at the level of the market and in host countries. The latter are particularly acute in many African countries, where oversight and enabling institutions lack capacity, and are prone to mismanagement and corruption. Sound due diligence, robust risk assessment, and careful stakeholder management are critical to mitigating these risks.

Africa’s challenge: integrating development with energy transition

Africa has a complex role to play in the just transition. The continent contributes the smallest share of global greenhouse gas emissions – only between 2 and 4 percent – among other regions. And yet, as elsewhere across the global south, African countries will suffer many of the worst consequences of climate change. At the same time, efforts to curb emissions by reducing fossil fuel extraction and carbon intensive activities – from industrial production to transport and mining – hit growing economies in Africa hard.

Many African leaders have so far nodded politely at climate change conferences. But several are stepping up to speak out. Nigeria’s outgoing Vice President Yemi Osinbajo has condemned the “double standards” of wealthier countries on climate change. This would ring true for citizens, business owners, and officials across the continent. Similar messages will be prominent in the coming months, particularly as western countries scramble to respond to the current energy shock by doubling down on fossil fuels as a source of power.

Financing and forests

The message from Africa is not, however, one of recalcitrance and retrenchment. Instead, the aim is to clarify that a just transition must consider development needs, and that substantial assistance is needed to ensure that Africans can continue to improve their living standards while transitioning away from fossil fuels. Vice President Osinbajo himself has been clear on the financial assistance that Nigeria will need to transition: USD 10 billion in the short term, and USD 410 billion over the coming decades. His substantial efforts have also successfully secured the first of those pledges from international partners.

Africa’s untouched natural landscapes will likewise be at the forefront of these conversations. The centre of the continent contains the lungs of humanity: forests and peat bogs which trap billions of cubic meters of carbon. Yet their protection requires substantial financing. African governments are requesting this money not to restrict their own citizens from accessing their own lands, but to establish an alternative foundation for economic growth. In the words of President Félix-Antoine Tshisekedi of the DRC at the UN General Assembly, “It is about the DRC attaining its economic and social objectives through preserving its forests and remaining a country of solutions for the struggle against climate change.”

But where would such money come from? Western governments have so far been far less forthcoming in direct support for forest governance and environment-focused funding than African leaders feel is commensurate to the critical carbon stores they possess.

The carbon finance opportunity

Carbon markets present a major potential pool of finance and a means of verifying offsets and diversifying risk. As such, carbon credits will play a vital role in filling the financing gap. Companies across the globe are obliged to keep emissions below mandated levels, and increasingly large numbers have voluntary committed to ambitious reduction targets. Where emissions cannot be cut, companies instead purchase credits tied to carbon emissions avoided, passively removed, or actively captured. The total market is estimated to be worth well over USD 200 billion, with some estimates forecasting growth up to USD 1 trillion. Within this, the voluntary segment of the market – to facilitate non-mandatory pledges by private companies – is worth around USD 2 billion and is expected to grow to over USD 50 billion by 2030.

Africa is ripe with opportunities for projects funded by carbon credits and is already host to a wide range. Mangrove protection projects are proliferating in Ivory Coast, Mozambique, and Kenya. Kenya is also host to carbon credit-funded tree planting programmes and wildlife sanctuaries. Reforestation is a major priority in Nigeria, which is increasingly drawing carbon-related finance. Reforestation and forestry protection across the Congo Basin – including Gabon, Congo Brazzaville, and the DRC – are a key focus of attention. Carbon credit investors sparked great excitement in the market earlier this year when they announced their intention to participate in a licensing round to purchase oil blocks in the DRC which overlap protected areas and carbon-rich peatlands.

African governments are waking up to the opportunity. Gabon – driven by environment minister Lee White – is beating a path towards becoming the region’s ‘green superpower’ and is highly supportive of forestry projects. It even has its own space programme, with a focus on forest monitoring.

Governments are increasingly considering their carbon stocks as their natural capital, to be measured as attentively as they would mineral or hydrocarbon reserves. Yet sound data – on which the value of credits is heavily reliant – is typically lacking in African countries. In response, technology firms such as natcap research are beginning to provide governments with detailed and accurate measurements to verify results and commoditise these assets.

International bodies and partner countries are also heavily invested. The Central African Forestry Initiative (CAFI), which brings together donors, host countries and implementers, is highly active. For example, through CAFI, Norway is financing forestry protection in Gabon. Norway paid USD 17 million in 2021, as part of a 2019 deal that may be worth up to USD 150 million. Norway also reached a similar deal with Liberia in 2014. Meanwhile, over a third of the funding mobilised by the UN’s Green Climate Fund – one of the largest climate finance bodies – is deployed in Africa-based projects.

Working through regulation and risk

Regulatory and governance challenges remain at all levels, however, from market structure to methods of accreditation and trade, to practical implementation and oversight of projects within host countries. Even the diversity of market participants – including energy companies, international bodies, governments, crypto start-ups, and institutional investors – can be dizzying.

Nonetheless project companies, investors, and offsetting buyers can engage with confidence in this burgeoning market, if equipped with careful risk assessments, adept handling of local conditions, and sound government engagement.

Investors often find it challenging to navigate the market itself. The mandatory compliance market is well-established with substantial institutional regulation, though still contains a plethora of rules and schemes. The voluntary carbon market is often viewed as even more opaque, but is fast maturing, and structural issues at the market level are increasingly being ironed out. Multiple industry initiatives – such as the Voluntary Carbon Markets Integrity Initiative, and the Integrity Council for the Voluntary Carbon Market – are injecting much-needed standards. Innovative companies – such as Sylvera – provide independent quality assessments of carbon credits, whole others – such as the AirCarbon Exchange and Flowcarbon – are looking to boost market liquidity and facilitate frictionless trade.

Regulation and governance within host countries of carbon credit-funded projects are also critical, not only for the ethical credentials, but for the value of the credits themselves. Proper social licence is a requirement of many certifications, and its absence can also end projects prematurely. Land rights are critical to the durability of projects. Credits based on carbon emission avoidance also raises the question of who judges alternate futures, and therefore the volumes of carbon emissions avoided.

These aspects present a particular set of risks in African countries. National institutions handling everything from project governance to land rights often lack capacity. Corruption and mismanagement – as across all sectors in many African countries – remains a risk. Senior officials of Nigeria’s government agency in charge of REDD+ have been accused of embezzling up to NGN 6.5 billion (USD 14.8 million). Land titles are often overlapping and open to arbitrary seizure. In March, authorities in the DRC found dozens of logging concessions to have been allocated illegally, and a third of these were subsequently cancelled. Government engagement can also be hurdles to project companies. For example, US firm dClimate is looking to establish a system for carbon credit registration in the DRC, though reportedly hit barriers earlier this year in their negotiations with the Congolese authorities, seemingly when decision-making was moved from the environment ministry to the presidency.

Projects themselves are also prone to issues. Major concerns are common around whether adequate free, prior, and informed consent was sought from host communities. Others have planted non-native species, or otherwise harmed biodiversity. And management teams across a variety of projects have been accused of embezzlement, abuse of position, and corruption.

These risks are navigable. Comprehensive risk assessment and due diligence of target projects, based on detailed in-country enquiries, is a crucial step for investors and buyers. Project companies can manage risk by ensuring a sound understanding of the local market conditions and stakeholder landscape.