At the 27th United Nations Climate Change Conference of the Parties (COP27) held in Egypt in November 2022, a thirteen-member steering committee of African leaders, CEOs, and carbon credit experts in collaboration with the Global Energy Alliance for People and Planet (GEAPP), Sustainable Energy for All (SEforALL), and the UN Economic Commission for Africa, with the support of the UN Climate Change High Level Champions, inaugurated the African Carbon Markets Initiative (ACMI).
The ACMI was created with the intention of promoting private investment in Africa's energy development and substantially raising Africa's participation in carbon credit markets, where foreign buyers can purchase carbon credits to offset their carbon dioxide (CO2) emissions, thereby funding clean energy projects.
The carbon credit market is a remarkable opportunity to generate billions for the continent's economies' obligations for climate finance whilst enhancing energy access, generating jobs, safeguarding biodiversity, and promoting climate action.
According to ACMI, the continent can produce 300 million carbon credits annually by 2030 by exploiting the predicted rise in carbon trading activity. This level of production would support 30 million jobs and bring in $6 billion in revenue. By 2050, over $120 billion and 110 million jobs would be supported by the annual production of over 1.5 billion carbon credits in Africa.
The Carbon Market
The Kyoto Protocol of 1997 and the Paris Agreement of 2015 are some of the international agreements that outline targets for CO2 emissions. Most nations, with the exception of six, have ratified the charter that has resulted in the creation of national emissions targets and the laws that support them. Due to the implementation of these new requirements, businesses are now under more pressure than ever to find ways to lower their carbon impact.
In a bid to comply with regulations on CO2 emissions, most businesses utilize the carbon market to reduce their carbon footprint as it helps by turning CO2 emissions (i.e., Carbon Credits) into a commodity that can both be purchased and sold.
A carbon credit is a transferable permit that gives its owner the authority to produce one ton of carbon dioxide emissions. When a company buys a carbon credit, usually from the government, they gain permission to generate one ton of CO2 emissions. With carbon credits, carbon revenue flows vertically from companies to regulators, though companies who end up with excess credits can sell them to other companies.
In principle, a company purchasing carbon credits is funding projects that remove carbon dioxide from the atmosphere, therefore offsetting the company's emissions. Many companies are setting net-zero targets, meaning they are offsetting 100% of the carbon they are emitting. An individual can also purchase carbon credits as an investment, selling them later to these companies or other investors for profit.
The African Carbon Market
Policymakers in Africa are beginning to understand that carbon markets provide a significant chance to accelerate sustainable economic growth by increasing climate funding to the region and reducing greenhouse gas emissions.
The purchase of carbon credits by businesses to help them achieve their climate commitments has nearly doubled globally in the last five years. Although it is starting from a low base and the continent is currently producing a small percentage of its potential, the demand for African carbon credits is on the rise.
Meanwhile, a number of factors pose significant growth barriers for Africa's promising carbon credit market. These include the lack of project developers who can work at scale, complex regulatory environment, subpar methods for pricing and certifying carbon credits, integrity concerns, and other issues. ACMI was established to address some of these issues and develop an initial roadmap for the entire carbon market ecosystem. The ACMI is also aimed at supporting African governments in creating carbon market country plans.
Africa can leverage Colombia's Voluntary Carbon Market Platform, which was established by the Colombian government in 2016 as part of its efforts to achieve the nation's climate ambitions. The country's efforts paid off because the market for carbon credits in the nation increased by more than four times between 2016 and 2019 to reach $20 million.
Regulations Impacting Carbon Credit in Nigeria
Carbon credit in Nigeria is directly impacted by the United Nations Framework Convention on Climate Change, the Kyoto Protocol, and the Paris Agreement. The central goal of these agreements is to ensure the stabilization of carbon concentrations in the atmosphere.
The Climate Change Act, 2021 establishes a legal framework for Nigeria to develop climate change mitigation and adaptation strategies that are integrated with other relevant policies and promote inclusive green growth and sustainable economic development. It also sets a target for Nigeria to achieve net-zero emissions by the years, 2050 to 2070.
Emission trading system plays an important role in determining carbon credit pricing for trading carbon credits. Companies are permitted to obtain carbon credits for each ton of CO2 emission they emit under this system. Nigeria recently unveiled its own emissions trading system, which will aid in the pricing of carbon and inspire trust in investors considering the carbon trading market.
Investors in the country's carbon market can also trade carbon credits as tokens on digital exchanges and other carbon exchanges with the aid of blockchain technology; although the Nigerian Stock Exchange does not appear to be a ready platform for such trades as yet.
Carbon taxes aim at discouraging the use of fossil fuels and an effective transition to cleaner fuels as taxes are imposed on coal, oil products, and natural gas in proportion to their carbon content. This helps to reduce CO2 emissions, which are by far the most common greenhouse gas.
Given Nigeria's commitment to be among the first to launch the ACMI carbon market plan with the aim of significantly accelerating the development and sale of carbon credits, it is important to understand the potential implications for businesses engaged in carbon trading in Nigeria. Currently, Nigeria does not have an explicit carbon tax. However, it is expected that the carbon market plan will incorporate clear framework and legal provisions on the sales and purchase of carbon credits.
Potential Benefits of Carbon Trading in Nigeria
Nigeria is poised to lead the African continent in addressing climate change given the enactment of the Climate Change Act, 2021 and its commitment to achieve net-zero emissions by 2060. President Muhammadu Buhari established a National Council on Climate Change in September 2022, dedicated to utilizing carbon credits as a tool to help Nigeria meet its climate change and sustainable development targets.
With these commitments and the introduction of the ACMI, Nigeria should be able to receive funding through the African Development Bank's Carbon Support program, which is designed to help its member nations access carbon financing in order to guarantee the profitability of their investments. Nigeria can also choose to auction its permits to companies. The resulting fiscal revenue can be reinvested in a variety of ways, such as funding clean energy initiatives, other climate action programs or compensating low-income households.
In view of Nigeria's commitment to be among the first to launch the ACMI carbon market plan, there is a need for a framework outlining and regulating the implementation of carbon credits in Nigeria as the group of businesses that can qualify for carbon credits is still unclear.
Nigeria should begin to consider establishing a clear carbon tax policy as it lays the foundation for carbon credits to grow into a significant industry, however, this may be difficult given the poor electricity and infrastructural deficit in the country. Nonetheless, a clear carbon tax framework will help the nation raise revenue to fund necessary climate change initiatives.
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