Last month, all eyes were on Africa at the Conference of Parties (COP27) held in Sharm El Sheikh, Egypt. The convergence on the continent provided an avenue for African countries to table all their climate-related concerns, such as the recent request for loss and damage finance for developing countries.
The eventual acceptance of the finance request, in addition to climate investments like the $2 billion solar project in Angola and the $500 million energy finance in Egypt, was a significant milestone for Africa at the conference.
However, considering the continent’s climate realities, there is an urgent need to increase and diversify its climate finance portfolio.
Climate impacts are increasingly becoming widespread across the globe, and Africa is at the receiving end, despite contributing the least to global warming and having the lowest emissions. It is disturbing that seven of the ten most vulnerable countries to climate change globally are in Africa. Climate-related disasters cost the countries about $7 billion to $15 billion a year, and the losses could soar to $50 billion annually by 2030. In the same vein, African countries need to raise an annual average of $124 billion to adapt to the climate upheavals on the continent. As of today, they get roughly $28 billion a year.
Renewable energy sources and finance challenges.
At the Africa Financial Industry Summit (AFIS) recently held in Lome, Togo, leading figures of the African financial ecosystem had a dialogue on what African financial institutions can do to bolster climate financing post-COP27. Energy financing was at the core of this discussion, raising the imperative to have the right mix to finance Africa’s energy transition.
Research has shown Africa has the lowest rates of energy access globally. Over 640 million Africans have no access to energy, corresponding to an electricity access rate of just over 40 per cent. But while making efforts to bridge this gap, it is equally important to make these energy sources renewable.
Interestingly, Africa is rich in renewable energy resources. Researchers put the continent’s solar photovoltaic (PV) technical potential at 7,900 GW, suggesting Africa possesses some of the greatest potential for solar power generation. Additionally, copper silicon, lithium and other rare earth minerals that are critical for technological devices and the future of global energy systems are bountiful on the continent.
For a long time, a country like the Democratic Republic of the Congo has been an important source of Cobalt – an essential mineral for the lithium-ion batteries used in electric vehicles, laptops and smartphones. Many countries within the continent also harbour some of the world’s largest reserves of oil and natural gas. It is even said that a shift from fossil fuels towards a renewable energy system could lead to a 6.4% higher GDP, 3.5% more economy-wide jobs, and a 25.4% higher welfare index from 2020 to 2050.
Head of enterprise risk services at KPMG, Tomi Adepoju, noted that despite these potentials in Africa financing remains a problem. And reasons for this include a lack of local regulatory push to drive the adoption of green energy, a lack of a clear sustainable finance framework, and insufficient knowledge/technical know-how, amongst others.
Embracing green bonds
One of the several ways identified at the summit to attract sustainable energy finance to the continent is the issuance of green bonds. There is a need for an adequate understanding and awareness of the opportunities for green bonds which have become one of the instruments used in financing renewable energy, and Africa is not a significant player in the market.
Between 2014 and 2020, Africa received a meagre two per cent of the $1 trillion green bond market issued globally. And this form of financing is important because they form a crucial link between capital providers and renewable energy projects, all needed in Africa for sustainable development. While countries like South Africa, Nigeria, and Morocco have issued green bonds, the continent needs more players to accelerate the progress of this innovative finance instrument.
However, non-governmental organisations are also playing their part. Organisations like the International Finance Corporation (IFC), and the African Development Bank (AfDB) have been instrumental in issuing green bonds used for projects like the Xina Solar One in South Africa, the Cabeólica wind park in Cape Verde, Shapoorji Pallonji Solar PV in Egypt.
Exploring the carbon market
The Carbon Market is another innovative finance model that offers Africa an incredible opportunity to unlock billions for the climate finance needs of their economies and curb greenhouse gas emissions. So big has the market become globally that its value soared by 164 per cent in 2021 to a record high of 760 billion euros. However, the global market leaves out Africa despite the resources in its possession.
Kodjo Diop Valérie Noëlle, Director for Innovation and Sustainable Development, West African Development Bank (BOAD) emphasizes that Africa needs to tap into this billion-dollar market by commercialising its natural assets. “Going green can be expensive, and Africa can finance it through the carbon market. We should embrace nature-based solutions. Africa’s got nature, and we have been talking about forestry and the ocean on the continent. These two bodies of nature trap carbon, and Africa has an abundance. So we need to populate the carbon market,” she said.
For Valerie Neim, founder and CEO of Brazza Transactions (BT), “Nature-based solutions are often more cost-effective, long-lasting and have multiple harmonious benefits. For example, a concept based on the ecosystem approach, which aims to holistically manage land, water and living resources in a way that promotes conservation, restoration and sustainable use equitably would be beneficial. Investing in nature-based solutions or ecosystem-based adaptation to the planetary crisis is one of the smartest decisions policymakers can take to secure our future and achieve the sustainable development goal,”
Gabon is one of the African countries that has commercialized its nature. Last year, $17 million was paid to the central African country for preserving its forest, becoming the first African country to receive payment for reducing CO2 emissions. Commendably, COP27 brought good tidings in this regard. An Africa Carbon Markets Initiative (ACMI) targeted at supporting the growth of carbon credit production and creating jobs in Africa was inaugurated. The initiative has a robust ambition to produce 300 million carbon credits annually by 2030 and 1.5 billion credits annually by 2050, unlocking 6 billion in revenue by 2030 and over 120 billion by 2050. Furthermore, over 110 million jobs would be created through the initiative by 2050.
Multiple African nations like Kenya, Malawi, Gabon, Nigeria and Togo are already committed to collaborating with ACMI. Nigeria alone could produce between 25 and 30 million tons worth of carbon credits annually by 2030, generating over $500m annually.
Some other ways to attract investments into green energy on the continent include the removal of fossil fuel subsidies, specific green portfolios mandate for organisations and the introduction of green tariffs.
Clamour for an equitable energy transition.
While there has been a global clamour to phase out fossil fuel before 2050, Nigeria has argued for a less hasty transition to cleaner renewable energy for developing nations. So instead of the 2050 target, Nigeria has pledged to reduce carbon emissions to zero by 2060.
Commenting on this, Dr Hassan Mahmud, Director of Monetary policy at the Central Bank of Nigeria (CBN) said that “Nigeria and other African countries must come to a competitive standpoint to go into a sustainable transition so that the world can listen when we can speak. We need to go at the pace of our economic development. We are trying to get investment into fossil fuels because global investment is still going into them. The sector is a major source of foreign exchange inflows in the country.”
Despite the foregoing, he noted that Nigeria has achieved some milestones in the area of green financing. “Greenness of monetary policies has enabled commercial banks in Nigeria to issue green bonds of over 15 billion. CBN also has some funds to finance green projects like the solar panel project to provide energy to 25 million Nigerians. So we have milestones in the area,” he noted.