Climate change, financing Africa

PARADOXICALLY, the impacts of climate change are more pronounced in low-carbon-emitting nations, with events beyond the capacity of communities and countries to adapt.

Prof Mthuli Ncube

For instance, Africa’s carbon footprint is relatively small compared to other regions.

In 2020, Africa’s total greenhouse gas (GHG) emissions stood around 1,5 billion tonnes of carbon dioxide (CO2) equivalent, which represents about 3 percent of global emissions.

Climate change mitigation and adaptation

Globally, there is consensus that up scaling the climate action agenda requires that the means of the implementation, namely finance, technology transfer and capacity building, be given utmost priority.

No wonder the amplified calls for Parties to the United Nations Framework Convention on Climate Change (UNFCCC) to accelerate ambition through their nationally determined contributions.

Following increased scientific evidence pointing to fossil fuels as the major driver of climate change, there were increased calls for a global phase-out thereof at the just-ended COP28 held in Dubai, United Arab Emirates.

However, most Global South Parties advocate a gradual “phasing down” (just transition as opposed to an outright “phase-out”) through the deployment of renewables to replace traditional fossil fuels.

Developing country parties argue that the envisaged transition requires decision-makers to be mindful of historical disparities, suffered impacts and varying responsibilities, and to ensure a fair distribution of the efforts and benefits of this transition. Inevitably, given the complexity of the climate crisis and energy transition nexus, it is necessary to work towards building a shared vision of renewable energy deployment that builds upon exemplary cases, standardises processes, improves legislation and proposes instruments that support and ensure local development.

Africa and other developing countries dependent on the exploitation of fossil fuels should, therefore, do the following:

Continue to call for the use of these resources using cleaner technologies and for a “gradual phase-out” to allow adequate time to adjust social and economic systems and raise concern on double standards by some developed countries that are reverting to fossil fuels in the wake of the persisting crisis in Eastern Europe.

Amplify calls for the provision of more funding to Global South countries for renewable energy and energy efficiency, as well as for the development of sustainable technologies and sustainable food systems.

Evidence shows that Africa has enormous potential for development of renewable energy sources, particularly solar and wind.

The continent is endowed with some of the best solar resources in the world, with parts of North Africa receiving an average of over 2 000 hours of sunshine per year.

Africa also has excellent wind resources, particularly along its long coastline.

In essence, developing renewable energy sources in Africa could help to reduce the continent’s reliance on fossil fuels and lower GHG emissions, as well as creating new opportunities for economic development, job creation and poverty reduction.

Forests in Africa such as the Congo Basin rainforest, the Guinea-Congo forest, the East African Coastal Forest, the Miombo woodlands and the Sudanian Savanna have a significant role to play in the global carbon cycle (carbon sinks). As such, they have potential to play a major part in carbon trading.

Despite this huge potential, the current value of carbon trading in Africa is relatively low, contributing a paltry 2 percent on the global carbon markets of trading taking place mostly in the voluntary carbon market.

The African continent is estimated to have potential to reduce emissions by over two billion tonnes of carbon dioxide equivalent (CO2e) per year by 2030. By reducing deforestation and forest degradation, as well as upscaling sustainable forest management, Africa could generate carbon credits that could be sold on the carbon market. However, the realisation of this potential hinges on a number of factors, including the development of a formal carbon market, enforcement of regulations and the availability of funding, as well as the development of renewable energy and other low-carbon technologies.

Climate financing landscape

Global landscape for climate finance estimated that 2021 climate finance flows amounted to US$850 billion-US$940 billion, while the global carbon credit market was valued at US$760 billion (and is expected to grow by over 21 percent during the period 2023-2028) [Climate Policy Initiative, 2022)].

The global green bond market issuance reached US$1,2 trillion in the first half of 2023, up from US$1 trillion in the same period in 2022, signifying growing awareness of the need to address climate change (Climate Bonds Initiative, 2023). By implication, the growth in the climate finance landscape represents a significant increase in the amount of capital raised for green initiatives, which include renewable energy, energy efficiency, sustainable transport, and sustainable water and wastewater management.

Article 2.1 (c) and Article 9 of the Paris Agreement highlight the need for “finance flows consistent with a pathway toward low GHG emissions and climate-resilient development”.

At least US$4,35 trillion is required annually by 2030 to meet global climate objectives (Climate Policy Initiative, 2022).

Mobilisation of adequate and predictable financial flows persistently presents a major impediment towards the attainment of the Paris Agreement targets across most Global South countries, Zimbabwe included.

While evidence points to a significant increase in climate finance in recent years, it is still far short of the estimated needs and priorities. In 2019, the total climate finance flows to developing countries were around US$70 billion, against an estimated annual requirement of US$100 billion-US$300 billion.

The amount of equity financing for climate change in Africa is much lower than in other regions and the International Finance Corporation (IFC, 2018) estimates that this may reach US$2,5 trillion by 2040.

In addition, the majority of climate finance flows are in the form of loans, rather than grants, which can reinforce debt burdens for developing countries.

There is also lack of transparency and accountability in the way climate finance is allocated and disbursed (Brazier, 2017).

On the other hand, the current financial architecture and governance arrangements under the Paris Agreement are yet to support countries in averting, minimising and addressing climate-related loss and damages that are predicted to become more frequent and intense in the coming decades.

Green financing for Africa

Most, if not all, developing country parties lack adequate financial resources to accelerate their low-carbon and climate-resilient developmental actions. This is mostly due to their low per capita income, unstable economies, constrained fiscal space, lack of institutional capacity and structural weaknesses that militate against the desired forward thrust towards a resilient and green growth pathway, thus depriving the potential to harness the powerful synergies involving adaptation, growth and development.

The protracted debates around climate financing at the annual COP meetings under the auspices of the UNFCCC, the non-fulfilment of pledges made by developed country parties, as well as impediments around access to the available climate finance, point to the dire need for a paradigm shift in approach by spurring proactiveness among developing countries to combat the effects of climate change.

This entails leveraging on innovative financing instruments to crowd in private climate financing in Africa (blended finance).

Africa’s private investors ought to recognise that climate financing is not only an environmental issue, but is also a developmental matter that embraces economic and social transformation in the quest for sustainable development. Therefore, climate-allied financial instruments guarantee returns on the investor, as well as on the continent.

Green climate financing has been on an upward spiral in Africa in recent years, with the goal of supporting projects that help reduce emissions, increase resilience to climate change and improve livelihoods, for example, the African Development Bank’s climate action plan and the Green Climate Fund financed the “Accelerating Renewable Energy Integration and Sustainable Energy” project in Kenya.

The success of Africa’s green transition process is anchored in the combined efforts of the public and private sectors, with a strong collaboration with international development partners towards mobilising the required climate financial resources ensuring that all investments are environmentally sustainable, while delivering the desired economic and social benefits for all. Africa requires at least US$52,7 billion annually to advance climate action, yet current annual spending on adaptation is just around US$11,4 billion.

An assortment of innovative mechanisms could help increase sustainable green financing in Africa and typical examples are:

Use of blended finance, which combines public and private financing to support projects that have both social and environmental benefits;

Climate bonds, which can be used to finance projects that reduce GHG emissions or increase resilience to climate change. Functioning bond markets and investment funds (green bond funds) can provide a good example of how to draw in institutional investors and such funds should be replicated and scaled up to incentivise issuers to generate a sufficient supply of green assets to finance green projects;

Equity financing, which can be used to fund green initiatives such as renewable energy projects, sustainable agriculture and energy efficiency improvements. Despite the perceived risks, equity financing has a number of advantages over other types of financing, including lower borrowing costs, more flexibility in terms of repayment and the ability to attract long-term investors;

Establishment of green banks, which are financial institutions that exclusively invest in green projects; and

Carbon pricing mechanisms (carbon markets), such as emissions trading systems or carbon taxes, could be used to raise revenue for sustainable development. Recent efforts to develop regional carbon markets, such as the African Carbon Markets Initiative, could help to address the current challenges bedevilling carbon trading on the African continent.

In addition, Africa’s abundant renewable energy resources could make it a net exporter of carbon credits, providing a steady stream of revenue for sustainable development projects. Zimbabwe has made strides in developing a regulatory framework for carbon trading, administered through the Ministry of Environment, Climate and Wildlife, which is beginning to bear fruit as many stakeholders have expressed interest in participating in the carbon markets.

In conclusion, sustainable green financing, being a critical component of green industrialisation, therefore presents an opportunity for developing countries to leapfrog to higher levels of development through transitioning to low-carbon and resource-efficient economies.

By evolving to low-carbon economies, there will be a growing demand for green technologies and services, thus developing countries stand to benefit from this transition by developing new industries and creating new jobs.

Green industrialisation can help reduce poverty and inequality by providing access to clean energy, clean water and other basic services in a way that enhances prospects of shaping a world that is sustainable, inclusive and prosperous for all.

Professor Mthuli Ncube is the Minister of Finance, Economic Development and Investment Promotion. He wrote the article for cnbcafrica.com