Is Africa Ready for Carbon Investment?

Africa represents roughly 3% of projects worldwide under the UN’s Clean Development Mechanism. A combination of better investments to be found elsewhere (particularly in China and India), regional risks such as corruption and political unrest, and overall investor uncertainty towards the continent has kept Africa an also-ran in global carbon markets.

Yet some financiers are pushing ahead despite the problems. Take South Africa’s Nedbank, the country’s fourth largest bank. On Dec. 15, Nedbank Capital, its investment bank subsidiary, announced its first forestry-based carbon project in Kenya. The deal — a link-up with San Francisco-based Wildlife Works — will create 2.5 million carbon credits by 2026, which Nedbank will sell in the global voluntary market (mostly to Western and South African companies). Nedbank’s head of carbon, Kevin Whitfield, reckons 20% to 30% of the project’s credits have been sold so far. The Kenyan tree-preservation scheme falls under the UN-backed Reduced Emissions from Deforestation and Degradation, or REDD, program that aims to create financial incentives to protect forests, particularly in the developing world.

Some in the financial markets, though, remain skeptical, saying there’s a lack of transparency and REDD could hurt other carbon credits. “The inclusion of forestry projects in emission trading systems runs the risk of devaluing other emissions credits,” says Louis Redshaw, head of environmental markets at investment bank Barclays Capital.

Despite the skeptics, Nedbank’s Whitfield says the bank has another five REDD projects slated across Africa. They include deals in Uganda, Ivory Coast, Cameroon, Congo, and Gabon, which will total roughly 1 million hectares of forest. He declined to give detail on the specific timeframe for the projects’ completion.

“We also shared the skepticism [over forestry projects], says Whitfield, whose team spent over nine months interviewing the community in Kenya in preparation for the deal. “We chased down cattlemen in the middle of the night as part of our due diligence,” he says. “There’s an appetite for African credits.”

If Nedbank is so keen, what has kept others from investing in Africa’s nascent carbon markets? A major issue is risk. That includes everything from political unrest to fears carbon projects won’t be completed. To overcome the problem, Whitfield reckons knowledge of the local markets is paramount. “We’ve got people on the ground, so we’re better placed than most. We’re biased towards Africa, we wouldn’t look to invest in North Dakota because we don’t know that market,” he adds.

Now, Africa could gain billions of dollars of investment as policymakers begin to question whether Western cash should fund carbon projects in emerging economy giants. Adding to Africa’s potential windfall: green-energy funds promised at the Copenhagen climate change conference are starting to flow. For sure, the continent will likely remain a bit player in the carbon markets in the short-term. But a combination of growing interest from financial institutions and the availability of Western-backed climate change funds could increase Africa’s profile in the fight against global warming.

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