By Carolyne Cherotich Bii, Eric Magale & Maureen Kabasa
APA Fellow 2024
BG003
Introduction
On 29 November 2024, the African Centre for Technology Studies, in collaboration with the ACTS Pathways Academy, hosted a webinar titled “Integrating Green Finance into Africa’s Economic Growth Agenda.” The speakers included Dr. Lydia Kabue, a climate change specialist; Mr. Bright Wekesa, an agricultural policy analyst; and Mr. Sévérin EKPE, a hydro hydrology and water policy specialist. The focus was on how Africa can strategically harness green finance mechanisms, such as carbon credits and green bonds, to accelerate its transition to a low-carbon economy while supporting economic growth.
A carbon credit is a tradeable permit that allows an organization (buyer) to compensate another entity (seller) for capturing or removing one metric tonne of CO2 or equivalent of other GHG they cannot prevent into the atmosphere courtesy of their activities. It incentivizes emission reductions through cap-and-trade systems, where businesses emitting less than their allowance sell the surplus while those exceeding limits buy credits. This market-based approach promotes cost-effective emission cuts and supports projects like UNFCCC’s Reducing Emissions from Deforestation and Forest Degradation(REDD+). Additionally, carbon credits are traded in two main markets: voluntary markets, where companies offset emissions as part of their Environmental, Social, and Governance(ESG) commitments, and compliance markets, which are governed by government mandates or international agreements.
Green bonds, on the other hand, offer another important mechanism for raising funds specifically for climate-related or environmentally beneficial projects such as clean energy projects or climate-resilient infrastructure. These debt securities have grown rapidly globally, with issuance exceeding USD 500 billion in 2021 (Climate Bonds Initiative, 2022). However, challenges such as transparency issues and the risk of “greenwashing” persist.
Key Insights
Africa Green Finance Context
The move to carbon finance is gaining traction across the continent. Countries are looking for cost-effective ways to pay to promote efforts to combat and adapt to climate change. However, there is a financing gap in bringing their Nationally Determined Contributions (NDCs) to fruition. A few initiatives, like the African Carbon Market Initiative (ACMI), are working to build capacity across the continent through knowledge sharing, project development, and encouraging regional cooperation. South Africa is paving the way with Africa’s only compliance market that utilizes a hybrid carbon tax and offsetting mechanism expected to deliver meaningful emission reductions by 2025 (IMF African department, 2023). Kenya is Africa’s second country to adopt a fully regulated carbon trading system. It is noted that Ghana has now also enacted legislation to create a Carbon Markets Office. It seeks to finance a significant portion of its Nationally Determined Contribution implementation through carbon credit revenue, making it the third African country with a compliant carbon market.
Additionally, regional initiatives like the West African Alliance on Carbon Markets and Climate Finance and the East African Alliance on Carbon Markets and Climate Finance are building readiness for mechanisms under Article 6 of the Paris Agreement. Nonetheless, obstacles exist, including insufficient knowledge of how the carbon market works, a lack of capacity, limited financial resources, and an unequal distribution of carbon finance that benefits richer countries. Overcoming these barriers is essential to unleashing the potential for carbon finance to support sustainable development throughout Africa.
Kenya Green Finance Context
Kenya is making significant strides in the carbon market with the recent introduction of the Climate Change Act 2023 and the Carbon Credit Trading and Benefit Sharing Bill 2023. These landmark pieces of legislation establish a clear and structured framework for carbon credit trading, ensuring that emission reductions are accurately recorded and transparently tracked. A key component of this framework is the creation of a National Carbon Registry, which guarantees compliance with Article 6 of the Paris Agreement by preventing double counting and ensuring the integrity of carbon credits.
These regulatory advancements mark Kenya’s transition from a voluntary to a compliant carbon market. This shift offers significant public and private sector participation opportunities, fostering investor confidence and unlocking new avenues for sustainable development finance.
Examples of Carbon Credit Projects in Kenya
The first example is BURN Manufacturing, which has developed efficient cookstoves that reduce fuel consumption, lower greenhouse gas emissions, and mitigate indoor air pollution. The project generates carbon credits through its thermal efficiency and has been independently verified through a randomized control trial. As a fully integrated carbon developer, BURN manages all aspects, from product design to carbon credit issuance.
The second example is the JIBU Safe Water Initiative, which, in partnership with Homepride, provides affordable, clean water to low-income households across Kenya, Uganda, Ghana, and Rwanda. By offering an alternative to carbon-intensive water purification methods like boiling with firewood, JIBU’s initiative reduces emissions while expanding access to safe drinking water.
Green Bonds Development in Kenya
Kenya’s green bond market remains in its formative stages, with only one listing, ACORN, as a key example. In comparison, South Africa holds the largest green bond market on the continent, with a dedicated segment for green bonds. Despite the potential of green bonds as a financial tool for sustainable development, interest in this market across Africa remains generally low, and sovereign listings crucial for signaling market confidence are scarce. However, the Nairobi Securities Exchange (NSE) has established guidelines for green bond listings, and international organizations such as the Climate Bonds Initiative (CBI) and FSD Africa are actively supporting technical capacity building, signaling a growing recognition of green bonds’ potential for future market expansion.
Challenges within Kenya’s Carbon Market
While Kenya’s carbon market has made notable progress, several challenges must be addressed. One of the main hurdles is the high cost of compliance, particularly in meeting international listing standards and securing third-party verifiers like Verra or Gold Standard. Since there are currently no local verifiers, project developers are forced to work with international firms, which drives up costs. Another challenge is the limited local expertise in designing, implementing, and monitoring carbon credit projects, which hinders the effectiveness of these initiatives. Overcoming these challenges and improving market infrastructure will be crucial for ensuring the long-term success of Kenya’s carbon market.
Conclusion
The recent $300 billion climate finance pledge by wealthy nations and the $1.2 trillion commitment from Multilateral Development Banks (MDBs) by 2030 at COP 29 present significant opportunities for Africa’s green finance markets. Success will depend on strategically developing local verification capacity, implementing clear policy frameworks, and fostering regional cooperation. While challenges remain in carbon and green bond markets, Africa’s expanding regulatory frameworks and market initiatives signal promising progress toward a low-carbon economy. A sustained commitment to capacity building and market development will be key to fully leveraging these emerging opportunities.
References
- Africa Carbon Market InitiativeAfrica (2024). Africa Carbon Markets: Status and Outlook Report 2024-25
- African Union (2024). Climate Finance in Africa: An overview of climate finance flows, challenges and opportunities
- Agarwal, R. K. (Ed.). (2018). Carbon capture, utilization, and sequestration. BoD–Books on Demand.
- Climate Bonds Initiative (2022). $500bn Green Issuance 2021: social and sustainable acceleration: Annual green $1tn in sight: Market expansion forecasts for 2022 and 2025
- Climate Policy Initiative (CPI) (2023). Global Landscape of Climate Finance 2023.
- IMF African department (2023), South Africa Carbon Pricing And Climate Mitigation Policy
- Magale, E. G. (2021). Developing a green bond market in Kenya: Perspectives from practitioners and lessons from developing markets. Journal of Sustainable Finance & Investment, 1-18.
- UNFCCC (2024). COP29 UN Climate Conference Agrees to Triple Finance to Developing Countries, Protecting Lives and Livelihoods.
