Will voluntary carbon markets support or distract from Africa’s Net Zero transition?

Welcome back to the Net Zero Roundup from the Carbon Trust’s Net Zero Intelligence Unit.

In this edition, Africa’s inaugural Climate Summit is under the spotlight. We also digest the findings of the first ever Global Stocktake, assess the mounting pressure facing the oil and gas industry and examine the cracks in the EU’s taxonomy.

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Under the spotlight

Africa Climate Summit: carbon markets could help plug some of Africa’s climate finance gap, but only with greater integrity of supply and demand

Between 4-6 September, Nairobi hosted the inaugural Africa Climate Summit, which brought leaders from the world of politics, business, and development finance together to discuss climate action. The Summit produced $26bn worth of commitments from across the globe, as well as the ‘Nairobi Declaration’ from African leaders. This declaration will inform Africa’s negotiating position in upcoming international discussions, including COP28. It contains several new commitments on climate from African leaders, as well as calls to action for countries in the Global North.

Throughout the declaration, a major theme was how to mobilise finance for the continent’s climate mitigation and adaptation. Africa has rich natural resources including carbon sinks that are in urgent need of protection, and critical minerals which can power the energy transition while driving green growth in the region. Africa also has ambitious new renewable energy targets and an opportunity to leapfrog fossil-fuel based development. However, the continent needs finance to unlock this potential. As a region responsible for just 4% of historical global emissions, but particularly vulnerable to climate impacts, developed countries need to honour their commitments to help Africa finance its Net Zero transition.

Africa currently receives around 12% of the climate finance it needs, and faces borrowing costs estimated to be five to eight times that of wealthy countries. To address this, the Nairobi Declaration calls for several new financial instruments and changes to the global financial system. The package of solutions tabled include a global carbon tax, more concessional lending from Multinational Development Banks, debt relief and better deployment of the IMF’s special drawing rights, which freed up $650bn for the Covid-19 recovery.

One finance raising method was particularly contentious: carbon credits. Voluntary carbon markets (VCMs) allow entities to offset their own carbon emissions by purchasing ‘credits’ which fund projects to avoid or reduce carbon. The Africa Carbon Markets Initiative received a total of $650m worth of private sector commitments over the three-day Summit. Opinions varied as to whether VCMs could be an effective tool for plugging Africa’s enormous climate finance gap, or whether they would be used as “pollution permits” by those shirking responsibility to reduce their own emissions.

Our analysis shows that international guidelines on Net Zero send a resounding message that credits cannot be a replacement for emissions reductions. If VCMs are to be a useful tool in Africa’s arsenal, those investing must first follow these best practices. There must also be greater integrity of supply. VCMs should ensure their offerings meet the Carbon Trust’s five principles for high-quality credits.

Carbon credits typically fund projects which mitigate climate change. When used responsibly, they can also offer social and environmental co-benefits, such as supporting biodiversity and adaptation. However, other financing methods will likely go further in building Africa’s resilience to climate change, and addressing damages caused by past impacts. Read more about Loss and Damage funding in the following insight, written by Jarredine Morris, Senior Manager at Carbon Trust Africa.

Quick Intelligence

Policy: a world-first Global Stocktake outlines the climate solutions needed in a “rapidly closing” window of opportunity

Findings from the world’s most thorough inventory of climate action were published on 8 September, after a two-year process of technical dialogues. When countries committed to the Paris Agreement in 2015, they also agreed to take stock of progress in 2023, then every five years after. The report synthesises 17 key findings on progress towards mitigation, adaptation and means of implementation, including finance. A mixed picture on the state of progress has emerged. On one hand, the world is significantly off track when it comes to meeting the goals of the Paris Agreement. On the other hand, existing cost-effective solutions exist and are ready to be harnessed to drive change.

In particular, the Stocktake highlights the need to replicate climate mitigation actions that can also contribute to sustainable development priorities. The Carbon Trust’s analysis for Iniciativa Climática de México’s proposal for improving the ambition level of Mexico’s 2020 NDC identified cost-effective emissions mitigation actions that could also support sustainable development priorities, such as the development and strengthening of infrastructure for active and non-motorized mobility. As countries revise their NDCs ahead of submission in 2025, policymakers should draw on the findings of the Stocktake to forge greater alignment between climate plans and long-term development strategies.

With just over two months to go before COP28, the Global Stocktake invites a course-correction of the global response to climate change. The report’s emphasis on the need to fully phaseout unabated fossil fuels prepares the ground for a serious challenge to the role of coal, oil and gas in the Net Zero transition: a topic that is sure to take centre stage at this year’s COP28.

Business: COP28 will reveal whether Big Oil is serious about Net Zero

The oil and gas industry is facing increased pressure to consider its role in the Net Zero transition. Beyond the Global Stocktake’s emphasis on the need to fully phaseout fossil fuels, US Climate Envoy John Kerry has been urging Saudi Aramco and other oil and gas giants to bring concrete plans to COP28, including specific commitments on renewables spending and standards for carbon capture technologies. Meanwhile, Ecuador’s state-owned oil company will be forced to close down oil drilling operations in a particularly diverse part of the Amazon rainforest within the next year. This follows the result of a hard-won referendum, fought by environmental groups.

Oil and gas companies should now bring proposals to COP28 outlining how they will take responsibility for their historical contribution to climate change as well as plans for being part of the solution. COP28 president and oil chief Sultan al Jaber insists the conference’s goal is “responsible phase-down of all unabated fossil fuels”. However corporate commitments so far have avoided the lion’s share of the industry’s emissions, or shown an over-reliance on unscaled carbon capture technologies. To achieve the responsible energy transition, oil and gas companies will need to explore the complete transformation of their business models. This must start with the scaling down of investments in new fossil fuel reserves, retiring existing assets and investing in renewables.

Finance: Misaligned reporting timelines under EU taxonomy provide vital lessons for future UK taxonomy

Despite their best efforts, European businesses and financial institutions are struggling to comply with the EU taxonomy, according to a recent study. The taxonomy aims to be a catalyst for green investment and help investors avoid greenwashing, by clarifying which economic activities are ‘green’. However ambiguous definitions, and a misaligned reporting timeline, are preventing the taxonomy from fulfilling its potential. This could risk stalling efforts to mobilise the $32 trillion of investment Europe needs to generate in order to deliver Net Zero. The EU’s experience provides valuable lessons for the soon to be published UK taxonomy. As well as defining key terms, the UK government’s advisors recommend that businesses be given an earlier deadline than financial institutions when it comes to reporting their climate impacts. This would avoid the dilemma EU financial institutions face in needing to report the climate impacts of their portfolio companies based on estimates rather than published data. The Carbon Trust’s policy and finance experts highlight that, while not perfect, the EU taxonomy can still aid transparency, especially if businesses and financial institutions use language and taxonomy criteria consistently. Collaboration is key, and financial institutions can support businesses to improve taxonomy alignment through active ownership, thereby improving their own taxonomy alignment.

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Parting thought: the next zero transition in action

Record solar growth sets EU countries on track to meet 2030 renewable energy targets ahead of schedule

There was a notable exception among stories of slow climate progress this month. Thanks to huge growth in solar, most EU countries will meet their 2030 renewable energy targets ahead of schedule.

To quote the Global Stocktake, phasing out unabated fossil fuels and scaling up renewable energy are twin ‘indispensable elements’ of tackling climate change. It is hugely positive to see the EU making rapid progress on at least one side of that equation.

There is reason to believe this trend can continue. The European Parliament has since voted to hike 2030 renewable energy targets from 32% to 42.5%. To meet these stretching targets, investments in grid infrastructure and technologies which store energy will be essential to developing resilient, flexible grids powered by renewables.

This edition of the Net Zero Roundup featured was written by Chloe St George and Nina Foster . Thanks for reading. To ensure you don’t miss out on future monthly Net Zero Roundups, click here to subscribe.

The Net Zero Intelligence Unit produces experience-led insights to accelerate global progress towards Net Zero. If you’re a journalist or event organiser and would like to get in touch with us, please email press@carbontrust.com or events@carbontrust.com.