This article was supported by a grant from the Pulitzer Center on Crisis Reporting.
The tranquil Aberdare Mountain Range in Kenya lies 150km north of the capital, Nairobi, whose business parks, factories and high-tech headquarters comprise one of Africa’s most dynamic entrepreneurial environments. Yet the communities who live in the Aberdares have stepped into the economy of the future.
Hosting a portion of the growing global trade in carbon credits, they hope to tackle the carbon emissions that threaten their lives and livelihoods while unlocking a new stream of virtuous, sustainable cash – an intoxicating proposition, if done right.
Cooking for credits in Kenya
In the Aberdares, many rely on wood and charcoal for cooking. According to the Clean Cooking Alliance, this is the case for almost 1bn people across sub-Saharan Africa – a status quo that means four million people a year are killed by the fumes these fuels generate. Moreover, demand for the raw materials has pushed the continent’s forests to breaking point. Africa loses nearly 4m hectares of forest – about the size of the Netherlands, and more than double the world average – every year.
On top of the damaging impacts on biodiversity of so much habitat loss, such a rate of deforestation threatens some of the richest sources of carbon drawdown and sequestration on earth, severely limiting the global response to climate change.
The solution seems simple enough. Better stoves would mean cleaner cooking, meaning cleaner air and less local deforestation. Indeed, models for more efficient stoves have proliferated in response to the problem, offering far better performance than the open “three-stone” fires on which villagers in the Aberdares area traditionally cook, and with a fraction of the inputs.
But there’s never been any shortage of clever development interventions; the small actions, innovations or alterations that make a huge difference to people and planet. The trouble has always been making them pay.
Carbon trading back from the brink
Carbon trading is having a bit of a moment right now, particularly in Africa, where Cop27 in Egypt in November 2022 introduced a slew of initiatives intended to make carbon trading more extensive and easier to do. The flagship African Carbon Markets Initiative (ACMI), also launched in Egypt, calls itself “a transformative economic and development opportunity” for the continent. It claims it will produce 300m carbon credits and 110m jobs by 2050, and unlock $120bn in revenue over the same period.
But the carbon trading model hasn’t always been so hot.
The Clean Development Mechanism is a UN-led emissions scheme defined in the 1997 Kyoto Protocol. Geopolitical manoeuvring from the EU and Japan drove it to the brink of collapse as a run on carbon credits drove the price down to a meagre €0.05 per tonne. What followed was a decade of soul-searching, as international momentum for carbon trading fractured into a set of overlapping state, regional and national initiatives. Governments, perhaps emboldened by the watershed Paris Agreement adopted at Cop21 in 2015, began pursuing more direct, aggressive decarbonisation policies.
Then the Covid-19 pandemic hit, and Russia invaded Ukraine. In the economic, financial, political and industrial turmoil that resulted, countries have watered down their commitments to climate action. Net-zero policy has become increasingly characterised by “pragmatist” greenwashing – allowing for backpedalling on fossil-fuel reduction targets and revisionism on gas and nuclear energy. This sea-change, in turn, has resurrected carbon trading as a relatively painless, largely financialised means to address climate change. Such sentiment has been accompanied by a doubling in the carbon price from around $55 a tonne in May 2021 to $110 a tonne in February 2023.
Of particular interest to investors speculating on these prices is the “voluntary” carbon market (VCM), made up of voluntary purchases by people and businesses seeking to mitigate their own environmental impact, as distinct from the “compliance” market, where authorities mandate the purchase of carbon credits under some kind of legislated emissions trading scheme (ETS). Global management consultancy firm McKinsey expects the voluntary market, currently worth around $5bn, to hit a $50bn valuation as soon as 2030.
Getting a fair price on carbon that also works for Africa
The past three years of increased carbon prices have not been realised for Africa. In the Aberdares, a Somerset, UK-based company called CO2balance has been distributing cleaner cooking stoves to villagers, covering the cost via the sale of carbon credits, which capture the reduction in emissions the stoves achieve compared to the old three-stone fires. Yet a credit from CO2balance’s Aberdares project costs less than a fifth of the EU spot price.
Nils Razmilovic, CEO of Cynk, an African carbon trading platform, says prices for African carbon credits remain far too low to offer the continent much by way of genuine economic transformation.
“What makes it acceptable for a European corporate to come and pay 5, 7, 10, 15 dollars for one tonne of carbon that’s been sequestered or avoided in Africa, where, if someone’s running a project in Switzerland, the average price for a credit coming out of that project is F150 ($168)?” he asks. “How do we get a fair price?”
Beyond differential input costs, such as labour, land or raw materials, Razmilovic argues that the major underpinning issue is a lack of trust. He reflects on the controversies that continue to plague the regulatory framework underpinning the voluntary carbon market, and have been thrust into the limelight as it gains prominence.
He suggests that African carbon credits are undervalued because of an even starker lack of auditing and regulatory architecture. Buyers, in other words, are even less confident in Africa that they’re purchasing a real, verifiable, impactful tonne of carbon, so are not willing to pay the full price.
Most recently, these concerns about the global market have crystallised in a series of high-profile reports. Following an investigation in conjunction with Die Zeit and SourceMaterial, the Guardian claimed in January of this year that over 90% of rainforest carbon credits issued by Verra – the world’s leading carbon credit certifier – represented emissions reductions that may not actually exist. As a result, they asserted, the credits were “worthless”.
David Antonioli, CEO of Verra, strongly disputes the claims, but acknowledges that the price of carbon credits largely depends on the methodology used and the quality of the “story” they tell.
“A forest conservation project that’s working with a community that used to look to the forest to chop it down because they needed timber or land, but now they’re not doing that because they’re protecting it – that’s a pretty nice story!” says Antonioli.
When you can prove projects deliver additional sustainable development impacts, such as schools, healthcare or jobs, he says: buyers will be enticed to pay a little more for the credits they generate.
Razmilovic has no problem telling such stories. His projects have employed hundreds of people in rural Kenya, delivering advances in economic, ecological and community health that would otherwise be out of reach. But the lack of trust in verification and outcomes means seven years of operations are yet to generate a single saleable carbon credit. Instead, the projects rely on largely philanthropic capital to keep going.
“We’ve just been investing and investing and investing,” he says, “to try to create a loop where this begins to work.”
He’s working closely with the ACMI to achieve a more robust African carbon trading industry framework that can demand higher prices for its credits. But juggernauts are slow to get going.
Beyond the announcement of 13 action programmes in January 2023, early signs are the scale and regularisation Razmilovic craves may be some way off. This mirrors the case globally, with the Integrity Council for the Voluntary Carbon Market (ICVCM) – an international effort to develop an overarching governance body for the industry – only going live in March 2023.
The importance of verification
Back in the Aberdares, CO2balance has a pretty good story too. A 2017 case study introduces Mary Akeyo, a villager whose old three-stone stove was so smoky her family was visiting the doctor a minimum of three times per month. She recounts the joy the new stove has given her – no more check-ups, no more coughing children, more money for food, water and schooling.
These broader benefits are captured in the Aberdares project’s Gold Standard certification. Gold Standard, a non-profit founded in 2003 by the World Wide Fund for Nature (WWF), is one of the “big two” carbon credit certifiers along with Verra, though Verra has a much larger market share of around 75%.
Certifiers are real linchpins of the industry. They have responsibility for screening and evaluating projects, creating credits, maintaining the registries where they’re bought and sold and, usually, copping the flak when things go wrong. Gold Standard, in particular, specialises in credits that align with the UN Sustainable Development Goals, designed to add a “development premium” to carbon prices beyond the pure cost of projects.
Even without this premium, though, carbon credit certification is fiendishly complicated. For a start, projects must demonstrate that they have the potential to conform to six basic criteria – to be certified; real; additional; independently verified; unique and traceable.
Checking “additionality” is a particularly thorny problem: how do you prove that the project would not have gone ahead if not for the added financial incentive of the carbon credit being sold. Because it relies on simply trusting project developers’ assessments of their own behaviour in some hypothetical, alternate universe, it’s a parameter some say is impossible to measure.
Certification methodology often relies on developers’ assessments and is applied by specific project type – a cooking stove project can’t be evaluated in the same way as a wind farm, which is very different to a mangrove plantation, and so on. Quantification of the emissions reductions that can be attributed to the intervention is done mathematically, alongside site visits and community consultation – a process that can take years.
Documentation for the Aberdares project shows the groundwork commencing in early 2010, with credits only beginning to be issued in November 2012. Meanwhile, a small army of auditors, scientists, researchers and other consultants returned each year to monitor progress and ensure the project was delivering on its aims.
Sector close to crisis
Sarah Leugers, chief growth officer at Gold Standard, defends the process. It’s complex, she recognises, but critical, if the market is to stave off a crisis of confidence that could depress carbon prices even further and undo what has been achieved in places like the Aberdares.
It’s a view she shares with John Holler, a senior programme officer at the WWF. Citing a 2023 report by Carbon Market Watch that showed nine out of ten carbon market intermediaries do not disclose fees or profit margins – which means that it is impossible to say how much money is actually reaching projects or communities on the ground – he sees the sector as perilously close to such a crisis.
“The biggest risk to the success and growth of the VCM,” Holler says, “is the quality of the credits that are being issued.”
Holler recommends a wholesale revision of the idea of carbon credits as an offset of either personal or business emissions. The offsetting role, after all, is the fulcrum of most greenwashing claims levelled at the industry and its proponents.
The most enthusiastic and voluminous users of carbon credits are airlines, fossil fuel companies and automobile manufacturers. So the critique of carbon credits as a “licence to pollute” – and thereby impediment to actual climate action – holds serious weight.
Instead, says Holler, carbon credits should merely be viewed as a vehicle for routing finance toward good things – cooking stoves on the ground in the Aberdares, rainforest protection in Cambodia, community wind power in Sri Lanka. “You’re purchasing carbon credits to contribute to global decarbonisation,” he says, “not making a claim against your own emissions.”
From North to South
What do those last three examples of carbon credit projects had in common? They are all in the Global South – as are the vast majority of others. Partially, this is by design. The original Clean Development Mechanism, which kicked off the global carbon market, was explicitly intended to route finance from richer to poorer countries. That is also the environmental policy of several rich countries with large oil and gas reserves or high per capita emissions, particularly Norway, Switzerland and, recently, the US. It is also partially because, as Razmilovic attested, it is much cheaper to generate offsets in the less-developed world.
In the Aberdares, it seems, the model worked. CO2balance could cover its costs, tens of thousands of people enjoyed better health and environmental outcomes, and somewhere – probably in the UK, US or Europe – a consumer got to feel a little better about a purchase they made, because it came with a side helping of Aberdare carbon credits.
But those credits were almost certainly under priced. And the same happy coincidence of wants, needs and means cannot be seen everywhere carbon credits are being generated. In some areas, Holler says, locals don’t even know that they are part of a carbon trading scheme.
While there is still a lot of speculation around the regulatory framework and proof of concept that will make it worth scaling up global carbon markets, as well as attracting investment, carbon crediting can provide a clear development outcome.
Whether this should be financialised into a speculative asset is another matter entirely if the goal is that robust development outcomes should be achieved alongside meaningful climate action. Industry participants almost unanimously agree: the best pathway to emissions reductions and green development is to keep fossil fuels in the ground. But during the slow transition to zero emissions, it may be that carbon markets are a necessary evil.
For more insights on carbon markets, visit the IC Intelligence website.
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