Inside Africa's 'homegrown' climate financing schemes

A recent meeting of African Finance ministers in Zimbabwe resolved to find alternative ways to meet the continent’s climate financing needs, noting with disappointment that very little is materialising from the promises of donour countries in the Global North.

The Finance ministers complained that climate change inflicts an additional oversized financial burden on a continent that is already struggling to fund its development programmes.

‘Africa Suffers Disproportionately’

"The continent faces disproportionate burdens and risks arising from climate change-related events and patterns," Antonio Pedro, Deputy Executive Secretary at the Economic Commission for Africa (ECA), said at the conference.

"These include prolonged droughts, devastating floods and out-of-season storms - all of which cause massive humanitarian crises and deepen our economic vulnerabilities."

Many African countries are suffering from the effects of the relentless release of carbon emissions into the atmosphere. The United Nations Intergovernmental Panel on Climate Change (IPCC) reported that Africa contributes only three per cent of global emissions, compared to China’s 23 per cent, the United States’ 19 per cent and the European Union’s 13 per cent. Despite this, the continent is among the worst affected by the devastations of climate change, the panel found.

More than 800 million people in Africa are classified as food insecure due to climate change. The African Development Bank (AfDB) estimates that the annual loss and damage costs attributable to climate change in its region range from USD 289.2 billion to 440.5 billion.

Resource Mobilisation Challenge

Estimates of the financing needs of Africa suggest that an additional USD 194 billion - equivalent to roughly 14 per cent of the continent’s gross domestic product (GDP) - is needed annually to support its transition to sustainable power generation and the achievement of the Sustainable Development Goals. 

While in theory these hundreds of billions needed for climate mitigation and adaptation should come from high emitting countries, in reality that money may not be made available in the short-to-medium-term due to the begrudging nature of the payments.

Research by the Global Centre on Adaptation shows that Africa is receiving a tiny fraction of the climate finance it needs. "Africa only received $11.4 billion in adaptation finance in 2019-2020 and the increase in 2021-2022 is likely to be modest," reads the report.  

"At this rate, Africa will receive $182 billion by 2035 for climate adaptation, less than one-tenth of the up to $1.7 trillion by 2035. Loans were the most utilised instrument to deliver adaptation finance in 2019-2020, which combined with surging interest rates, is contributing to Africa’s poorest countries falling into a debt trap."

Professor Christian Gollier, managing director of the Toulouse School of Economics, is pessimistic about the prospects of increased climate finance from the Global North. 

"The energy transition in the North will be more costly than most people are ready to accept. Adding on top of that, support to the energy transition in the Global South is not likely to be supported by many Western politicians," he told FairPlanet.

"There is a big gap between the moral perception that the North is responsible for the climate catastrophe in the South and their willingness to compensate the victims." 

Africa’s Climate Financing Options

As Africa awaits potential increased funding from the Global North, the impacts of climate change continue to drain budgets and push countries into debt. This situation has prompted African ministers to propose "innovative, home-grown" funding models to meet their climate financing needs.

What sort of "innovative" and "homegrown" options could be available?

Claver Gatete, ECA executive secretary, thinks there is a way around financing obstacles. "A productive green finance system in Africa has the potential to generate US$3 trillion by 2030," Gatete, who is also the UN Under-Secretary General, told the African ministers.

"But we must move from ‘potential’ to tangible actions with bankable regional projects. Innovative instruments like debt-for-nature swaps, regional blue bonds, regional carbon markets and natural capital accounting can provide financing that address debt issues and foster environmental action." 

He cited the example of Seychelles, which in 2016 was able to float a sovereign blue bond, raising USD 15 million. 

"Similarly, leveraging Africa’s vast coastline has the potential to generate USD 576 billion annually and create 127 million jobs by 2063," Gatete said. Gatete was referring to the continent’s vast blue economy potential. 

Debt-for-nature swaps are financial transactions in which a portion of a developing country’s foreign debt is forgiven in exchange for local investments in environmental conservation measures. Africa is saddled with a debt burden of about USD 1.8 trillion, roughly the same amount that the G20 estimates the continent needs for its climate financing.

Raising Funds Through Local Capital Markets

Jonathan First, Senior Advisor for Africa at Climate Policy Initiative (CPI), is also skeptical about the prospects of a climate finance windfall coming from the Global North. 

"We, Africans, continue to hope this will come from donors, governments, development finance institutions and international investors, when experience and research tells us otherwise," First told FairPlanet. 

"In its September 2022 Landscape of Climate Finance in Africa, CPI reported that the continent requires USD 277 billion annually to implement its Nationally Determined Contributions (NDCs) to the Paris Agreement and meet our 2030 climate goals, yet annual climate flows stand at only $30 billion, with only 14 per cent of this coming from the private sector and 49 per cent of this figure from domestic sources."

First pointed out that African countries, with a few exceptions, have the local capital markets - including established private sector banking networks and pension funds - to increase domestic investment in impactful infrastructure that reduces emissions, improves sustainability and builds stronger adaptation and resilience to climate change.

"We have a mountain to climb, but part of the solution is a far greater use of domestic investment capital and developing inter-regional investment," he said.

"Better strategic use of existing international public sector and [limited] domestic public sector funding could catalyse local domestic capital market funding."

‘Useful, but Not a Long-term Solution’

Climate financing experts say that while borrowing options could be available to Africa, they come with their own set of risks. 

"Debt-based approaches may not be useful long-term solutions," said Michael Olabisi from Michigan State University.

"Poor countries have limited ability to borrow. They must either pay above-market rates to borrow in international debt markets or the ratios of service payments to revenues are troubling for many governments.

"Blue bonds and green bonds could thread the narrow space between risk and opportunity, but with limitations."

Nassim Oulmane, Acting Director of the Technology, Climate Change and Natural Resource Management Division at ECA, acknowledges that the options the continent is exploring are not without risks.

"Impediments to private investment in African climate and green growth projects include the unsuccessful implementation of green growth strategies, weak regulatory frameworks and institutions, high-perceived investment risk and the lack of bankable project pipelines," said Oulmane.

He further noted that barriers to the issuance of green and blue bonds in Africa include the time-consuming and costly process of developing the instruments and the need to ensure and report on the proper use of proceeds. 

"Monitoring difficulties and inconsistencies in project classifications and commitments pose risks of greenwashing," he said. "In addition, insufficient awareness and understanding among issuers and investors, limited capacity to assess and verify the green credentials of projects and weak regulation and governance all hinder market development."

He added that in addressing these challenges, African countries have had success in prioritising multi-stakeholder consultations and regulatory reform. 

"In addition, there is scope for regional mechanisms to build from the example of the Great Blue Wall initiative and use collective guarantees to issue new, potentially cheaper, green and blue bonds."

Oulmane noted that foreign exchange risks can be mitigated for debt management purposes by issuing bonds in local currencies, though this approach might limit market interest.

Olabisi, on his part, argued that the continent should pursue the options despite their potential drawbacks. "Every step forward from here comes with risks. Most of those risks do not come close to the risks of unmitigated climate change," he said. 

He added that Africa is well-positioned to become a global leader in the renewable energy transition, stating, "The question is whether our private sector is willing to do the work, whether our leaders want to do the work and whether partners with resources from outside the continent want to work with Africans on financing arrangements that are fair."

Maximising Africa’s Green Potential 

Monique Nsanzabaganwa, deputy chairperson of the African Union, told the African ministers at the Zimbabwe conference that another option for Africa is to fully capitalise on its green potential.

"From 2011 to 2020, African forests increased carbon stock by 11.6 million kilotonnes of CO2- equivalent net emissions, while carbon stocks in forests outside Africa declined by 13 million kilotons," said Nsanzabaganwa.

"The Congo Basin forests have now become the world’s largest sink of CO2 emissions. But, the continent only received 2.7 per cent of promised financing. Achieving the green transition requires bold action, innovative financing and partnerships between governments, the private sector and the civil society."

Many African countries, especially those rich in forests, are already generating revenue by selling voluntary carbon credits and aim to increase these sales in the coming years.

The African Carbon Market Initiative (ACMI), made up of several African nations, was launched at the COP27 climate summit of 2022 and aims to boost the number of carbon credits generated on the continent to around 300 million credits by 2030 and 1.5 billion a year by 2050.

The ACMI says this could generate USD 6 billion in revenue by 2030 and USD 120 billion by 2050.

But both Gatete and Zimbabwe’s Finance minister Mthuli Ncube are concerned about the lack of fair pricing on the carbon trade market. 

"As we discuss the issue of greening our economies it is important to take into account our forests, which can be the source for developing a thriving carbon market based on fair prices," Ncube said.

Gatete added, "Carbon trading must be at a fair price to reap the rewards. It does not make sense for African countries to earn less than USD 10 per tonne of carbon whilst countries in Europe earn over USD 100."

Opportunity for African Climate Frameworks

Professor Ademola Adenle from the Technical University of Denmark noted that the failure of developed nations to fulfill their climate financing promises offers African countries an opportunity to develop national and regional frameworks that align their interests to tap into domestic or regional funds.

He contended that innovative instruments, including regional blue bonds, regional carbon markets and natural capital accounting, will not be effective in Africa without a clear and integrated framework that addresses both domestic and regional greenhouse gas emissions.

He explained that this approach would allow governments to understand the volume of emissions generated at the national or regional level. With this information, he added, all key stakeholders, including private sector leaders and government officials, can collaborate to develop a framework that not only addresses the impacts of climate change but also creates innovative instruments that are relevant and effective locally and regionally for mitigation and adaptation.

"The provision and availability of the African climate framework can leverage access to funds from donors, because African countries have an innovative instrument that works as opposed to the Western framework that is being imposed on African countries to implement climate change projects," said professor Adenle. 

"This approach has never worked in Africa because most African countries cannot access funds from donors due to stringent rules that are inherent in the western climate change framework."

Image by GPA Photo Archive.