Our ninth edition of Africa Focus shows Africa embarking on a period of unprecedented growth and opportunity.
We open this issue with a closer look at Article 6 of the Paris Agreement, which holds much promise for the African continent. Article 6 allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their nationally defined contributions. The COP26 negotiations in Glasgow led to a set of agreed rules to help put Article 6 into practice. COP27 reaffirmed the previously agreed principles of Article 6, but sadly, challenges in reaching agreement on some contentious issues led to part of this being deferred to COP28 in 2023. The relevance of the Article 6 to community-based agriculture—an area of particular importance in Africa—is highlighted by our guest contributor, Dan Collison, Chief Executive of Farm Africa.
Natural synergies between the Middle East and Africa—geographic proximity, well-developed logistical networks and close political and economic ties—are key features in this edition. We ask the question, "Can the Middle East—with its vast capital and a booming Islamic finance market—provide the much-needed boost to the underserviced Muslim population in Africa?" Focusing on the Gulf Cooperation Council states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, we explore the growing investment and trade flows between the GCC states and Africa. Recent years have seen these ties expand south to include sub-Saharan Africa, and from an almost exclusive focus on oil and petrochemical-related products to a broad spectrum of other sectors.
Cross-border investors are always sensitive to the risk of wrongful conduct that the state hosting their investments, and that state’s organs, can inflict upon them. Many African countries have vowed to promote and protect foreign investments, and have taken steps to modify the investor-state dispute settlement system. One of our articles explores the current state of investment treaties in Africa and efforts to protect foreign investments in Africa as well as African investments abroad.
In many ways, Africa has emerged as a pioneer in financial services—a good market in which to do business and realize profits—beyond just the development projects. The way its people move money around the continent on their mobile phones is far ahead of even the more developed markets. Africa has long been of interest to private equity investors, and rounding off the range of topics covered in this edition, we have an interview with Bryce Fort, Chief Executive Officer of Emerging Capital Partners, who was the driving force behind the recent listing of IHS Towers, an African mobile telecommunications company, on NYSE. The interview explores current developments in private equity in Africa.
We hope that you will find the new edition of Africa Focus a thought-provoking read.
Article 6 of the Paris Agreement: Opportunities for Africa
The possibility of climate markets has finally materialized into the draft stage at COP27, but many crucial decisions that would allow for carbon trading to begin in earnest were deferred to COP28.
The Paris Climate Agreement, a legally binding international treaty on climate change, entered into force in November 2016 and was adopted by 196 parties in COP21 with the goal of limiting global warming to no more than 1.5 to 2.0 degrees Celsius above pre-industrial levels. The binding agreement is the first of its kind to bring multilateral climate change by way of cooperation between nations to reduce their emissions. To facilitate these efforts, the Paris Agreement sets a review of each party's' commitments every five years and provides a pathway for developed nations to assist developing nations in their emission mitigation efforts. It also creates a framework for transparent monitoring and reporting of emissions on both individual and collective levels.
The provisions of the Paris Agreement establish a framework for global climate action. Article 4 of the agreement requires each party to prepare, communicate and maintain successive nationally determined contributions (NDC) that it intends to achieve as its contribution toward the global goals. NDCs are submitted every five years to the UNFCCC secretariat. Parties are requested to submit the next round of NDCs by 2020 and every five years thereafter, regardless of their respective implementation timeframes. Almost all parties submitted new or updated NDCs to the UNFCCC secretariat in the lead-up to COP26, outlining their national plans for 2020 to 2025 to reduce global greenhouse gas (GHG) emissions. In line with the Paris Agreement's principle of ratcheting up aggregate and individual ambitions over time, the next round of NDCs (in 2025) will be expected to be more ambitious, representing the highest possible ambition at that time. Although the Paris Agreement does not set specific requirements for the NDCs, there are certain expectations about the stringency of targets by various countries, largely reflecting each country's capabilities, its level of development and its contribution to emissions over time.
One of the key outcomes of the Paris Agreement is the establishment of Article 6, which governs carbon markets and recognizes that "some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity." In short, Article 6 allows parties to voluntarily cooperate with one another to achieve the emission reduction targets set out in each party's NDCs. Under Article 6, a party may transfer carbon credits earned from the reduction of GHG emissions to help one or more parties meet their own climate targets. By making it clear that countries can transfer carbon offsets internationally to deepen their emission reductions, Article 6 explicitly enables international carbon trading.
Article 6 is crucial to the success of the Paris Agreement. It guides how countries should cooperate to generate deeper GHG reductions. In 2019, the International Emissions Trading Association (IETA) concluded that cross-border coordination in the form of carbon trading could cut the cost of meeting NDCs in half by 2030, making it possible to cut emissions 50 percent more, at no additional cost. Unsurprisingly, voluntary cooperation in the form of carbon trading has become a major focus of discussion, enabling the mobilization of global resources to ensure net reduction of GHGs and establishing a global carbon price that would tie the negative externalities of GHG emissions to polluters, therefore parties exceeding their NDCs would bear the costs of global warming.
COP27 was a productive stepping stone toward setting up the foundations for the potential creation of carbon markets as outlined in the Paris Agreement. A draft 60-page document was published during the conference, but many sections remain up for debate and future negotiations may be carried over into 2023.
Article 6.2 describes cooperative approaches parties may engage in that involve internationally transferred mitigation outcomes (ITMO). This sets the foundations of the accounting framework behind international cooperation. Limited international oversight is defined, and a great deal of flexibility is allowed in designing and implementing the cooperative approaches. The cornerstones of Article 6.2 cooperative approaches are ensuring transparency, and avoidance of double-counting of ITMOs in order to preserve environmental integrity.
Confidentiality: While COP 26 finalized the core mechanics of Article 6, COP27 was able to facilitate discussions around key mechanics, including what information countries would require to report when trading ITMOs, and that countries may "designate information…as confidential" when reporting to the Article 6 technical expert review team. However, unlike earlier drafts, the latest document requires an explanation of such confidentiality.
This change has raised concerns among climate activists that the agreed review process is insufficiently transparent in terms of accountability, and might allow greenwashing, opening the door to a lack of transparency.
The technical body of the UN climate regime was tasked with the development of rules to constrain the use of confidentiality. Participating countries were asked to submit their views prior to the next intersessional meeting in Bonn in June 2023.
The wording of Article 6 allows room to set a high bar for transparency and integrity that promotes much-needed regulation and accountability in what would otherwise be an unregulated voluntary carbon market.
Authorization of ITMOs: Another key requirement of Article 6.2 is the establishment of authorization criteria of ITMOs. The authorization of an ITMO determines how the ITMO will be used by the participating parties. There are three kinds of authorized uses for an ITMO: toward an NDC; toward other international purposes, for instance, GHG mitigation under other international regimes such as the International Civil Aviation Organization; or for other purposes (for instance, carbon trading in voluntary carbon markets).
ITMOs are also given an expiration date, since they must be used (and adjusted for) in the NDC period in which they have occurred.
Article 6.4 establishes a centralized crediting mechanism under the authority of the CMA 2, which enables credit trading generated through specific projects. Activities under this mechanism can receive carbon credits issued by the UNFCCC if they are approved by the host party and complete the activity cycle. Such credits can be transferred internationally as well. Instead of using a set formula for establishing a baseline of carbon emissions, the mechanism under Article 6.4 allows greater technical flexibility by examining individual party baseline estimates and allowing them to be adjusted to their circumstances.
Negotiations at COP27 included defining the scope of "carbon removals" processes—natural or engineered—that would remove carbon dioxide from the atmosphere, contributing to a party's carbon credit. COP27 also hosted discussions on the parameters of what constitutes a carbon credit, referred to the supervisory body for further clarification.
Article 6.8 establishes a framework for non-market approaches (NMA) toward mitigation and adaptation, which acknowledges the importance of non-market-based cooperation to promote mitigation and adaptation ambition. This introduces cooperation between parties through finance, technology transfer and capacity building, where no trading of emission reductions is involved on a quid pro quo basis.
Article 6.9 establishes a framework to promote NMAs. Parties negotiated the governance and functions of this framework at COP27 and a work program to promote NMAs, including a potential voluntary UNFCCC-hosted web portal for their trading that could link projects with potential funders.
Other contentious issues concerning Article 6 that have been deferred to COP28— expected to be held in Dubai in November 2023—include how to treat emissions "removals", whether to allow credits for "emissions avoidance" and when carbon credits could be "revoked".
There is a strong sense of support towards COP27 being the 'African COP', helping emerging economies decarbonize their industries and contribute to the global goal.
Participants in African financial services markets have been quick to recognize the opportunities that Article 6 offers for funding projects and activities on the African continent that advance climate change mitigation and adaptation. Many of the continent's 54 countries have expressed interest in participating in the various Article 6 mechanisms under development. Some are already actively engaged in pilot projects and other market-preparing initiatives.
The West African Alliance on Carbon Markets and Climate Finance (WAACMCF) is a good example of regional collaboration, which aims to "participate in international carbon markets, benefit from technology transfer and access result-based climate finance for NDC implementation". According to Ousmane Fall Sarr, coordinator of the WAACMCF, the WAACMCF must "make carbon markets accessible for West African countries to make sure least developed countries do not miss the train under the Paris Agreement as they did with the CDM." The Alliance currently comprises 16 member states: Benin, Burkina Faso, Cape Verde, Ivory Coast, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo.
Aided by funding by the German government, a similar alliance in East Africa has already published a handbook for Article 6 negotiations for member parties (Burundi, Ethiopia, Kenya, Rwanda, Sudan, Tanzania and Uganda) and other entities.
Encouraging Africa's full participation in Article 6 mechanisms is paramount for the continent. Nature-based solutions in Africa could achieve mitigation outcomes in the order of 1.5 billion tons of CO2-equivalent per year and, according to the International Energy Agency (IEA), Africa could achieve mitigation outcomes in the order of 3.8 billion tons of CO2-equivalent over the period covering 2020–2030 (380 million tons of CO2 per year).
The forests of the Congo basin have overtaken Amazonia as a carbon sink, but its carbon sequestration is decreasing because of human activity. By 2030, its ability to absorb CO2 from the atmosphere might be 14 percent less than it was ten to 15 years ago. Clearly, Africa's potential contributions to stabilizing the Earth's climate are globally significant.
Recommendations for Africa's implementation of Article 6
For the Paris Agreement goals to be achieved, the mechanisms of Article 6 need to be as inclusive as possible, both geographically and in terms of attracting public and private sector investment. As the latest findings of the Intergovernmental Panel on Climate Change (IPCC) show, Africa is likely to be disproportionately impacted should the 1.5 to 2.0ºC objective not be met, and global emissions are currently on track to more than double that. This does not come as a surprise, as the African continent is especially vulnerable to the harmful effects of climate change. Therefore, for African nations in particular, the threat as described by the IPCC report of failing to meet that objective is existentially dire. Market mechanisms and competition for climate finance may point to the fact that a one-size-fits-all approach may disproportionally benefit emerging economies. It is of the utmost importance to consider the circumstances of African countries.
To ensure strong African participation, cooperative approaches defined under Article 6.2 and the mechanism under Article 6.4 need to be practical, inclusive and fair. Guidance and accounting metrics must be robust and clear. Furthermore, African nations need to be closely involved in developing such projects. Their own growth and development aspirations need to be respected and the measures implemented must be recognized by them to support those aspirations. Opportunities should be seized regarding expanding the cooperation with selected African host countries and private sector organizations that have demonstrated their ability to deliver, but that would benefit greatly from improved access to finance and enhanced capacity in order to meet Article 6 requirements. This can be achieved through support initiatives in Africa with the potential to quickly unlock large-scale investments. Regional blocs such as the WAACMCF alliance help create a long-term structure that capitalizes on the strengths of its members through promoting sub-regional cooperation that builds institutional capacity for long-term engagement with the Paris Agreement.
This means that investments in climate change mitigation and adaptation in Africa need to be considered alongside bridging the continent's vast infrastructure and energy deficits, and solving its other growth inhibitors. Funding strategies therefore cannot be limited only to carbon trading but need to incorporate other forms of sustainable finance and conventional funding sources as well. Because climate knows no national borders, efforts need to be integrated across African nations. There are myriad potential projects in the continent that should be considered, including international cooperation and investment with clear sustainable development benefits that could be unlocked by a well-designed carbon market approach. Indeed, many African countries make reference to market mechanisms in their PA contributions, in order to assist them in both the implementation of their NDCs and the sustainable transformation of their economies.
The success of the implementation of Article 6 approaches in African countries is contingent on their function in a practical, inclusive and equitable manner. Africa's perceptions of opportunities and challenges presented by Article 6 are heavily influenced by existing experiences with the CDM. This mechanism allows countries with emission-reduction or emission-limitation commitments under the Kyoto Protocol to offset their obligations by implementing emission-reduction projects in developing countries. By the time African countries awoke to the opportunities under the CDM, Asian countries had already issued hundreds of millions of dollars worth of carbon credits. The transition from the CDM mechanism under the Kyoto Protocol to Article 6 mechanisms under the Paris Agreement has potentially important implications for the continuation of existing mitigation activities established through the CDM.
Regarding Article 6, African countries are equipped with enhanced knowledge and experience to selectively build on the institutions, capacities and activities already established under the CDM, with support from several developed nations. As in other emerging market regions, many African nations have made their NDCs under Article 4 conditional on international support, including through Article 6 carbon markets. Just some examples of such international support specifically related to Article 6 include Germany's International Climate Initiative, which provides support to West and East African alliances; Japan's Joint Crediting Mechanism, which allows for the issuance of carbon credits in Africa; and the Global Forests Finance Pledge.
COP27 in Africa: Laying the groundwork for greater assistance to more vulnerable countries
A series of breakthrough agreements were reached during COP27 to provide funding for vulnerable countries hit by climate disasters—a forward step toward fostering cooperation and collaboration. This is an important point of progress that assists developing countries respond to unfavorable circumstances. New pledges, totaling more than US$230 million, were made at the Adaptation Fund at COP 27, enhancing resilience of those living in climate-vulnerable communities. Climate finance was at the forefront of discussions, particularly around setting up "new collective quantified goal on climate finance" by 2024, focusing on the needs and priorities of developing countries.
The World Leaders Summit—held over two days during the first week of COP27—convened six roundtable discussions which highlighted solutions for the most pressing issues, including vulnerable communities, access to food security, access to finance to combat climate challenges, but details are still subject to further discussion.
The Paris Agreement provides a strong framework for financial, technical and capacity-building support to countries that require this, in Africa and elsewhere. It reaffirms that developed countries should take the lead in providing financial assistance to more vulnerable and less-equipped countries, to fund measures both for mitigation of and adaptation to the effects of climate change. This includes transfer of technology, for which a mechanism and framework is defined. As the Article 6 rulebook gains traction, flows of funding and technology from the developed world to Africa would need to increase, if those countries are to fulfill their obligations under the Paris Agreement. At COP27, negotiators were able to thrash out more of the practicalities involved, operationalizing a lot of crucial guidance on reporting requirements, enabling greater progress in the coming years based on productive discussions on crucial low-emission development activities, improved access to finance and resources, as well as conductive domestic institutional set-ups—translating into practical climate action.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.