Current State of Africa’s Experience of Carbon Pricing and Recommendations for the Future

Carbon Pricing and Recommendations for the Future

By King Carl Tornam Duho

The state of carbon pricing in Africa1 is bleak as only South Africa has a carbon tax implemented while Senegal and Côte d’Ivoire have their emissions trading scheme (ETS) or carbon tax under consideration. Africa’s success in mitigating climate change with market-based mechanisms will be successful only with a strong tripartite engagement between the public sector, private sector and civil society while development partners provide support. This article explores the concept of carbon pricing in Africa, the challenges and proffer some recommendations.

Carbon Pricing in Response to Negative Externalities

Carbon pricing is one of the tools which can address the negative externalities that are associated with emissions. It consists of market-oriented strategies like ETS, carbon tax and other hybrid mechanisms used to influence the reduction of greenhouse gas (GHG) emissions. The emissions are negative externalities that are produced by the production processes of businesses and other institutions.

Thus, climate pricing is a means to put a price (actual monetary value) to carbon emissions in terms of pricing strategies so that production and consumption choices reflect the impacts on climate change and opportunities for low-carbon energy options. The tools can penalise production processes that contribute to emissions while compensating for climate-friendly production processes. In the context where carbon pricing is effective, market prices of goods and services reflect the negative impact of products on the climate. Carbon pricing continues to be weakly represented in the development agenda of African countries. Yet, as depicted in the Figure (on page right), countries can generate climate finance from carbon pricing tools.

State of Carbon Pricing in Africa

There are some promising developments regarding the implementation of carbon pricing in Africa. All African countries are making strides in one area or the other, but South Africa is the pacesetter in Africa.

South Africa introduced the Carbon Tax Act (No 15 of 2019)2 which aim “to provide for the imposition of a tax on the carbon dioxide (CO2) equivalent of greenhouse gas emissions, and to provide for matters connected therewith.” This tax put a price on carbon emissions and will enhance awareness, increase reporting on climate emissions while the revenue will be used for the poor communities. Although the tax is introduced at a low price of about $0.42/ton3, there are indications that this will be increased over time. The country aims to apply the fundamental principle of environmental law, the ‘polluter pays principle’.

carbon pricing

The depth and scope of the carbon pricing regime in South Africa cannot be evident in other African countries. However, there is some evidence of positive steps taken albeit slow. For instance, 18 African countries4 are members of the REDD+ which has the focus on reducing emissions from deforestation and forest degradation, forest carbon stock conservation, the sustainable management of forests, and the enhancement of forest carbon stocks in developing countries. Also, Mozambique, the Democratic Republic of Congo and Ghana have signed a deal with the World Bank to cut carbon emissions.5

Additionally, a content analysis of the Nationally Determined Contributions (NDCs)6 reveals that only 2 countries (Côte d’Ivoire, Egypt) made reference to “emission trading” and only Côte d’Ivoire and South Africa made reference to “carbon tax”. Additionally, only 7 countries referred to “fossil fuel subsidy reform’ while 34 countries refer to “international market mechanisms”. Similarly, it is evident that ‘hydrogen energy’ and ‘electric vehicles7 are not found in Africa’s Agenda 2063: The Africa We Want.8 Some of these findings show the exclusiveness of the frameworks to capture very relevant issues concerning climate change.

Additionally, although there are some actions from the subregional institutions in Africa, there are bottlenecks that undermine their work. For instance, in West Africa9, some of the challenges that persist are the lack of national governance framework for transparency, weak involvement of the private sector, lack of capacity for project development, and the need to revise the NDCs. These problems permeate the African continent

Challenges to Effective Carbon Pricing Regime in Africa

There is a lack of regulatory frameworks to drive carbon pricing in Africa. Currently, most climate change frameworks used by countries are executive instruments and only a few countries have laws. Where there are legislative instruments that have legal status, there are not enough coverage of climate finance issues and the implementation is also low. Although an arduous task, regional institutions in Africa need to align the legal frameworks that promote carbon pricing mechanisms across Africa.10

There is a lack of regulatory frameworks to drive carbon pricing in Africa. Currently, most climate change frameworks used by countries are executive instruments and only a few countries have laws.

There is a lack of financial systems and financial resources to promote climate change mitigation activities. As regards the explicit carbon taxes, fiscal policy can address them, if policymakers and duty bearers have the political will. But, the success of such strategies will depend on the strength of the capital market and the money market to accommodate the instruments, especially regarding ETS and the hybrid mechanisms. The ETS, which are “cap and trade” programs that have been found to reduce CO2,11 involves the selling of permits to discharge specific pollutant where polluters pay an amount equal to their emissions. Due to the less developed capital market in Africa, trading climate-related financial derivatives could be stifled.

It is worth noting that capacity building continues to be a key area of focus for a successful carbon pricing regime in Africa. At the domestic and the regional levels, there is the need to upskill personnel on how to explore available carbon pricing options, make proposals and implement them. Likewise, various policy institutions like the Think Tanks and other consulting entities need to enhance their capacity in providing context-specific strategies to achieve the desired low-carbon emissions.

Weak creation of political and social will for decreasing climate change. Although businesses and their leaders need to be at the forefront in mitigating climate change, the political and social will needed in Africa cannot be underestimated. The political manifestoes in Africa tend not to capture climate change issues and pre-election debates do not consider enough discussion on environmental externalities or climate change issues. It is time for political leaders and society to rise to act in mitigating climate change. It is by this that financial tools like the carbon pricing mechanisms can be inculcated in key policies and eventually implemented.

Recommendations

The following are areas that duty bearers in Africa and development partners can help to enhance climate action and carbon pricing in Africa.

First, there should be strategies to strengthen regional collaboration through platforms or initiatives like United Nations Framework Convention on Climate Change Collaborative Instruments for Ambitious Climate Action (UNFCCC-CIACA) initiative and the regional dialogues on carbon pricing (REDICAP) process.

Also, a regional Readiness program on common access barriers for all countries should be developed. This will help early adopters like South Africa feed into the strategies of the laggards.

There should be political will from each country and this can be driven by advocacy works of civil society and the populace.

There should be practical steps to facilitate the creation of National stakeholders’ consultative platform where the Government, the Private sector, local communities, research institutions, youth, gender specialists are involved. There is so much that needs to be done for private sector uptake of the climate change issues and the need to use market-based approaches to address them.

There should be political will from each country and this can be driven by advocacy works of civil society and the populace. This should be accompanied by various institutional changes to allow for the ease of implementation of existing and future climate change laws, regulations and policies.

The support of development organisations and countries like the US, UK and China who are involved in Africa’s development agenda should draw more attention to climate change issues. There should be measures to create awareness, and target inculcation of sustainability across trade engagements and international diplomacy. Most essentially, climate change pricing should underpin the African continental trade agreement and the implementation thereof.

Other African countries can learn from the example of South Africa to implement their carbon pricing mechanisms, otherwise, the waiting shall continue and the increasing number of intentions shall remain as intentions.

About the Author

King Carl Tornam Duho

King Carl Tornam Duho is a an ACCA Prize-winner, CIMA Chartered Management Accountant and a business, economic, and research consultant with experience in academia, business and public policy. He is the Technical Director for Dataking Consulting and has consulted for UNICEF, GIZ, the Royal Netherlands Embassy, IMANI Africa and Development Reimagined. He is a member of the National Climate Monitoring, Reporting and Verification Communities of Practice (MRV-CoP) in Ghana. He has written extensively on the financial sector, cocoa sector, extractives industry, climate change, taxation and other economic issues. He has authored more than 30 articles including 13 peer-reviewed articles in ABS/ABDC ranked journals. https://orcid.org/0000-0002-8736-3220

References

  1. World Bank Group (2019), “State and Trends of Carbon Pricing 2019”, Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/31755
  2. Government of South Africa. (2019), “Carbon Tax Act 15 of 2019”, Republic of South Africa. https://www.gov.za/sites/default/files/gcis_document/201905/4248323-5act15of2019carbontaxact.pdf
  3. Winkler, H. and Marquard, A. (2019), “South Africa’s new carbon tax could help poor people pay less for energy”, World Economic Forum. https://www.weforum.org/agenda/2019/06/carbon – tax – revenues – could – be – harnessed – to – help-south-africa-s-poor/
  4. FCPF (2021), “FCPF Country Participants”, Forest Carbon Partnership Facility. https://www.forestcarbonpartnership.org/countries
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  7. Ryder, H. (2021), “Africa needs to take bold, transformative action on climate change”, African Business. https://african.business/2021/04/trade-investment/africa-needs-to-take-bold-transformative-action-on-climate-change/
  8. AU, (2013), “Agenda 2063: The Africa We Want”, African Union. https://au.int/sites/default/files/documents/33126-doc-01_background_note.pdf
  9. Sarr, O.F. (2020), “Virtual Technical Workshop on Needs-Based Finance for West Africa 26 – 27 October 2020”, West African Alliance on Carbon Markets and Climate Finance (WACC). https://unfccc.int/sites/default/files/resource/WAA_Presentation_OFSARR%20NBF%20Virtual%20wshop%2027%20OCTOBER%202029.pdf
  10. UNFCCC (2019), “Carbon pricing approaches in Eastern and Southern Africa”, United Nations Framework Convention on Climate Change. https://unfccc.int/sites/default/files/resource/Summary%20of%20East%20Africa%20carbon%20pricing%20report.pdf
  11. Bayer, P., & Aklin, M. (2020). The European Union emissions trading system reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences, 117(16), 8804-8812. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7183178/

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.