Designing Targeted Financing to Build Africa’s Carbon Market

30/05/2011
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DMafalda

While global carbon markets are taking off, Africa lags far behind with only 7% of the Clean Development Mechanism (CDM) global market share. The African Development Bank (AfDB) is designing targeted financing instruments, such as the Africa Carbon Facility (ACF), to help build Africa’s carbon markets and attract more green investments to the continent. Mafalda Duarte, ACF coordinator and principal climate specialist, African Development Bank (AfDB), explains.

Q: Why does Africa need the AfDB’s Africa Carbon Facility (ACF)?

A: In Africa, carbon market constraints are significant. There is a lack of technical, financial and legal understanding of the CDM. Projects are often of a smaller scale than in other markets. And for projects starting in 2011, the timeframe is quite short to generate Certified Emissions Reduction units (CERs) before 2013 when CDM regulatory changes may make carbon finance too risky for debt financiers.

There is real concern that private sector investment in CDM projects will dry up in the next couple of years. To avoid this, “something” needs to happen to maintain private sector confidence while the post-2012 regulatory framework continues to be negotiated and agreed. We are designing the Africa Carbon Facility to help fill this gap.

Q: How does ACF address these market constraints?

A: Our goal with ACF is to address supply-side barriers by providing selective seed capital under a project development facilitation financing mechanism. The facility would address demand-side barriers by providing bankable, post-2012 guarantees from African projects until 2020 in the event there is no functioning post-2012 carbon market. The aim is to inject more private and public sector investment into CDM projects in Africa until 2012 and beyond. Finally, ACF would address debt financing barriers by leveraging the AfDB’s existing debt financing role and overall capacity to support CDM projects coming through the Bank’s lending pipeline, as well as ACF.

Q: Who will benefit from ACF?

A: We expect that African CDM project developers will benefit from seed capital to help cover the prohibitive development costs. Hopefully this incentive will encourage more investment in African CDM projects which, although small, provide real sustainable development benefits for local communities.

Primary CER buyers and investors will be able to benefit from the post-2012 purchase guarantee. It is being designed as a bankable product to overcome the post-2012 market risk in a time of ongoing regulatory uncertainty. It will strive to give CER buyers and investors increased access to the pipeline of CDM projects in Africa and a stream of CERs out to 2020.

Contributors will also be able to benefit from ACF’s innovative, self-replenishing design. And, of course, Africa will be able to benefit from increased CDM opportunities and a bigger piece of the global carbon market.