Carbon credits are similar to gold stars that teachers give to their class for good homework. Some learners will earn many of these rewards, others only a few or none. Now imagine each learner is only allowed to keep three gold stars per week. So those that earn, say, five stars will have two extra ones – which they can either forfeit or give to a classmate, whose homework earned merely one star that week.

That’s roughly how carbon credits work, too. Companies that do well in their efforts to decarbonise – for example, by reducing their carbon emissions through verified renewable energy projects or reforestation efforts – are rewarded with carbon credits, just like good learners earn gold stars.

Carbon credits are tradable certificates, where one carbon credit equals a reduction, avoidance or removal of one metric ton of carbon emissions. Companies can sell their carbon credits to those companies that need to ‘offset’ their emissions if these are still higher than they should be.

By putting a price on carbon and trading with carbon credits, companies are incentivised to ramp up their decarbonisation strategies, invest in renewable energy and actively address climate change.

According to the WEF, carbon credits fall into three categories. Firstly, there are avoidance projects (which prevent emissions); secondly, there are reduction projects (which reduce emissions); and thirdly, there are removal projects (which directly remove greenhouse gases from the atmosphere).

In a pioneering move for the region, the Johannesburg Stock Exchange (JSE) launched a voluntary carbon market in November 2023 to encourage South African participants to buy or sell carbon credits and renewable energy certificates (RECs). The continent’s largest bourse – through its subsidiary JSE Ventures – partnered with Xpansiv, a US-based infrastructure provider for global environmental markets.

‘The JSE Ventures carbon market is fully integrated with Xpansiv CBL, the world’s largest spot carbon credit platform with more than 1 500 market participants,’ says Anelisa Matutu, head of commodities in the JSE’s capital markets division. ‘This means that local participants get immediate access to a global market, a network of buyers and sellers of carbon credits and RECs globally. Prices of the carbon credits on the platform are determined by willing buyer willing seller, and negotiated transparently. The platform also offers functionality such as request for quotes and auctions.’

She adds that the new market provides a mechanism to mobilise financial resources, which can be used to reinvest in more carbon-mitigating projects. Sale of carbon credits and RECs can be viewed as an incentive to invest and scale carbon-mitigating projects.

On any given day, there are typically 150 to 200 projects on the integrated platform. These include, among others, renewable energy, agriculture, landfill, land use, afforestation and conservation projects.

The African continent has significant natural emission reduction opportunities, according to Roelof van Huyssteen, PwC South Africa energy strategy and energy law expert. ‘Africa’s afforestation and reforestation opportunities are simpler and cheaper than the experimental carbon capture and storage technologies in other countries. This, coupled with the social benefits associated with many African projects, makes African carbon credits attractive investments,’ he says.

Here it’s important to understand that the criteria for issuing carbon credits in Africa can differ from those in industrialised countries. As renewables have become ‘business as usual’ in certain countries, well-known carbon standards such as the Verified Carbon Standard (VCS) and the Gold Standard have started to move away from issuing carbon credits for renewable energy projects, says Van Huyssteen. ‘However, in order to continue driving investment in renewables in Africa, newer local carbon standards such as the Inclusive Carbon Standard [ICS] still allow registration and issuance of carbon credits linked to renewables.

‘In a country such as South Africa, where coal-fired power is still the order of the day, investment in renewables must be driven by any means possible, including the ability to be credited with environmental attributes in the form of either carbon credits or RECs,’ he says.

At present, there are only a few local carbon credit standards in South Africa. In addition to the ICS there is, for example, an entity called Credible Carbon. According to the JSE’s Matutu, the South African government is in the process of reviewing local standards for inclusion in the carbon tax offset system, which she says will really help elevate these initiatives. The country’s carbon tax offset system currently accepts only carbon offset projects developed under three international standards (Clean Development Mechanism, Verified Carbon Standard and Gold Standard).

It’s crucial that carbon trading is properly regulated, standardised and verified, in order to prevent greenwashing. When done correctly, it can genuinely drive decarbonisation and yield tangible benefits for people, planet and profitability.

‘For example, emitters may incorporate carbon credits and renewable energy certificates into their net zero sustainability targets, ESG investing, green finance and project development programmes,’ says Matutu. ‘South Africa has a carbon tax and carbon credits may be used to offset this tax. In the case of renewable energy certificates for the reduction of Scope 2 GHG emissions, I’ve met some sustainable power producers who have said their objective is to use the proceeds from the REC sale to reduce their price per kilowatt-hour, so giving back the benefit to the purchaser of renewable energy.’

Some carbon credit certification standards now allow project developers to showcase their contributions to sustainable development, such as biodiversity conservation and community empowerment, according to Van Huyssteen.

‘These include carbon standards that directly integrate Sustainable Development Goal reporting, such as the Gold Standard, the VCS and standalone co-benefits standards, such as the Climate, Community and Biodiversity Standard and the Sustainable Development Verified Impact Standard, which can be added on to a VCS certification,’ he says. ‘Such credits typically sell at a premium and emitters are allowed to report the co-benefits as part of their sustainability reporting.

Meanwhile, South Africa’s new carbon market enables sellers and project developers to create projects to serve both the voluntary as well as the compliance market linked to the carbon tax regime.

Van Huyssteen says buyers, recognising the growing importance of these co-benefits, are increasingly looking for credits that deliver verified positive impacts on sustainable development and biodiversity beyond carbon reduction or removal.

Yet like all trade-offs in life, carbon trading has its challenges. Law firm Bowmans noted in November 2023 that, notwithstanding the challenges, ‘we see great potential for carbon projects and related credits to positively contribute towards combating climate change in Africa’.

The firm is actively involved in some emerging carbon exchanges and carbon projects in a number of African jurisdictions, including Kenya, Rwanda, South Africa, Tanzania and Zambia.

‘In addition to contributing towards the mitigation of climate change, these projects, if developed and operated properly, can result in numerous other potential benefits, including community upliftment and employment, and the generation of new and diversified income streams that boost the economy. Given that Africa’s forests provide a significant carbon sink for the absorption of carbon dioxide from the atmosphere, the projects we are involved in are often in pursuance of the issuance of forest carbon credits, either in the form of afforestation/reforestation (i.e. restoration), or avoided deforestation (i.e. protection), projects.’

The launch of JSE Ventures’ voluntary carbon market platform is a milestone for sustainable finance in Africa. Other countries, such as Nigeria, are planning to develop carbon pricing mechanisms and are looking to South Africa to inform the design of their national systems, says Van Huyssteen.

Matutu says that Africa has huge potential to be a net seller of carbon credits and, as funding is secured to develop additional projects, African economies will see the benefit of investments not only to develop the projects but also add to reducing the net global carbon footprint.

‘It’s imperative that the projects developed are assured of the highest integrity, resulting in an actual reduction,’ she says. ‘Governments are the champions to ensure these markets remain robust and accessible to global buyers; the funds raised from selling the credits should be channelled back to the communities.’

After all, even carbon markets with the highest integrity don’t serve as carte blanche for burning fossil fuels.

High emitters can no longer behave like learners who expect to be given gold stars by their better-performing classmates. Instead of regarding carbon credits and renewable energy certificates as an end in itself, they need to be understood as drivers for cutting carbon emissions and advancing climate-change mitigation in Africa.

By Silke Colquhoun
Images: Gallo/Getty images, iStock