Climate Financing Vol. I

Part I — what’s happening to our earth?

The natural ecosystem has always worked in a somewhat balanced manner. Carbon is emitted (e.g. from animals) into the atmosphere and nature (e.g. trees) recollects emitted carbon. Humans have been cooking with wood-based fuels for most of our history; carbon emissions have been part of our life. When looking from the view of the millions of years in which the earth has existed, there have been cyclical changes in the concentration of carbon in the atmosphere, caused by changes in temperature, leading to further changes in temperature and other effects. The earth has had a cycle of ice ages and warm periods (what we currently have). The increased warmth of the atmosphere led to the end of the last ice age. This is the concept of climate change — a long-term shift in the earth’s temperature and weather patterns (UN). Nonetheless, in this current warm phase of the earth’s temperature cycle, the carbon cycle has been relatively balanced until the industrialization era.

Atmospheric Carbon Dioxide Cycle

Source: The Carbon Cycle (nasa.gov)

Global Carbon Dioxide Emissions

Source: The Carbon Cycle (nasa.gov)

How exactly do all these affect you? According to the UN, The increase of carbon in the atmosphere leads to increased temperatures, and these have effects such as:

1. Increased temperatures: since the 1980s, each decade has been warmer than the preceding one. We all have experienced this. Global warming is why it didn’t snow on Christmas day last year in Berlin.
2. More severe storms: the rise in temperature increases the presence of moisture in the atmosphere increasing the intensity of rainfall and flooding. In other words, Lagos might join Atlantis.
3. Increased draughts: water becomes less (or not) available in some regions. Desertification increases. These reduce the land available for producing food.
4. Warming, rising ocean: the ocean stores most of the heat from global warming and it expands due to the heat. The ice caps melt as well due to the heat, adding to the volume of water. This also affects ocean life.
5. Not enough food: food supply chains are disrupted because the change kills off fisheries, livestock and plants. Food resources are at risk.
6. More health risks: the change in weather patterns will lead to diseases and the fact that global warming will probably cause ancient, deadly viruses to be defrosted is quite frightening.
7. Poverty and displacement: between 2010 and 2019, roughly 23 million people were displaced due to weather-related events. The loss of livestock, crops, and homes lead to poverty.

Climate change will have disastrous effects on our lives and it’s obvious that we need to stop it. This rapid emissions increase has been caused by mostly human activities and all these effects we are seeing today have been caused by a 1.1°C increase in global temperatures from 1850 to 1900. Knowing what to attack is helpful, and the chart below visualizes the major sources of emission.

Global Greenhouse Gas by Sector

Part II — what to do

The path to reducing the carbon in the atmosphere is the removal and reduction of carbon emissions. Reduction refers to switching from activities that emit large amounts of Greenhouse Gases (GHGs) to those that don’t, while removal deals with increasing the activities that remove carbon from the atmosphere and store it. For sake of brevity, I’ll use ‘reduce’ to refer to both.

The Net-Zero Goal

The Net-zero goal is based on the carbon cycle; we don’t have to eliminate all GHG emissions — we can’t, rather we just need to make sure that each ton of a GHG emitted, is captured and stored. There are many ways to achieve this, but success depends on scale. Carbon reducing activities include capturing carbon directly from factories & power plants, planting more trees, or just pulling CO2 directly from the atmosphere.

Now, scaling any solution requires capital, and currently, clean technologies are expensive. Take power consumption, for instance, generally, people still use fossil fuels because they are cheaper than using alternative technologies. This is an issue of economics. Therefore, people will leave fossil fuels if clean energy is cheaper. A major reason 970 million Africans lack access to clean cooking is that they simply cannot afford to switch. While access to cleaner energy (e.g. LPG) is also a major issue, some stoves reduce the GHG emissions from charcoal and firewood — but they aren’t cheap yet.

Cap and Trade

Making clean technologies cheaper could be done by making heavy carbon-emitting activities more expensive or reducing the cost of producing clean technologies. The cap and trade system does both. A government sets a cap on the level of emissions permitted for an organization and issues permits for each unit of emissions under that cap. Now, emitting firms are required to obtain a permit for each of their emissions, and these are obtained from the government or trading with other firms. Any firm that does not have enough permits is expected to cut down on its emissions or from trading with other firms. Emissions trading is expected to reduce man-made emissions.

The world’s largest emissions trading system is the European Union Emissions Trading System (EU ETS). The EU ETS covers 45% of the EU’s emissions and plans to have emissions reduced by 43% compared to 2005 levels. To increase the rate of emission cuts, the overall number of emission allowances declines annually at a 2.2% rate. The EU-ETS is an example of a mandatory carbon credit market. Here, companies are legally required to cut down their emissions. The UK and California also have mandatory carbon markets.

Apart from the mandatory carbon market, There’s the Voluntary Carbon Market (VCM) where companies that are not legally required to reduce their emissions partake in emissions trading to offset their footprint. This is where carbon-reduction projects are sought after to generate carbon credits which are then sold through brokers to companies (or individuals) that need to offset their emissions. If the idea of NetZero to ensure that each ton of GHG emitted is kept away from the atmosphere, then technically, we can emit more, as long as whatever is emitted is kept away from the atmosphere. Practically, we must reduce emissions themselves, rather than just reducing what goes into or stays in the atmosphere. The VCM, unlike the mandatory carbon market (CER), is mainly to fulfil corporate social responsibility targets, while CER is done to achieve the obligations under the Kyoto Protocol.

Part III — Partaking in the Voluntary Carbon Market

The Structure of the Voluntary Carbon Market

Firstly, a carbon credit represents a tradeable permit that represents a ton of carbon which was not emitted or was removed from the atmosphere. Carbon offsetting is the practice of buying carbon credits to compensate for carbon emitted elsewhere.

Companies such as Alphabet, Delta Airlines, Microsoft, Shell, and Unilever all purchase carbon credits to offset the carbon emitted from their activities. Individuals also buy carbon credits to offset the carbon produced due to their activities. Bill Gates and Jeff Bezos — basically, the Ultrarich — offset carbon from their flights and other activities since they use private jets (which produce much more emissions per customer than commercial flights). Bezos and Gates have shown vocal support for reducing emissions, and while they partake in activities that heavily emit carbon, they fund projects that remove carbon emissions — aligned with the idea of Netzero. You may also buy carbon credits to emit your emissions from driving around.

This system alone will not benefit the climate because not everyone can purchase credits, which is why we need to emit less. According to the Bank of America (BOA), offsets issued in 2020 covered 210 million metric tons of carbon emissions — 0.4% of the total global emissions, and net-zero emissions by 2050 will require an estimated 7.6 gigatons of carbon offsets. With this in mind, BOA stated that the carbon offset market may need to grow by as much as 50 times if companies are to meet 2050 net-zero emissions goals. There is a growing demand for carbon credits around the world, and growing demand must be met by adequate supply, which is where carbon emission removal projects enter the scene.

The Historical Prices of the EU Emissions Trading System

Source: Navergize, Investing.com.

Carbon Reduction Projects

Carbon reduction projects may be nature-based or mechanical. Nature-based solutions include reforestation (in a year, a tree can absorb and store over 48 pounds of carbon dioxide from the atmosphere), or wetland rejuvenation. These solutions use natural elements to sequester carbon. Mechanical solutions are technologies that increase efficiencies or reduce emissions, such as renewable energy projects or direct carbon capture projects. Deploying these solutions enables one to receive carbon credits that can be sold, subsidizing the project costs. The use of the funds depends on the company, some companies (eg Powerstove) extend their credits to their end-users.

It is important to note that there are some important factors before your carbon-removal project is certified to receive carbon credits. For example, if you plant 100 trees and cut them down in five years, your work had no net effect because the carbon absorbed has been released into the environment, it won’t be eligible to receive carbon credits. The project has to have a long-term impact. Another condition is the scale, such that 100 trees remove 4,800 pounds (2.12 metric tons) per year. This sounds large but a single private jet can emit 2 tons in one hour. This is an extreme example as using private jets is the most carbon-intensive activity. Nonetheless, the average person in the EU produces 8.2 tons of carbon per annum. With this in mind, you need about 387 trees to offset the emissions per person in the EU.

Some carbon reduction solutions include:

1. Planting trees
2. Wetland rejuvenation.
3. Converting households from solid fuels (firewood, charcoal) to clean energy (gas, electricity).
4. Converting households or cities from relying on fossil fuels for electricity to relying on renewable energy.

The last consideration I’ll mention is that there has to be clear evidence that carbon emissions are reduced by your project for it to become eligible. Almost no activity has a zero carbon footprint — that’s why we aim for “net-zero” carbon emissions, not zero carbon emissions. Zero emissions are impossible. As I mentioned in this article, even renewable energy produces carbon emissions due to the supply chain and other factors. Thus, you must be able to show how your project reduces the amount of carbon emitted. Your activity must cause less carbon to be emitted (or remain in the atmosphere) than the activity it is replacing. Replacing gasoline-powered vehicles with electric vehicles (EVs) reduces carbon emissions but replacing bicycles with EVs wouldn’t. The latter would not be eligible to receive carbon credits, although it is using clean energy.

The journey to net zero will be long and have many twists and turns. We must be open to testing out ideas and quickly scaling those which work. The emissions trading system is a wonderful way for developing countries to fund their transition, but we must ensure we choose the best technologies and business models. The carbon credits market has evolved to reduce the rate of fraudulent projects and will continue to become more efficient. As we offset emissions, we must also reduce total emissions and hopefully the rising cost of carbon credits will lead to greater investments to reduce emissions through increased efficiency and making cleaner technologies cheaper. The world has made progress, such as when energy from offshore wind in the UK was 9 times cheaper than gas in July 2022. I expect more progress, and I expect more African industries to partake in emissions trading.