In Depth Carbon trading: the new frontier?
June 22, 2024
A few weeks ago, the Council of Ministers introduced the first set of laws aimed at regulating the uncharted and untried frontier of carbon trading in Ethiopia. The ‘Forest Development, Protection and Utilization’ regulation allows private investors, as well as local communities, to engage in developing and safeguarding forests, and benefit from carbon sale revenues.
The legislation offers several incentives, including tax holidays, priority in land acquisition, and access to finance. The federal government is looking to collect five percent of all revenues generated from carbon sales, while regional administrations are entitled to 15 percent, with the remainder allotted to the forest developer, be it a private or a community-led venture.
However, all the revenue generated from the newly-minted business is to be reinvested in forest redevelopment and utilization.
Kebede Yimam, director-general of the Ethiopian Forest Development (EFD), has high hopes for the initiative.
“The new regulation will empower the private sector and communities to develop and protect forests and benefit from the carbon sales. This in turn will contribute to reducing the impact of climate change, which is highly affecting the society, and thereby increase agricultural productivity by increasing the availability of water. Improving forest coverage will have various contributions in terms of food security, climate stability, water availability and soil protection,” he told The Reporter.
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He disclosed his office has finalized a report detailing Ethiopia’s forest coverage status, and he expects the report to be made public “very soon.”
On Friday, PM Abiy launched the new report that states Ethiopia’s forest coverage has reached 23.6 percent, up from 17.2 percent in 2019.
Other official reports indicate that approximately 73 percent of Ethiopia’s land could benefit from restoration efforts. Experts agree that any success in ensuring food security, climate stability and effective water and soil management will be determined by the level of reforestation works. Further, amalgamating the climate policies with agricultural policies, experts observe, is also essential to leading a climate-smart agriculture.
Among these experts is Amare Haileselassie (PhD), a principal researcher at the International Institute of Water Management (IWMI) Ethiopia office.
“In recent years, Ethiopia has been navigating a complex landscape of challenges and opportunities in its quest for sustainable development, particularly in the realm of food systems. As a nation gifted with diverse ecosystems, rich cultural heritage, and a resilient population, Ethiopia stands at the forefront of innovative approaches to address the interlinked challenges of food security, environmental sustainability, and economic development. From the fertile highlands to the arid lowlands, each region offers unique opportunities and challenges that demand tailored strategies informed by local knowledge and expertise,” said Amare.
On June 20, 2024, IWMI, along with several stakeholders, organized a workshop on ‘Disseminating Research Findings and Policy Implications of Landscape Approach and Climate-Smart Agriculture.’
A dozen research papers were presented in collaboration with HP; Madda Walabu University, Hawassa University, Addis Ababa University, and Arba Minch University.
There are a small number of carbon sales forest projects in the country. This includes the Humbo Assisted Natural Regeneration Project in southern Ethiopia, which is considered a pioneer in the field. It began in 2010 through NGO support.
Ethiopia’s First Biennial Update Report (FBUR) reveals the project’s greenhouse gas (GHG) emission reduction is the equivalent of a little more than 29,300 metric tons a year. The report was submitted to the UN Framework Convention on Climate Change (UNFCCC) and published a few weeks ago.
The Bale forest in eastern Ethiopia is another example of a major protected forest area generating forex from carbon sales. This project began two years ago, and is scheduled to run until 2029. Various NGOs, including Farm Africa, are also involved in this carbon sales process.
“We have been able to generate eleven million euro from the reforestation and protecting the forest in Bale,” said Shewit Emmanuel, country director of Farm Africa. The carbon is sold on the voluntary market. Of the revenue, 60 percent went to local communities, while the rest to local government, according to Shewit.
The new regulation, however, is set to introduce changes to the way the revenues are split going forward.
In February 2023, Ethiopia signed the Emission Reductions Purchase Agreement (ERPA), committing up to USD 40 million available to communities, the government, and other stakeholders to help them cut carbon emissions and improve carbon sequestration. It is the first ERPA of its kind for Initiative for Sustainable Forest Landscapes (ISFL), which will honor efforts to cut about four million metric tons of CO2e (Carbon Dioxide equivalent) emissions by 2030.
With several billion seedlings purported to have been planted under the Prime Minister’s Green Legacy Initiative, Ethiopia is also eyeing increased forex generation from the carbon trading scheme. However, despite the aspirations, the global carbon trading system remains uncharted.
“As interest in carbon markets in Africa continue to rise, the sixtieth session of the subsidiary bodies (SB60) of the UNFCCC failed to reach agreement on all technicalities related to the implementation of Article 6 of the Paris Agreement, demonstrating the complex challenges of emissions trading. The methodological elements of the new UN carbon crediting mechanism also remained largely unresolved,” reads a UNECA statement from earlier this month.
Article 6 of the Paris Agreement governs how countries can cooperate voluntarily in the implementation of their nationally determined contributions to climate action while promoting sustainable development and environmental integrity.
On June 19, 2024, the UNFCCC disclosed it failed to reach an agreement on all technicalities related to the implementation of Article 6 of the Paris Agreement that would enable countries to transfer carbon credits earned from reduction of greenhouse gas emissions to help them meet their climate targets.
In the meantime, China’s emission trading scheme (ETS) is gaining momentum, with prices in April and May rising above Rmb 100 (USD 13.8) per ton for the first time since the scheme came online three years ago, according to the Economist Intelligence Unit.
This week, UNECA stated the African Group of Negotiators on climate change (AGN) offered a progressive solution that accelerates the voluntary carbon trading schemes based on Article 6 of the Paris Agreement. But UNECA’s statement pointed out that the methodological elements of the new UN carbon crediting mechanism also remained largely unresolved.
“Emphasizing the need for integrity and transparency in carbon market design, participants discussed the importance of promoting technologies and practices that drive emissions reductions, rather than solely relying on mobilizing development or climate finance,” reads the statement.
It recommends African countries to develop a simplified roadmap and framework to capacitate governments, CSOs, and the private sector; to transfer technology and ensure financial support. The UNECA also commended Senegal, Ghana, Nigeria, Ivory Coast, and Zimbabwe for initiatives in the implementation of Article 6 of the Paris Agreement, demonstrating the continent’s commitment to addressing climate change and encompass a range of activities, including carbon pricing mechanisms, clean energy projects, sustainable agriculture practices, and forest conservation efforts.
“The involvement of the private sector is crucial to effectively implement Article 6 in Africa as their engagement brings the much-needed financial resources, technical expertise, and innovation required to drive climate action and sustainable development. However, it is essential to put in place robust regulations are necessary to safeguard against potential risks, such as green-washing, market manipulation, and social and environmental impacts; strike a balance between their engagement and robust regulation, as Africa strives to harness the potential of Article 6 to drive inclusive, sustainable, and climate-resilient growth on the continent,” reads the statement.
Africa has vast amounts of carbon stored in its ecosystems with the Congo forests – dubbed the world’s second lung – being able to absorb about 1.2 billion tons of CO2 each year. The Congo Basin holds roughly 8 percent of the world’s forest-based carbon.
The world’s 50 poorest nations contribute only one percent of emissions but suffer 99 percent of climate related deaths.
At COP27, African countries launched the Africa Carbon Markets Initiative to produce 300 million carbon credits annually. The initiative seeks to unlock USD 6 billion in revenues and create 30 million jobs by 2030.
Ethiopia submitted an ambitious (Intended) Nationally Determined Contribution in 2015 and updated Nationally Determined Contribution (NDC) in 2021, with a conditional pledge to reduce GHG emissions by 64 percent and 68.8 percent by 2030, respectively, compared to the 2010 level business-as-usual projection. This target is significantly higher than the previous NDC. The implementation of the updated NDC requires a total of USD 316 billion, with 80 percent of the funding expected to be mobilized from international climate finance sources. The remaining cost will be financed domestically.
Of the estimated total cost of implementing the NDC between 2020 and 2030, USD 275.5 billion (close to 87.2 percent) will be for mitigation actions against the corresponding figure of USD 40.5 billion (about 12.8 percent) for adaptation interventions. The estimate further shows that, of the financing needs, 20 percent is unconditional, to be raised domestically against the corresponding conditional amount of US USD 252.8 billion to be secured from international climate financial support.
Ethiopia is committed to an investment of USD 63.2 billion on climate change mitigation and adaptation actions from domestic sources, but is expecting the remaining (conditional) finance of USD 252.8 billion from international sources.
In the past decade, Ethiopia received support of USD3.2 billion per year from domestic, bilateral, multilateral sources as well as from international climate finance institutions on climate change mitigation and adaptation projects and programs in agriculture, energy, transport, industry, forest, urban development, health sectors.
The estimate does not include in-kind and free labor contributions from communities in natural resources management, landscape restoration, and other activities. Furthermore, the government contributions in the form of recurrent and capital budget allocations are not fully captured in the estimation. Despite this investment, Ethiopia still needs to attract and mobilize finance to support its climate compatible development agenda.
For the updated NDCs to be implemented, carbon financing will be essential, and Article 6 of the Paris Agreement enables an environment to generate finance and use it to implement the ambitious NDC goal.
According to Ethiopia’s FBUR released by the Ministry of Planning and Development this month, over 1.6 million carbon credits have been issued in Ethiopia through the Clean Development Mechanism (CDM) and the Voluntary Carbon Market (VCM) standards. Ethiopia has 29 registered VCM activities that have issued close to 600,000 emission reductions. The VCM activities have also focused on improved cookstoves, though in addition have expanded the Ethiopian carbon market portfolio through a strong focus on forestry and water projects that were not supported by the CDM.
According to the report, the land covered by forests in Ethiopia is about 17 million hectares, which accounts for 15.61 percent of the country’s total land area. Ethiopia has adopted a new forest definition that includes both forests and shrublands.
It defines forests as “land spanning at least 0.5 hectare covered by trees and bamboo, attaining a height of at least 2 meters and a canopy cover of at least 20 percent, or trees with the potential to reach these thresholds in situ in due course.”
On the other hand, shrublands are defined as “land with shrubs/bushes canopy cover less than 10 percent or combined cover of bush and shrubs less than 10 percent.”
The reason for Ethiopia’s change in the national forest definition is to better capture the dry and lowland-moist vegetation resources.
As part of the African Forest Landscape Restoration Initiative, Ethiopia has pledged to restore 15 million hectares of degraded landscapes. Three major Forest Landscape Restoration (FLR) initiatives are being used to achieve this target: Participatory Forest Management (PFM), Area Enclosures/Exclosures (AEs), and Sustainable Land Management Program and Green Legacy Initiative (SLM-GLI).