WITH a realisation that there is a dire need to protect the planet from environmentally unsustainable practices and curb climate change, climate action became unavoidable.
The origins of climate action might be traced back to the Kyoto Protocol in 1997, which aimed at ensuring that industrialised nations reduce their carbon dioxide emissions and the presence of greenhouse gases in the atmosphere.
According to the United Nations Development Programme (UNDP), climate action means stepped-up efforts to reduce greenhouse gas emissions and strengthen resilience and adaptive capacity to climate-induced impacts.
One way of taking climate action would be through making a drastic shift to more ecologically friendly production methods, for example, moving away from fossil fuels to greener forms of energy. An alternative approach would be to identify, support and promote entities that are undertaking green and ecologically friendly projects.
Let us take company ABC for example that operates a thermal power station and emits carbon dioxide into the atmosphere. Instead of switching immediately to a hydropower station or solar, which might not be feasible in the interim, it can identify company XYZ, which is growing trees or doing other environmentally friendly projects that reduce carbon emissions and support it as a way to offset the actions of company ABC.
It is estimated that one tonne of carbon dioxide will need 50 trees to be grown per year to offset its impact.
The above example is a generalisation of the concept but more practically what happens is that governments, especially of industrialised nations, have emission targets that they want to achieve. To do so they set targets for companies as well and penalise those companies that fail to do so either through taxes. In addition, markets are created for those companies exceeding their carbon limits to purchase carbon credits from those entities that are below the limits. These markets are known as compulsory markets.
Even other entities that are not necessarily compelled by their governments to reduce emissions can do so through voluntary carbon markets.
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These voluntary carbon markets allow even non-regulated entities to reach carbon neutrality by trading carbon credits in the market. The market for voluntary carbon offset credits was estimated at around US$2 billion in 2022. Carbon offset credits, according to Investopedia are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. Carbon offset credits are measurable and verifiable emission reductions, from certified climate action projects. These permits essentially are moulded into financial instruments that are traded like any other commodities.
The biggest debate at the moment is whether the pricing of the carbon credits fully captures the impact of the effects of carbon dioxide and greenhouse gas emissions, but this is a debate that this article will not delve into.
A country in Europe can purchase its offset credits from a project in Asia or Africa. This makes the topic of carbon credits relevant to even countries like Zimbabwe that are not highly industrialised and emit less carbon dioxide and greenhouse gases but perhaps could also be involved in nature-based solutions.
Nature-based solutions fall into four categories, which are forestry practices, wetland-related practices, restorative agriculture, and ocean-based practices. Forestry practices include planting new forests, allowing forests to re-grow naturally where they have been cut down, and improving forest management.
These projects reduce, avoid or remove greenhouse gas emissions, including but not limited to protecting and restoring irrecoverable natural carbon sinks, forests or marine ecosystems and scaling nascent carbon removal technology that keeps global climate goals within reach.
Projects must adhere to a rigorous set of criteria to pass verification by third-party agencies and a review by a panel of experts at leading carbon certification standards, like Vera Verification, Carbon Standard or the Gold Standard. After an organisation or an individual buys a carbon credit, the credit is permanently retired so it cannot be re-used. Perhaps you might be asking that if all carbon credits are the same, will they differ in terms of quality. The factors that influence the quality are called environmental integrity drivers and they include permanence, additionality, baselines and no leakage amongst others. Permanence speaks to carbon dioxide removal that cannot be reversed in the future, whilst no leakage is concerned about carbon dioxide displaced outside the project boundaries.
These carbon credits are also issued based on actual and accurately measured carbon dioxide emission reduction following a robust, independent, third-party validation and verification.
As you would imagine, in business there is always a risk of fraud and the equivalent in the area of reducing emissions is greenwashing.
Greenwashing occurs when companies fail to prioritise in-house emissions reduction, double-count carbon credits, or invest in non-verified credits. These acts are greenwashing because they deceive the public into thinking such companies are committed to reducing carbon emissions.
So, what do investors look for when climate investing? The evaluation metrics include but are not limited to regulatory landscape, project viability, and risk versus return computations.
Investors are inclined to invest in projects from jurisdictions that have clear and supportive legislation and in countries where the government is committed to enforcing environmental policies. The projects should have an alignment between financial expectations with sustainability goals and have positive risk-adjusted returns with robust project designs and execution plans. Investors also pay particular attention to stakeholder engagement in these projects. There is importance in collaborating with local communities and other stakeholders, such that projects have a social positive impact.
In conclusion, the Zimbabwean carbon market opportunities include abundant renewable resources, afforestation, carbon sequestration potential, and climate and sustainability-aware governance.
Statutory Instrument 150 of 2023 provides a stepping stone to the Climate Change Bill that will provide the control and management of carbon credit trading projects in the country.
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms. Mapfumo is an environmentalist and an associate at Conservation Focus.
