South Africa has entered the mainstream of carbon finance, offering the opportunity for foreign investors in countries with high levels of greenhouse gas emissions to buy into local projects in return for certified emission reductions (CER) credits.
Central Energy Fund, the state-owned agency that promotes projects to cut greenhouse gas emissions, announced on October 31 it was going global, setting up an office to trade CER credits in London, the world centre of this new futures market.
Under the Kyoto Protocol on climate control and its terms for Clean Development Mechanism (CDM), private companies can invest in projects to reduce carbon emissions in developing nations, thus earning CER credits they can write off against their own emissions output in their home country. Each CER represents one tonne of carbon dioxide.
By doing business in CERs South Africa is hoping to tap into a rapidly expanding and potentially lucrative market. Currently, CERs are trading at around $25, with a World Bank report released in May estimating that the project-based market was worth around $5.5bn last year, with the overall global carbon market valued at $30bn, almost three times the $11bn of 2005.
According to Deven Pillay, the head of Carbon Markets South Africa's new trading office, the organisation already has projects that would account for approximately 5m credits each year, spread over ten operations. Another 43 have been approved by local authorities but have yet to achieve accreditation by the United Nations (UN). These projects include production of gas from landfill areas, and solar and wind energy developments.
Following the lead of countries such as India and Brazil, South Africa's entry onto the London market gives it a higher profile to attract international investors keen to boost their greenhouse gas credentials and earn credits.
"It's an integrated carbon offering, so we will look at identifying carbon projects, developing carbon projects and trying to monetise the credits that come out of these carbon projects," reported Pillay.
However, South Africa has a long way to go before it becomes a major player on the CER stage, with existing projects accounting only for 3% of UN-accredited projects. Latin America alone has some 300 projects up and running, a major slice of the 700 developments registered worldwide.
Gabriele Braband, the head of energy at Frankfurt law firm Simmons & Simmons, said South Africa has a lot of leeway to make up, though it has strong potential.
"The success of South African CDM projects in the global carbon finance market depends on the development of successful projects that are attractive to both investors and buyers," Braband told the local press on August 3.
Gaining UN accreditation for a project can be a costly business, with administrative expenses estimated at around $200,000. The high cost is often a disincentive for smaller developers, as is the time needed for the approvals process, up to one year.
Henk Sa, the South African director of EcoSecurities, a company specialising in emissions reductions, said it is a market that requires deep pockets, patience and specialised skills.
"The returns come through only in the long term, so you need to have enough money to sit it out," he told the local press on October 26.
Soon after Carbon Markets was established, Pillay said the benefits of CER trading to South Africa would be manifold, encouraging investment, boosting employment and reducing greenhouse gas emissions.
"It gives us commercial drivers to make economic decisions to run these projects - so I'm for that - but we still need much bigger solutions in terms of how we solve the world's problems in terms of climate change," he told the local media on October 10.
South Africa could face mandatory Kyoto Protocol consequences for failing to meet its targets by the middle of next decade as its own emissions rise on the back of the expanding economy, a further incentive for implementing CDM projects.
