A look at South Africa’s carbon trading potential

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 According to Glenn Hodes-senior program manager (UNEP), the carbon market in South Africa will help to level the playing field by making renewable projects more attractive to investors. Small-scale renewable projects (less than 50 MW) which are pursued in South Africa due to dispersed populations, have struggled to obtain finance from large companies and banks. However, with carbon trading, more attention will be brought to these projects. “This would certainly deal with the poverty issue more effectively as the power is closer to where the demand is,” Hodes says.

But, how will carbon trading benefit South Africa’s renewable energy projects? Hodes says that if there is a price on carbon, whether through tax or a trading regime, private companies will be incentivised to invest in renewable energy projects and technology. “I think the private sector is for carbon trading. It sets a clear market signal.”  

But why hasn’t carbon trading taken off? Hodes blames this on uncoordinated attempts, regulatory and policy challenges. He explains that the implementation thereof and global connections can make it a challenge for carbon trading to work. There have also been circumstances under which baseline-and-credit CDM schemes have resulted in the maltreatment of indigenous peoples and their environment. There have also been cases of trade fraud and accounting discrepancies.

Low levels of awareness as to how to access this market as well as a poorly resourced department are also to blame, according to the experts. South Africa has already missed a number of opportunities as it failed to capitalise on the first commitment period (2008 to 2012) of the Kyoto Protocol. Until the 17th international annual climate conference, COP17 in 2011, opportunity for South African carbon project developers was mostly to generate and sell carbon offsets (CERs). These CERs were sold from countries classified as developing countries to companies in developed countries which are bound by the emissions reduction targets of the Kyoto Protocol to reduce annual greenhouse gas emissions. The Clean Development Mechanism has in the past given South Africa the opportunity to benefit from registering carbon credits or CERs. Other developing countries such as China, India and Brazil managed to register hundreds of emissions reduction projects under the CDM and got developed European countries to finance sustainable development in their countries.

Currently, only 22 South African Project Design Documents (PDDs) have been registered by the CDM executive board as CDM projects, with only nine having actually issued CERs. In comparison to other developing countries, South Africa seems to have missed out on significant clean development opportunities.

However, when the 2015 South African carbon tax comes in to effect, the demand for carbon credits via the voluntary market in South Africa will impact the country’s carbon trading. To ensure increased tax free thresholds, companies will be encouraged to reduce their CO2 emissions. To help them reduce their emissions to reduce tax liabilities, South African companies will most likely be able to purchase carbon credits from verifiable projects to offset a proportion of their carbon obligation. This means that there is scope for South African carbon projects to sell their credits in South Africa to local companies via a regional carbon trading scheme. There is talk that companies will be able to offset their tax liability by buying local carbon credits equivalent to 5% to 10% of their carbon tax liability. This will have an impact on the liquidity of the local market as a result of increased demand for local credits which will see a boost to local carbon project development.

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