Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The African Group of Negotiators on Climate Change (AGN), the
technical body of Africa's three-tier negotiating structure, is
planning to meet from March 14-17 in Livingstone, Zambia to review
the outcome of last year's United Nations Climate Change Conference
of Parties (COP26). Discussions will focus on the outcomes of COP26
on sub-Saharan Africa (SSA), ahead of COP27 due to be held in Egypt
in November 2022.
Key points
SSA countries achieved substantial pledges of renewed financing
at COP26, although these fall short of estimates of the total
funding needed for loss and damage from, adaptation to, and
mitigation of the effects of climate change.
Regional development and multilateral financial institutions
are stepping in to fill the financing gap, although it is still not
enough; the cost of the climate change transition is estimated at
USD1.7 trillion in SSA alone by 2030 (100% of SSA's GDP as of
2020).
Further, lags in regulatory development and aligning of
countries' climate change agendas with economic development plans
are hurdles to accessing allotted funding.
Some SSA countries, including the Democratic Republic of the
Congo, Gabon, Ghana, Kenya, South Africa, and Zambia, are likely to
benefit from the opportunities derived from climate change
mitigation and decarbonization in key sectors such as power,
transport, agriculture, construction, mining, and natural gas.
SSA countries received insufficient financial pledges
at COP26 to cover their full climate adaptation needs, but they did
receive substantial commitments
UNFCCC estimates indicate that about USD125 trillion of direct
capital investments are needed to transform the global economy and
avoid the worst physical impacts of climate change by 2050. Of
this, about USD32 trillion of investments is needed by 2030, out of
which USD1.7 trillion (5.3%) of this amount is required in SSA -
that is, USD170 billion per year. This equates to 100% of the
region's GDP in 2020. Renewed pledges for adaptation made at COP26
equate to USD40 billion in funding by 2025, but this falls short of
estimates by the UN Environment Programme (UNEP) that annual
adaptation costs for developing countries would total USD70
billion. Despite the huge financing challenges ahead, some SSA
countries did manage to secure important financing deals at COP26
to support their individual energy transition plans. South Africa -
the continent's most industrialized economy and largest
carbon-dioxide (CO2) emitter - secured a USD8.5-billion deal under
the Just Energy Transition Partnership with the United States, the
European Union, and several individual European countries, a
climate-finance swap to close several coal-fired power plants and
launch renewable projects to replace them. However, to unlock this
funding, the South African government is very likely to be required
to build a viable pipeline of eligible projects.
SSA governments face growing difficulty in attracting
funding for carbon-intensive projects since investors are focusing
increasingly on environmental, social and governance (ESG)
objectives.
There is a broad consensus among the world's leading donor
countries to end international financing of projects producing
carbon-intensive fossil-fuel energy sources, namely coal and
upstream oil. The pursuit of ESG objectives has already resulted in
the withdrawal of financing commitments to projects in the
sub-Saharan Africa region. For example, in November 2021, China
announced that it would no longer finance a 3-megawatt coal power
plant in South Africa's Limpopo province. Narrow support for
midstream and downstream natural gas projects remains, but upstream
natural gas projects face even greater financing challenges. The
European Commission published the Complementary Climate Delegated
Act, which deems natural gas a 'transition' energy source, making
the investment in natural gas projects compatible with the EU's
2050 net-zero goal. Similarly, the World Bank stated that it would,
in "exceptional circumstances", support upstream natural gas
projects. Nonetheless, financial disclosure requirements regarding
carbon emissions, pressure from shareholders, and concerns of
'green-washing' among potential investors when raising capital
appear increasingly likely to reduce the appetite of regional and
domestic financial institutions, including sovereign wealth funds,
to continue support to hydrocarbon projects. Consequently, fossil
fuel projects are likely to face increasing difficulty in finding
investment guarantees, political risk insurance, and performance
bonds, typically sought to mitigate project risks, perceived to be
high in SSA.
Regional multilateral development banks (MDBs) and
private capital sources are unlikely to fill the gap left by
traditional financing sources.
African governments are likely to turn to regional MDBs,
domestic financial institutions such as sovereign wealth funds and
pension funds, and aspirational regional middle-class private
investors with investment capital to fund strategic fossil-fuel
projects. For example, on 27 January 2022, African Export-Import
Bank (Afreximbank) announced USD5-billion funding for Nigeria's
national oil company, Nigerian National Petroleum Company Ltd,
under a resource-backed loan arrangement for greenfield and
brownfield projects in the country's upstream sector. Private
investment from domestic sources is also likely to increase in
upstream fossil fuel projects. In Tanzania, local firm Mirambo
Mining bought a controlling stake in Tancoal Energy, which, from
its Ngaka coalfield, is reportedly East Africa's biggest supplier
of the fuel.
SSA countries are likely to benefit from a range of new
revenue sources relating to the energy transition
Agreement at COP26 on Article 6 rules under the Paris Agreement
has opened up a potential new avenue for SSA countries to tap
growing international demand for offset projects in voluntary
carbon markets, which in 2021 achieved over USD1 billion a year in
nominal trade. The International Emissions Trading Association
estimates that Article 6 could lead to a reduction in the total
cost of NDC implementation by about USD250 billion per year in
2030. Although Africa currently accounts for less than 3% of global
carbon trading, Gabon announced plans to place up to USD5 billion
of carbon credits on the market in 2022 after passing its climate
law in September 2021. Gabon possesses 13% of the Congo Basin
rainforest, absorbing 100 million tons of CO2 (net) per year. The
Democratic Republic of the Congo (DRC) has similar ambitions to
secure funding for preservation efforts in its portion of the Congo
Basin, signing a USD500-million investment deal with the UK at
COP26.
Finally, there has been some skepticism about the upside from
Article 6 as it rules out double counting, creating a ceiling on
carbon emissions for developing countries - particularly SSA with
the lowest emissions globally (less than 4%). SSA countries that
have issued green bonds (to support renewable energy projects,
clean transportation, and climate adaptation projects) and blue
bonds (to support sustainable marine and fisheries projects), at
the sovereign and municipal levels, in recent times include South
Africa (USD200 million in 2020).
Given that funding is increasingly likely to be
prioritized and shifted towards clean energy, innovation, and
energy efficiency, some SSA countries should benefit from the
opportunities of mitigation and decarbonization in key sectors such
as power, transport, agriculture, construction, mining, and natural
gas
In this regard, countries such as Gabon, Ghana, and South Africa
have commenced developing and implementing policies around a
sustainable circular economy, particularly deepening renewable
energy penetration in the total energy mix. Further, the EU Green
New Deal's circular economy plan presents opportunities to localize
parts of the value chain to African producers and strengthen value
addition by promoting manufacturing - which will become even more
critical as the EU's carbon border adjustment mechanism is
introduced. Finally, African governments are seeking increased
investments in new forms of resource-based industrialization using
critical minerals such as copper and cobalt, which are vital for
the energy transition and abundant on the continent.
Posted 09 March 2022 by Natznet Tesfay, Executive Director, Africa, Economics & Country Risk, IHS Markit and
Peter Gardett, Executive Director, Climate and Cleantech, IHS Markit and
Theo Acheampong, Ph.D., Senior Analyst Country Risk – Sub-Saharan Africa, IHS Markit and
William Farmer, Analyst, Sub-Saharan Africa, Country Risk, IHS Markit
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.