Carbon finance as a means of economic development

eco

Carbon finance as a means of economic development

Carbon finance remains a formidable means of economic development, as shown by some emerging countries

Carbon finance is a branch of finance that emerged from a junction between the environment and energy sectors and from the market mechanisms included in the 1997 Kyoto Protocol. The objective is to reduce greenhouse gas emissions into the atmosphere by promoting financial investments in cleaner production technologies. The objective of the Kyoto Protocol was to reduce greenhouse gas emissions by 5% between 2008 and 2012.

Beyond these objectives, carbon finance remains a formidable means of economic development by favouring green industries. Emerging countries can thus take advantage of this new opportunity to develop economically while using significantly less polluting technologies.

China’s challenge: moving from a polluting country to a leader in green technologies

Following the sharp slowdown in Chinese growth a year ago, it is easy to understand that China is changing its development strategy and why not gradually moving from a carbon-based economy to a more green technology-based economy. As this sector is still in full maturity, China could once again enjoy strong growth and become the leading producer of green technologies.

We can already see this change when we know that the world leader in photovoltaic panels is Chinese because the Yingli Green Energy Holding Company group remains the world leader in solar energy.

China, which holds the inglorious title of the world’s leading polluter, seems to be making timid efforts to limit its greenhouse gas emissions, and this is reflected in its energy consumption. In 2015, for the second year in a row, the Asian giant consumed less coal (-5% in 2015 and this is expected to continue in 2016 according to the American institute IEEFA). This decline is the first to accompany the decline in the country’s electricity production (-0.5% in 2015, the first since 1998).

China is demonstrating that even the largest countries can respect climate and environmental limits. This growing disengagement from coal by the Chinese authorities is due in particular to the gradual but massive development of renewable energy sources. In 2015, the share of these non-fossil sources (wind, solar, hydro…) in China’s energy mix reached 12%.

The country’s northwestern region has the world’s largest clean energy facilities, such as the Trois-Gorges hydroelectric dam and the impressive Gansu wind farm owned by China Wind Power Group and financed by the International Finance Corporation (IFC).

This change in energy strategy has a negative side, the country’s mining activities are decreasing, which worries China’s trading partners, coal exporters. The current decline in consumption naturally leads to a decrease in imports.

economic development

The 30% drop in Chinese imports has negative impacts on other countries such as Australia, which has a particularly developed mining basin, and therefore appears to be the territory most affected by this Chinese slowdown in terms of coal imports.

The example of China therefore shows us that investment in green technologies is possible for the major powers and it also allows them to develop new sectors that will generate growth.

Africa: still virgin ground for green investments

Africa is at the heart of tomorrow’s ecological challenges and this could well enable it to pursue its economic development. This continent could benefit from investments in renewable energy from financial institutions such as the World Bank, the African Development Bank (AfDB) or major investors.

In particular, the AfDB supports African countries’ access to funds to fight climate change on the continent. Financing the fight against climate change in Africa is a major challenge today and requires the participation of all investors.

In addition, this area is one of the most affected by climate change, with, for example, the many water shortages and the advance of the desert hitting the continent. The use of new climate-indexed derivatives could be a good solution to hedge against these disasters.

Today, countries such as Morocco, Gabon and Ethiopia have committed themselves to reducing their CO2 emissions, but this opinion is not yet shared by all countries because they do not feel concerned as the most polluting countries (most African countries are among the least developed countries in the world).

Indeed, Africa represents a minor role in greenhouse gas emissions, but these investments could be a tremendous opportunity for development and economic growth beyond ecological benefit.

Especially in Gabon where many investments have been made in renewable energies and to reduce the share of fossil fuels: we can see projects for thermal power plants and hydroelectric dams flourishing throughout the country in the capital Libreville or in the south of the country with the Grand Poubara dam.

Africa is still a virgin land for green investments and therefore remains a project with real potential for investors and the continent’s economy. However, it is still difficult to establish such infrastructure in these areas because of implementation problems and it is difficult to sustain such investments given the unstable nature of these regions.

Finally, this region will not be able to benefit from carbon credits because even if electricity normally generates carbon, it should be noted that in Africa electricity production is mainly carried out by hydroelectric power plants that are not carbon sources. Unfortunately, this further tightens the opportunities for low-carbon investment in these regions.

A still emerging market but where emerging countries will play a predominant role

The carbon and green finance market remains a small but growing market in the coming years. It will be difficult for already industrialized economies such as Western countries to change production processes towards greener production. It is therefore logical to think that this transformation will take place more in emerging or developing countries because there is already little or no infrastructure there.

In this case, China wants to make a real industrial shift by turning more to green technologies and playing a leading role in expanding the current carbon market. African countries will also be able to play an even more important role because industry has very little presence in these countries. Opting for a green industry would send a strong message to the world of change for a greater respect for our planet.

For more information:

  • Simon Leplâtre « Finance verte : la Chine peut booster le marché des green bonds », Novethic
  • Baudelaire Mieu, « Climat : la Côte d’Ivoire creuse le filon de la finance carbone », Jeune Afrique

 

Benoit ANGLADE

Benoit ANGLADE


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