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Challenges and Opportunities in Building African Carbon Businesses

Written By Elana Laichena, Director of Entrepreneur Support


Over the course of Africa Climate Week, carbon markets featured prominently, including a commitment from the UAE to buy $450 million of carbon credits through the African Carbon Markets Initiative. Carbon trading was put in the spotlight after a massive 4x growth in voluntary carbon markets from 2020 to 2021, but growth has since stagnated, with a decline in carbon prices received by African enterprises between 2021-2023. Through Delta40’s experience working with entrepreneurs on the ground and researching opportunities to build businesses driven by carbon revenue over the last year, we have come to see five major challenges with carbon markets, each of which presents an opportunity for innovation.

Before we get into the details, why does carbon trading matter? Is it just a way for corporations to claim that they are eco-friendly without doing the hard work to decarbonize their own supply chain? At Delta40, we feel that carbon credits are one of the best tools we have to provide climate financing for innovations in Africa, which as a continent contributes less than 3% to global greenhouse gas emissions but is disproportionately affected by the results of climate change. Carbon credits are achieving real impact by making life-changing products like clean cooking solutions and solar irrigation pumps more affordable to low-income households and providing a financial incentive to preserve and plant more trees, in a context where there is always a ready market for charcoal and firewood. As Delta40, we believe that carbon trading can be harnessed to ensure that African families stay low-carbon in a way that maximizes their health and wellbeing and creates economic opportunities.

However, carbon markets are yet to deliver on this promise, due to five key structural issues, affecting both buyers and sellers:

1. ACCESS:

Traditionally, registering for a carbon project through a leading standard like Verified Carbon Standard or Gold Standard costs ~$200,000 upfront, mostly paid to consultants to complete opaque paperwork and an audit process in a way which is recognized by the standard. This is exclusionary for the majority of African-led businesses, which often have localized climate solutions which meet the needs of their communities.

  • Opportunities: At Delta40, we’re excited about newer standards that are based on transparent, data-driven, universal monitoring of carbon projects with no or minimal upfront costs charged to the project developer, and no need to hire specialist consultants to complete the project registration. Options such as CarbonClear for solar, Open Forest Protocol for trees, CavEx for household devices, Downforce Technologies for soil carbon, and Puro.earth for engineered carbon removals, amongst others, are lowering the barrier to entry for African entrepreneurs and we hope that they will earn trust from carbon buyers, based on their inherent transparency. As African governments establish clearer guidelines for participating in compliance markets under Article 6 (country-to-country trades), we hope there will be a transparent pathway for African businesses to participate without having to hire specialized consultants for guidance.

2. EQUITY:

End users or community members often do not receive direct revenue from the carbon projects based on their low-carbon practices. Household device companies (i.e. cookstoves, safe drinking water) typically subsidize their products with carbon revenue to lower the price point, but how companies set the price of their products is based on overheads including management salaries, and there is little transparency in what percentage of carbon revenue is going directly to the end users, as well as whether households continue to use the low-carbon product in the long term if they did not pay a market rate for it in the first place.

  • Opportunities: At Delta40, we’re looking to pilot a new approach in which an appropriate portion of carbon revenues are shared as cash back to the end user, based on their adoption of the product (i.e. driven by the number of hours used). Our hypothesis is that households will increase utilization of low-carbon, healthy products if they receive a direct cash incentive, which can be used to offset their asset financing.

3. INTEGRITY:

Over 85% of carbon projects in Africa are based on biomass cookstoves and clean drinking water, many of which do not track after sales usage or compare to real benchmarks of user behavior pre-intervention. This, amongst other factors, has led to a persistent overstatement of CO2 saved in these project classes, causing buyers to lose trust in these project types.

  • Opportunities: Despite these challenges, we encourage carbon buyers to not throw the proverbial “baby out with the bathwater” for clean cooking projects, but rather, scrutinize how projects track after-sales usage and require that project developers offer universal tracking of their devices, rather than just sampling. New tech like electric pressure cookers, hot plates, and ethanol cookstoves are making it easier to digitally meter and monitor stove usage (while protecting user privacy). However, this additional monitoring comes at a substantial cost, which needs to be borne by the payer in the form of higher carbon prices, to make it worthwhile for project developers to invest in universal monitoring and transparent results sharing.

4. PRICING:

Building on the points above, integrity driven by universal monitoring and equity in carbon benefit sharing are only possible if the price of carbon credits is high enough to cover the costs of project registration and monitoring and then leave profits to be shared back with the end user or community. Prices in carbon markets vary wildly; for example, afforestation and reforestation credits average at less than $10 per ton of CO2, yet select projects which can tell a great story about community-driven forestry sell for $30-$40 per ton of CO2.

  • Opportunities: Delta40 looks forward to helping our portfolio companies leverage the power of storytelling to command better prices for carbon projects. Our interviews with carbon buyers at US-based tech companies reveal that they’re willing to pay a premium for carbon projects with social impact, and they value high-quality stories and photos which can be packaged to share with their customers and staff. While impact data is important, there’s nothing like personal stories to bring the impact of carbon credits to life.

5. SUPPLY:

When Delta40 first started researching business models in carbon markets, we thought a key opportunity might be a software play to enhance the aspects mentioned above of access, equity, integrity and pricing for African businesses, but we were quickly disabused of this notion with feedback from carbon buyers and investors that there are too many carbon platforms and intermediaries, and not enough high-quality projects on the ground in Africa. While most project developers are struggling with low prices of carbon and slow uptake from corporations, a select few projects which offer community-driven nature restoration sell out at premium prices of >$30 per ton of CO2, leaving buyers to wish they could buy this category to fulfill their climate targets.

  • Opportunities: We see the opportunity to build new businesses in Africa which leverage these learnings to offer carbon credits which are transparent and high-integrity throughout the process, including universal digital monitoring and publicly available information on how carbon revenue directly benefits end users and the community. With 2030 around the corner, we expect that corporate and government demand for carbon offsets will pick up more quickly than supply.

In closing, carbon trading has the potential to significantly contribute to climate positive growth in Africa, but only if buyers, sellers, and standards do their part to build a system which is accessible to small businesses, equitable to end users and community members, built on integrity and transparency, and priced to enable these factors.

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