Reducing harmful emissions to protect the environment and avoid the worst of global warming is a growing global priority. “From 2007 to 2020, … global risk reports [have shown] the top three [concerns] were cost of living, natural disasters, and extreme weather,” Sherif El Diwany, co-founder and managing director of MGM Climate Business Development, told AmCham Egypt members in February 2023. “For the next 10 years, the top [concerns] are failure to mitigate climate change, failure of climate adaptation, natural disasters and extreme weather events.”
In the short term, an economy can achieve its emission ambitions while preserving GDP growth if polluters finance green businesses. In return, they can operate as usual. “Carbon credits are a type of financial instrument that represents the right to emit a certain amount of carbon dioxide or other greenhouse gases,” Development Aid, a think tank, said in a paper published in July 2023. “They are a key mechanism for reducing greenhouse gas emissions and combating climate change.”
According to a May note from the World Bank, carbon credits currently cover roughly a quarter of the world’s emissions.
Egypt’s Financial Regulatory Authority (FRA) is working on developing carbon credit regulation, verification, and trading infrastructures. Despite its importance, carbon trading is tricky. “Carbon credit schemes are far from perfect,” noted Development Aid. Yet, “they provide a step towards sustainability and carbon neutralization.”
Egypt’s credits
During the UN’s 27th Conference of the Parties (COP 27) in November 2022, Egypt announced plans to launch a “regulated African voluntary carbon market (VCM).” It allows companies to issue or buy carbon credits based on strict local laws and regulations.
The Stock Exchange Regulatory Authority (EGX) and FRA will oversee this VCM. According to the announcement, they will “develop regulatory frameworks, business models and organizational structures to develop the African Carbon Market’s value chain.”
EGX and FRA will also be responsible for “raising the level of awareness about the importance of the VCM and its role in providing access to climate finance for companies, as well as setting the standards and regulations that guarantee the highest level of integrity.”
EGX Chairman Ramy El Dokany told the media in November 2022 that in the “first three to four years [of the VCM’s operation], the platform’s target will be to issue 7 million tons of local carbon credits.”
While all local industries can issue carbon credits, the government is focusing on agribusiness. In November 2022, local media reported the Agricultural Bank of Egypt and investment firm Enara Group created Libra Capital to “develop, manage and issue carbon certificates for agribusinesses,” El Dokany said.
The FRA is developing auditing and verification infrastructures that will be updated annually. El Dokany noted that “the EGX is currently in talks with global verifiers, including Verra and Gold Standard.”
In November 2022, Minister of Economic Planning Hala El Said announced an EGP 1 billion fund (EgyCOP) to finance local eco-friendly projects eligible for issuing carbon credits. Said singled out “transport, energy, waste and biodiversity.” She added that Gold Standard would certify those projects.
Good for business
Carbon credits greatly benefit polluting industries like cement, steel, mining, and others that can’t yet reduce their emissions. Carbon credit buying “enables conventional business owners to continue their business-as-usual routines while compensating for their emitted [carbon gases] via the purchase of carbon credits, hence, shifting more into sustainable business models,” noted Development Aid.
Certified carbon credit issuers can use those credits to secure additional income to expand their operations. Akepa, a sustainability advisory firm, noted in an August blog that governments in low and middle-income nations could attract foreign currency by selling green infrastructure credits, especially from clean energy stations, to foreigners.
The prospect of increasing income should entice able companies to reduce their carbon footprint, ultimately helping the country meet its emissions targets under the 2015 Paris Agreement,” said Akepa.
The second advantage of using carbon credits is there is already a “realistic … common unit of account,” the Development Aid paper said. That allows governments to set clear periodic emission reduction targets, thus allowing planners to “identify and prioritize … the best investments,” added Development Aid.
Aside from the positive environmental impact, companies involved in carbon markets benefit from a “boost [in] brand reputation and business growth,” said University College Estate Management (UCEM) in October. “Offsetting emissions is a great way for businesses to show stakeholders, clients, consumers, and potential employees that they’re taking measures to achieve net zero and reduce climate change.”
Controversial tool
As carbon credits and trading implementation expanded, problems and manipulative practices emerged. “Consensus on [carbon credit] merits … has shifted in recent years,” UCEM said.
According to Development Aid, buyers started “purchasing carbon credits as a way to avoid emission reduction activities,” rather than as a stopgap measure until they reduce their carbon footprint.
That means “circumventing any potential benefits to the environment when one company reduces carbon emissions as an equivalent amount will be emitted by another,” Development Aid added. “Unless everyone focuses on reducing carbon emissions, the benefits of reduction by some will be taken advantage of by others.”
Sellers also abuse carbon credits. In January 2023, The Guardian published an investigative story into global carbon credit certifier Verra. They found that “more than 90% of their rainforest offset credits – among the most commonly used by companies – are likely to be ‘phantom credits’ and do not represent genuine carbon reductions.”
The report cited two unnamed and undated studies “with further analysis, indicating that 94% of [those] credits had no benefit to the climate.” Among the dozens of companies and organizations that bought those credits were Gucci, Salesforce, BHP, Shell, easyJet, Leon, and the band Pearl Jam.
Faking environmental credentials to deceive stakeholders is not new. It led the EU to decide, effective April 2013, to “ban certain industrial gas credits,” Connie Hedegaard, EU commissioner for climate action, said in January 2011 when the EU voted for the ban. “Not only are some of these credits of doubtful value, continuing to use them is also not in the EU’s interest as doing so could discourage host countries from supporting cheaper and more direct action to cut these emissions.”
Identifying fake carbon credits is challenging, as “there is no internationally recognized standard for,” said Development Aid. That “makes it difficult to confirm the amount of carbon that businesses claim to offset and their resultant [or] collateral impact on the environment and local communities.”
Further complicating the use of carbon credits is they are still “poorly understood, so calculating carbon emissions and their consequences gives a false impression of certainty,” said Development Aid. “Even if corrected, uncertainty and debate would continue over the distribution of costs and benefits among people, future generations, and nature.”
Environmental advocacy groups Greenpeace International and Earth.Org said some “carbon offset programs” could damage other parts of the environment. Examples include excessive tree planting, which causes soil degradation, and expanding hydropower use, which can destroy surrounding natural habitats.
Those challenges “are serious,” Allegra Dawes, an associate fellow with the Energy Security and Climate Change Program at the Center for Strategic International Studies, a think tank, said in a February blog. “The market is unruly with large informational asymmetries between project developers, standards organizations, certifiers and buyers.”
Wrong time?
Egypt is entering the global carbon trading market at a troubling time. “In early 2023, it seemed momentum was building for voluntary markets,” said Dawes. “A growing number of companies looked to implement net-zero strategies, contributing to a thriving market.”
That momentum was evident in “developing economies, [which] announced ambitious plans to use revenues from credits … to boost their economies,” noted Dawes. “New market arrangements promised that carbon credits could kick start climate finance and spur innovation in clean technologies.”
During the first half of 2023, there were “new initiatives … to tackle the credibility challenge, including [the] Science-Based Initiative, the Voluntary Carbon Credit Integrity Initiative and the Integrity Council for the Voluntary Carbon Market,” said Dawes.
However, positive sentiment turned negative by mid-2023, spilling into 2024. “Sharp declines in carbon credit prices in 2023 have clouded the outlook for … the VCM in 2024, with market participants pessimistic about a swift recovery,” said Standard & Poor’s Global in a January note. The slump came after Verra’s forest carbon credit controversy came to light in April 2023.
The news led to a significant price drop across various carbon credits in the second half 2023. Aviation-issued credits lost 78% of their value, nature-based credits dropped by as much as 95%, and household device credits declined 40.6%. S&P Global said the least affected were carbon credits issued from clean energy projects — down nearly 33% last year.
That comes as governments increasingly stress the importance of carbon trading. “Governments’ targets to bring down carbon emissions to net zero by 2050 rely too heavily on offsetting,” the UCEM said. “They are a cost-effective way for organizations to have a positive environmental impact over investing in new technologies or transforming their business operations.”
However, carbon credits will eventually become a financial burden on operations, Akepa said. To fully benefit from carbon credits, buyers should perceive them as “incentives to track and reduce emissions throughout their supply chains.”
This article first appeared in July’s print edition of Business Monthly.
