The Carbon Market has the potential to become one of the world’s largest commodity markets within the next few years according to AAP Carbon Limited, a Kyoto Protocol Clean Development Mechanism (CDM) project developer operating mainly in the ferro-alloy sector in South Africa.

The global CDM market has seen unprecedented growth from US$4.5 million in Feb 2005 to US$36 billion in the last three years, and the potential for the market is virtually unlimited, said Shaun Reinecke, Business Development Executive for AAP Carbon.

Although more cautious in his time projections, Andre Fourie, CEO of the National Business Initiative, agrees that trade in carbon credits will be a massive part of the financial market in the next decade or so.

When the foreign exchange market started, there were the same hesitations you see when you talk about carbon trading – people were wondering how to align and calculate the value of fluctuating currencies on a daily basis … and it is the same with carbon trade. Given the recalcitrant stance of the US on carbon emissions, markets might start off as regional entities before we see a common global carbon market, said Fourie who is also a member of the National Environmental Advisory Forum.

“The Clean Development Mechanism (CDM) could be a pot of gold at the foot of the rainbow nation, bringing sustainable development, technology transfer and foreign investment,” according to Van den Berg in his chapter on Carbon Revenues for Africa in the book Bending the Curve – Your guide to tackling climate change in South Africa, due to be published by Africa Geographic in October this year.

But South Africa has been quite slack in moving into the CDM market in comparison to countries like China, India and Brazil. CDM investment has been incredibly low, with only 13 active projects in the country.

“The last time I looked Africa accounted for 1.7% of global CDMs; of this South Africa accounts for about 70%. Although we are by far the leading country in Africa, it is not nearly enough,” South Africa’s Minister for Environmental Affairs and Tourism, Martinus van Schalkwyk, told Wits BSJ on the sidelines of a recent conference of climate change in Cape Town.

Fourie agreed that South Africa was failing to take advantage of the potential in the global trade in carbon credits.

South Africa has only submitted 84 CDM projects to the Designated National Authority (DNA). Of these, 61 are only in the Project Idea Note phase and 23 are in Project Design Document (PDD) phase. Only 13 projects have been registered with the CDM Executive Board, said Reinecke.

In contrast, Van den Berg pointed out that, although South Africa has been slow in getting out of the starting blocks, on a per capita basis South Africa’s CDM development was not that far behind those of China and India.

Van Schalkwyk blamed the slow up-take in CDMs in South Africa on a complicated regulatory system under the DNA, and the 2012 time horizon, after which the future of CDMs is uncertain.

The minister was referring to the fact that the emission targets agreed to under the Kyoto Protocol lapse in 2012 and uncertainty about the trade in carbon credits will exist until the agreement is extended, as expected, hopefully with broader participation and higher reduction targets.

"To a large extent CDMs in South Africa have been crowded out by other development imperatives and the relatively low cost of electricity has limited the affordability of many potential renewable energy projects," said Van den Berg.

Jacques Malan, Chief Technology Officer for AAP Carbon, said that one of the barriers to CDMs has been the abundance of relatively cheap coal-fired power that South Africa has enjoyed for so many years. Up until the power supply hiccups in January there had been no perceived need to invest in alternative power supplies.

Possibly because AAP Carbon has been through the process Malan and Reinecke did not see the regulatory process as a stumbling block to entry into the CDM market and were complimentary about the support from the DNA. They cite the low cost of electricity as one of the biggest barriers to entry for CDM in South Africa. Van den Berg agrees with this, but said the less than optimal regulatory framework was another key barrier to CDM market entry.

Malan believes the biggest constraint to CDMs is within the mindset of the people. “Most do not believe that carbon credits can be a tradable commodity. When you try to explain this to an engineer he looks at you askance as through you are trying to sell something like air,” laughed Malan.

He was also upbeat about the future of the market.

“There will be a carbon market after 2012. While most companies do not want to invest in carbon projects beyond 2012, there are a few companies prepared to forward buy beyond 2012, albeit at a lower price,” said Malan.

Post 2012 we can expect developing countries like Brazil, Russia, India, South Africa and China, with higher pollution levels, to have their own carbon emission caps. South Africa is the 14th biggest pollutant in the world and as a result we are likely to have a domestic market for carbon credits too as we look to meet our own particular emission reduction target.

Although the trade in carbon credits is seen by a cynical few as a way for the more developed northern countries to outsource environmental responsibility to the developing southern countries, this approach ignores the benefits of technology transfer and foreign direct investment.

Trade in CERs has so far been an astounding global success with more than 839 CDM projects registered by 2006, which would avoid more than 1bn tons of carbon dioxide by 2012 earning carbon credits between US$16 billion and US$36 billion.

By comparison, South Africa’s current projects are likely to earn in the region of US$132 million (ZAR 1 billion) given the best-case projections and assuming top dollar earnings.

Clearly carbon trade is set to take the world markets by storm, and will do so whether South Africa is CDM ready or not.

How trade in carbon credits began and works.

The urgent global need to reduce our carbon footprint and mitigate the potentially devastating effects of global warning and climate change on Homo sapiens and many other species has resulted in a carbon treaty known as the Kyoto Protocol, set up under the United Nations Framework Convention for Climate Change.

Ratified by 174 nations, with the notable exclusion of the US and Australia, the developed country signatories have undertaken to reduce emissions to 5% below 1990 levels by 2012.

The Kyoto protocol also provides a framework for developed countries to partially achieve their target by investing in emission reduction projects, also known as Clean Development Mechanisms (CDMs), in developing countries. This is done either through direct foreign investment to help set up the projects in return for Carbon Emission Reductions (CERs) at a discounted forward purchase rate, or by buying CERs or carbon credits, at a higher rate, once produced by the CDM.

Under the Kyoto Protocol, countries wanting to take part in carbon trade need to create a DNA to evaluate and register approved CDM projects in the country. South Africa’s DNA falls under the Department of Minerals and Energy and came into operation in July 2005. You can find more information about the DNA and the requirements for registering as a CDM at http://www.dme.gov.za/dna/index.stm

Basic explanation of carbon trading

Carbon trading has grown out of the scientific verification of global warming and the realisation that the world needs to reduce carbon dioxide emissions drastically in order for us to exist sustainably on this planet.

The concept of carbon trading has been formalised by a voluntary carbon treaty known as the Kyoto Protocol, which places a modest cap on carbon emissions, with the goal of reducing emissions from developed countries. Emissions can be reduced by the implementation of environmentally friendly technology in factories, or where this is cost prohibitive, by buying carbon credits from other companies who reduce carbon emissions through the use of alternative technology.

The Kyoto protocol has focused on reducing emissions in developed countries because they have historically been the major source of carbon emissions, and are therefore regarded as having caused the problem.

The Kyoto Protocol allows developing countries to continue to increase carbon emissions on the premise that they need to be allowed to grow their economies.