The JSE Ventures Carbon Market, powered by Xpansiv was launched this morning by the Johannesburg Stock Exchange (JSE), in collaboration with Xpansiv. This trading platform allows local participants to buy or sell carbon credits and renewable energy certificates ("RECs") held in local or global registries and adds another tool to mitigate climate change.
What is a carbon credit?
A carbon credit is a tradable certificate representing a one-metric tonne reduction in carbon dioxide emissions. Carbon credits are generated through projects that reduce emissions, such as renewable energy initiatives or reforestation. Carbon credits can be sold to entities wishing to offset their emissions, but who are unable to do so through reducing the carbon emitted from their operations.
What is a voluntary carbon market?
Voluntary carbon markets ("VCMs"), in contrast to mandatory compliance markets ("MCMs"), enable individuals and organizations to voluntarily purchase credits to reduce their carbon emissions. A transparent and regulated VCM allows a proactive approach to climate change, supporting emission reduction projects and being driven by demand from corporates seeking environmental sustainability.
Unlike VCMs, MCMs are regulated systems with finite allowances for emissions. Participants can trade surplus credits to meet targets and gain financial incentives.
RECs v carbon credits
RECs differ from carbon credits in the following ways:
- By the units in which they are measured,
- The sources from which they originate,
- Their purpose,
- Their uses, and
- The environmental claims that they support.
South African carbon taxpayers may reduce their direct carbon tax liabilities by acquiring eligible carbon credits and offsetting those carbon credits against their taxable greenhouse emissions. In contrast, RECs can lower an organisation's scope 2 emissions relating to purchased electricity.
Concerns surrounding Voluntary Carbon Markets
Increasingly, companies are under pressure to make climate commitments or to back up the claims or commitments which they have made. The VCM offers an opportunity for corporates to achieve their decarbonisation strategies through trading in carbon credits where they cannot achieve reduction through a change in operations.
Given that the market is voluntary, participants need to be able to trust that they are entering into credible carbon transactions if the market is to succeed in driving decarbonisation in the real world. If the credits purchased through the market do not, in fact, reference a reduction of carbon, or such reduction cannot be reliably verified, or there is a risk of double-counting or lack of additionality, then the market in fact hinders decarbonisation efforts, providing a way for corporates to avoid having to decarbonise their operations while still being able to make claims around decarbonisation. Globally, VCMs have faced this criticism.
Besides the need for credible market infrastructure, clarity is also required around the claims that corporates can make once they have acquired carbon credits. This is important to avoid the risk of greenwashing risk where corporates rely on the VCM as part of their decarbonisation strategy.
On 28 June 2023, the Voluntary Carbon Market Integrity Initiative ("VCMI") published its Claims Code of Practice. The Code is supported by international organisations, governments, companies, NGOs, and civil society and provides a rulebook for corporates to follow ensuring that they make credible climate claims. The Code, for example, requires corporates to meet key threshold requirements before making a valid VCMI Claim. The adoption of this Code by corporates engaged in the VCM will help build market confidence in the use of credits acquired on VCMs.
A supply of credits is, of course, critical for the functioning of the VCM, but to date the African experience has been more demand than supply. While Africa is well positioned for carbon projects, developers face regulatory and cost uncertainty. For example, it is important that the holder of the rights to a land-based carbon credit project has proper security of tenure and secure rights to the land on which the project will take place. The holder must either be the registered owner of the land, or the holder of a registered long term lease or other registered real right over the land. The rights must have preference over any mortgage bond or onerous title conditions or registered real rights in favour of any third party that are registered over the land. Ministerial consent is required before it would be possible to register any real rights over land for any project to be undertaken over a portion of farmland that is not registered as a portion in the deeds registry. The land must also be properly zoned for its intended use and, of course, appropriate regulatory approvals, including environmental approvals, would need to be obtained.
Engagement with local communities will be required as part of the verification process and may become a critical consideration, depending on where the project is undertaken. Often, in an African context, land on which projects are to be developed is owned by communities or tribal authorities, bringing complexity to contracting, which should not be overlooked, and requiring substantive engagement. It is important that all relevant land rights holders, communities, and other key stakeholders are identified to ensure that their rights, practices, and customs are respected and that open and transparent communication is maintained to address any concerns that may be raised.
In addition to these project-related considerations, developers will need to ensure that they raise sufficient finance to fund the project development, its verification and possibly on-going costs relating to management of the credit scheme. These costs can be a barrier to entry for smaller projects.
The launch of the JSE's trading platform follows the announcement by CYNK, a Kenya-based carbon offsets trading platform, that it had handled a carbon futures trade of more than 2 million credits.
The VCM in Kenya has been active for many years. Key beneficiaries of the VCM include farmers, ranches and government entities. At a VCM auction organised by Kenya in June 2023 in which various African countries participated, 2.2 million credits were purchased by 15 Saudi companies. The VCM is, however, facing challenges, particularly around greenwashing. Kenya, as a signatory to the Paris Agreement and has committed to a Nationally Determined Contribution, is in the process of establishing a MCM, which will address some of the challenges facing its VCM. Once a MCM is established in Kenya with a national carbon registry, the VCM may not continue to be as robust.
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