Why financing Africa’s green energy transition should be the focus of COP27

Africa needs cheap, affordable and modern energy solutions to realise its development goals. Projections show that one in four of the world’s people will be sub-Saharan African in 2050. As the region’s population and incomes grow, the pace of industry, commerce and agriculture will accelerate. Yet, 600 million people in Africa do not have access to electricity.

According to the IEA, demand for modern energy in sub-Saharan Africa is expected to expand by a third in the next decade. Moreover, power generation capacity will need to increase ten-fold by 2065 to meet projected electricity demands.

Africa accounts for only 3% of cumulative global CO2 emissions, but it is disproportionately affected by the impacts of climate change. Of the 10 countries most vulnerable to climate change, seven are located in Africa. Against this backdrop, the region faces the complex challenge of growing its economies along with the pressing mandate for emissions reduction.

There is no doubt that Africa will need to increase its energy consumption to drive economic growth and achieve development goals. Although emissions are decreasing in other regions, Africa’s CO2 emissions are poised to grow in the coming decades. The growth rate in energy-related CO2 emissions in Africa over the last two decades is 123%, considerably greater than the world average of 60%, due largely to the high rate of population growth. Indeed, shifting from a growth powered by cheap fossil fuels to low-emission and climate-resilient economies requires both bolder policies and vast investments.

Current climate financing commitments fall woefully short of the region’s needs. In 2009, at COP15 in Copenhagen, developed countries agreed to mobilise $100 billion per year by 2020 to developing countries. While, in 2020, a total of $ 83.3 billion in climate finance was mobilised; but of this, only $20 billion was directed to Africa. Climate finance flowing from all sources reached $632 billion in 2019/2020, with Africa receiving just 3% of this. Given the scale of need, at COP26 the Africa Group of Negotiators called for $1.3 trillion in climate finance annually starting in 2030.

Other notable outcomes for Africa from COP26, included a reaffirmation of the $100 billion pledge in climate funding for developing countries; a commitment to double finance for adaptation; clearer rules around carbon markets; and heightened attention to losses and damage.

The Glasgow Climate Pact noted its ‘regret’ that the developed countries were not able to mobilise the financing pledged at COP15. Indeed, climate financing is again likely to be the most contentious issue at the upcoming COP27 (dubbed Africa’s COP) in Sharm el-Sheikh, Egypt.

The current finance architecture and mechanisms for accessing finance are not meeting Africa’s needs. Financing Africa's green energy transition requires a major ramp-up in the scale and quality of investments in infrastructure, climate innovations, climate-smart agriculture, renewable energy and biodiversity.

Concessional loans from bilateral and multilateral donors account for over two-thirds of climate financing to African countries. Despite the climate pact’s emphasis on ‘grants’ and ‘highly concessional forms of finance,’ however, this source of financing will not match the trillions required to achieve low-carbon development. And a heavy dependence on loans for financing Africa's green energy transition is neither an optimal nor sustainable cause of action.

Specifically, the pandemic has had a negative impact on Africa’s sovereign debt situation: resulting in half of the region’s countries in either debt distress or at high risk of debt distress. On average, the region’s economies collected 13.6% less revenue than projected in 2020 and 9.3% less in 2021. Furthermore, eleven countries are experiencing double-digit inflation, worsening an already heavy debt-service burden. One in five African countries dedicate 20% or more of foreign-exchange income to external debt servicing and this burden is much larger for a handful of highly-leveraged states. Undoubtedly, private investment and private finance, including innovative financing solutions, will have to play a bigger role.

Perhaps the most promising outcome of COP26 was the Just Energy Transition Partnership (JETP) between the governments of South Africa and the International Partners Group (Germany, France, the United Kingdom, the United States and the European Union). The JETP aims to accelerate the decarbonisation of South Africa's economy, with a focus on the electricity system, by mobilising an initial amount of $8.5 billion over the next three to five years through various mechanisms, including grants, concessional loans, investments and risk-sharing instruments. The success of the JETP could serve as a model for climate financing in Africa, particularly if it has a systemic regional approach.

Negotiating for climate finance is important, but more policy imagination will be needed to integrate climate action into development agendas. The African Continental Free Trade Area (AfCFTA) serves as a framework for the region’s green energy transition — by promoting green industries and trade-related policies. For example, investment in lithium-ion battery manufacturing on the continent should be a priority. By shifting battery manufacturing downstream to where many of the critical inputs are sourced, such as to the DRC, where 70% of the global cobalt supply is produced, the region can become a critical hub in the global supply chain for electric vehicles.

Additionally, given the region’s debt situation, debt-for-nature swaps could be an effective instrument for diverse climate financing. Debt-for-nature swaps are financial transactions in which a portion of a country's foreign debt is forgiven in exchange for local investments in environmental conservation measures. In the current economic downturn, this instrument is likely to be more appealing to developed countries than issuing new loans and grants.

Finally, carbon credit mechanisms are an effective tool for both preserving and restoring ecosystems and generating additional revenues for governments. African countries have the potential to meet 30% of the world’s sequestration needs by 2050. And the United Nations Economic Commission of Africa estimates that with optimal pricing, Africa can generate between $15 and $82 billion annually by trading carbon credits with emitters. A lack of finance and capacity, however, has prevented African governments from participating in global carbon markets. Building a regional registry and a market exchange for carbon credits would create transparency and protect against price volatility.

These solutions are far from exhaustive, but they will be integral components of the region’s broader strategy to decouple growth from CO2 emissions, including the exploitation of natural gas as a green energy transition fuel.