NIGERIA’S ENERGY TRANSITION WATCH: CARBON CREDITS IN NIGERIA

Introduction

Carbon Credit is an instrument representing reduced Green House Gas (GHG) emissions. It is a permit that allows the owner to emit a certain amount of carbon dioxide or other GHG. One credit permits the emission of one ton of carbon dioxide or the equivalent in other GHG. It is a critical element of carbon trading systems to mitigate climate change. These credits can be traded if the total allowance is not used. Carbon  Credits can be earned through  various activities or projects that reduce or eliminate emissions, such as forestry, afforestation, waste to energy, renewable projects, blue carbon, etc.

Carbon Market

The carbon market is a system for buying and selling carbon credit. The carbon market is divided into two fragments i.e., compliance and voluntary. The former is created from regulatory requirements, while the latter allows companies and individuals to purchase carbon credits voluntarily.

Most compliance carbon markets work on a “cap-and-trade” system. The government sets a limit on how much greenhouse gases each company can emit – the “cap”.  If a company is under their allocation, they can sell their spare allowance to a company that would otherwise exceed their limit – the “trade”. The level can be lowered each year to encourage companies to reduce their emissions.

In the voluntary markets, participation is optional. Companies choose to buy-in, in order to reduce their carbon footprints. The carbon credits they buy can come from several types of environmental projects, either those that “remove” emissions or those that “avoid” emissions. Removal offsets are generated from projects that pull carbon from the atmosphere, such as planting trees. Avoidance offsets are generated by projects that prevent emissions from being released into the atmosphere, such as stopping an area of forest from being cut down. The voluntary carbon market system is not regulated by governments. Instead, to ensure the integrity of the carbon credits being traded, there are independent certification bodies that have defined standards to verify the projects against, providing accreditation.

Global Carbon Trade

After successful negotiations at the 2021 Glasgow COP26 Climate Summit on the operation of Article 6 of the Paris Agreement, global carbon trading now has a more structured framework for countries to follow. The agreed rules set clear guidelines for how the carbon market will work for bilateral deals between countries and in a United Nations-supervised marketplace.

In a nutshell, the basics of the agreement revolve around carbon credit offsets. For example, nations that reduce their emissions more than they had pledged receive credits that can then be sold to countries where it’s costly to cut GHG. The agreement aims to incentivize nations to make greater investments in climate mitigation initiatives and technologies, such as producing more renewable energy, to generate credits that they can trade.

The trade in mitigation outcomes allows for two contracting states to enter into an agreement whereby one party reduces carbon emission (in line with its Nationally Determined Contributions (NDC) to the reduction of carbon emissions) and transfers the credit gained from the reduction to the other party who then counts it towards its own NDC targets. This is usually followed by financial compensation paid by the receiving party. This is generally referred to as internationally transferred mitigation outcomes (ITMO) and can be executed by state actors or a private sector actor (to assist the country in meeting and/or exceeding its own NDC).

This arrangement will be considered as an investment by the receiving party in the selling party to assist in various carbon projects. Consequently, the consideration received by the selling party must be channeled towards low-carbon projects in its state. It is important to note that the ITMO sold will not be counted towards the selling party’s NDC, and the parties are required to make the necessary adjustments in their respective accounts towards the fulfilment of their individual NDC.

Globally, carbon credits are gaining traction as a viable response to curtail growing emissions. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF), estimates that demand for carbon credits could increase by 15 or more by 2030 and up to 100 by 2050. Reports by the World Bank also indicate that more than two-thirds of countries plan to use carbon markets to meet their NDC. Countries such as Chile, Ghana, Jordan, Singapore and Vanuatu are already developing digital infrastructure to support their participation in international carbon markets.

How much does one carbon credit cost?

Carbon credits have different prices, depending on the location and market where they are traded. There are many ways to value a carbon credit, whether using market dynamics, basing it on the cost of implementation, or the value that the project delivers.

Nigeria’s Commitment

Nigeria is a party to the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and the Paris Agreement, whose objectives are to regulate, stabilize and eventually reduce CO2 released into the atmosphere. Nigeria signed into law the Climate Change Act 2021 (the “Act”) on November 18, 2021. This legislation demonstrates Nigeria’s commitment to the environmental principles enunciated in the Paris Agreement and other international conventions. The Act is aimed at establishing a framework for Nigeria to achieve a reduction in greenhouse gas emissions through inclusive green growth and sustainable economic development and the implementation of Nigeria’s commitment to net zero emissions declared at COP26 in 2021. In addition to the Act, Nigeria launched its Energy Transition Plan (ETP), which is a roadmap to achieving its net zero emissions goal by 2060.

Nigeria’s plans to scale up its carbon markets are starting to take shape. In February 2023, the National Council on Climate Change confirmed it was formulating national carbon tax policy plans. This policy gives right to the government to set a price for emitters to pay for each ton of carbon emissions, consequently generating revenue for the economy whilst aligning the country to its net-zero commitments. While the Act is aimed at reducing the emission of GHG, however, there is no policy, regulation or law with respect to the carbon credit scheme. Sometimes in May 2023, the erstwhile House of Representatives urged the federal government to direct the National Council on Climate Change and the ministries responsible for industry, trade and investment, environment, and budget and national planning to immediately implement the carbon credit scheme through the formulation of an action plan consistent with the relevant section of the Act.[1] The foregoing is yet to be implemented, it is our view that the formulation of the action plan can serve as an avenue to resolve issues on policies with respect to carbon credit in the country.

Conclusion

Although Nigeria’s emissions are modest, its fast-growing economies, bold development ambitions, and rapidly growing population signify a heightened energy demand in the coming decades. Therefore, developing the country’s carbon credit market is critical in ensuring that the continent’s development trajectory aligns with a just energy transition. According to the African Carbon Markets Initiative’s (ACMI) projections, the country can produce up to 30 million carbon credits annually by 2030, which at US$20 per credit would earn Nigeria more than US$500 million annually. These statistics underscore how carbon markets are an incredible opportunity to unlock billions for climate finance needed to attain Nigeria’s ETP. Other benefits include promoting sustainable growth, stimulating economic development and mitigating climate change.