Denis Tukahikaho Ph.D. is an expert on Cooperatives, Financial Inclusion and Renewable Energy Investment
KAMPALA – In 2023, global carbon pricing revenues reached a record $104 billion and with 24% of global emissions covered according to the World Bank. As a developing country, Uganda can benefit from carbon markets by generating revenue from carbon credits while participating in international carbon markets. There are now 75 carbon pricing instruments in operation worldwide and over half of the collected revenue using such instruments has been used to fund climate and nature-related programs and carbon pricing can be one of the most powerful tools to help Uganda in reducing emissions. That’s why it is good to see these instruments expand to new sectors, become more adaptable and complement other measures deployed mitigate or adapt to climate change effects. Though the Ministry of Water andEnvironment is in final stages to operationalize a carbon credit market frame work, this has been long overdue and lack of participation by Ministries, MDAs and Private sector will pose serious limitations to its functionality and efficiency.
The levels of greenhouse gases (GHGs) have increased significantly over the past fifty years due to increase in human activity, practically in all sectors, namely, industrial, transportation, residential, commercial and agricultural. A carbon unit represents one metric ton of CO2 or equivalent. In order to make the carbon credit market vibrant globally, signatories to the Kyoto protocol representing both developed as well as developing countries agreed on caps or quotas placed on the maximum amount of greenhouse gases for their respective countries and each country was given set quota on the emissions of local business and other organizations within it and carbon credit represents such an emission allowance. The Kyoto protocol was an agreement between more than 170 countries, under which industrial countries were to reduce their collective GHGs by 5.2% compared to the levels in 1990. This may appear small, but the same would represent a 29% cut compared to the levels that would have been otherwise reached in 2010. The Intergovernmental Panel on Climate Change (IPCC) observed that, Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes. Such policies could include economic instruments, government funding and regulation. IPCC puts emphasis on a tradable permit system as one of the policy instruments that has been shown to be environmentally effective in the industrial sector, as long as there are reasonable levels of predictability over the initial allocation mechanism and long-term price as was formalized in the Kyoto Protocol. The Kyoto Protocol agreed ‘caps’ or ‘quotas’ on the maximum amount of GHGs for developed and developing countries and each country in turn sets quotas on the emissions of installations run by ‘operators’ – a term used for local business and other organizations of which Uganda is not implementing and countries must manage this through their own national registries which is validated and monitored for compliance by the United Nations Framework Convention on Climate Change (UNFCC). For effectiveness, each operator is a given an allowance on Carbon emission and whose unit is a Carbon Credit which gives the owner the right to emit one metric ton of carbon dioxide or other equivalent GHG. The term Carbon Credit characterizes the emission trading approach to Carbon and a credit can be an emission allowance which was originally allocated, or auctioned by the national administrators of a cap-and-trade mechanism, or it can be an offset of emissions. Operators that have not used up their quotas can sell their unused allowances as ‘Carbon credits and businesses that are about to exceed their quotas can buy the extra allowances as credits, either privately or in the open market. As the demand for energy grows over time, the total emissions must still stay within the cap but it allows industry some flexibility and predictability in its planning to accommodate this. By being permitted to buy and sell emission allowances, an operator can now seek out the most effective way of reducing carbon emissions as it can either opt to invest in cleaner machinery and practices or purchase emissions from another operator who already has excess capacity. The market mechanisms, thus, drive the industrial and commercial processes in the direction of low emissions or less “carbon intensive” approaches, than are used when there is no cost to emitting GHGs into the atmosphere.Planting of trees by operators or through aggregation may be an enabler in achieving self-carbon credit offsets which is key to cost minimization.
The biggest challenge for Uganda is the lack of a well-developed carbon credit secondary market, a lack of homogeneity between projects which causes difficulty in pricing and as well as questions due to the principle of supplementarily and its lifetime and additionally, offsets generated by a carbon projects under the Clean DevelopmentMechanism are potentially limited in value because operatorsshall be restricted as to what percentage of their allowance can be met through these flexible mechanisms. It is argued that theprice of carbon needs to be high enough to motivate thechanges in behavior and changes in economic production systems necessary to effectively limit emissions of greenhouse gases. Raising the price of carbon will achieve several goals ; provide signals to consumers about what goods and servicesare high-carbon ones and should therefore be used more sparingly, provide signals to producers about which inputs usemore carbon (such as coal and oil) and which use less or none (such as natural gas or nuclear power) and thereby inducing firms to substitute low-carbon inputs and It will also provide market incentives for inventors and innovators to develop andintroduce low- carbon products and processes that can replace the current generation of technologies and finally , a highcarbon price will economize on the information that is required to do all three of these tasks. Regulated carbon market mechanism will make operators be sensitive on their carbonfootprint which shall be automatically calculated by the price system and consumers would still not know how much of theprice is due to carbon emissions bbut they could make theirdecisions confident that they are paying for the social cost of their carbon footprint.
Globally in 2024, jurisdictions with carbon pricing mechanism accounted for 54% of the World’s GDP and by treating emissions as a market commodity, it becomes easier for business to understand and manage their activities and while economistsand traders can attempt to predict future pricing using well understood market mechanism. Thus the main advantages of a tradable carbon credit over a carbon tax are to include , the priceis more likely to be perceived as fair by those paying it and investors in carbon credits have more control over their own costs, the flexible mechanisms shall ensure that all investmentgoes into genuine sustainable carbon reduction schemes through its internationally-agreed validation process and if correctlyimplemented a target level of emission reductions shall be achieved with certainty while under a tax mechanism , the actual emissions would vary over time and it shall provide aframework for rewarding people or companies who plant treesor those that sequester carbon. Finally, the carbon tax is possiblyless complex, expensive, and time-consuming to implement. However, when credits are grandfathered, it puts new orgrowing companies at a disadvantage relative to more established companies and it is clear what effect the policy hason the price of energy. It is projected that, revenue from aregulated carbon Credit market in Uganda will contribute between 10%-15% of GDP by 2030. I am a proud carbon credit farmer from Ryakasinga CHE, Sheema District!
Join The Society for Environment and Climate Finance Professionals call or WhatsApp +256 777 222 732
The author, Denis Tukahikaho PhD. is the Ag. President, The society for Environment & Climate Finance Professionals and Managing Partner – Climate Hub -International.
denis.tukahikaho@climatehubinternational.com
Related
