Economic Update

Published 08 Sep 2022

– African leaders look to build financing momentum at COP27 in Egypt

– Climate projects remain underfunded as extreme weather events become more frequent

– Debt-climate swaps and other new financing instruments under consideration

– The Great Blue Wall seeks to protect vulnerable regions in the Indian Ocean

While uncertainty abounds in global energy markets amid Russia’s ongoing invasion of Ukraine, African leaders are increasingly looking to the private sector to finance investment in clean energy ahead of the COP27 UN Conference on Climate Change, to be held in Sharm El Sheikh, Egypt in November 2022.

The COP27 agenda will consider more than 140 projects in Africa, 19 of which are considered ready for implementation and investment, including four in Egypt that carry an estimated cost of $17.4bn but need additional private sector funding.

The 51 African countries that submitted nationally determined contributions (NDCs) during the COP21 UN Conference on Climate Change in Paris and have reported climate data will need roughly $2.8trn by 2030 to meet those commitments, according to the “Climate Finance Needs of African Countries” report published in June 2022 by the Climate Policy Initiative (CPI).

The UN forecasts that Africa will be one of the regions most severely affected by climate change. In recent years, the continent has experienced more extreme weather events, as heatwaves, droughts, flash floods, and Category 4 or 5 cyclones have prompted loss of human and animal life and agricultural crops.

Public financing shortfall

Despite Africa’s sizeable funding gap, financing to date has fallen short. In 2020 some $30bn was available, about 12% of the amount required per year. While African governments have committed $264bn thus far, the continent is looking to source the remaining $2.5trn from the private sector or international bodies.

Mitigation projects to reduce carbons emissions account for 66% of Africa’s climate financing needs, and the transportation sector accounts for 58% of mitigation projects, according to the CPI report.

The other sectors requiring funds for mitigation include energy, with 24%; agriculture, forestry and other land use, with 9%; and industry, with 7%. Meanwhile, adaptation accounts for 24% of required financing, but the total amount needed is likely underestimated due to a lack of data and expertise.

Amid this trajectory, there are signs that Western countries are beginning to commit to providing more resources and delivering on promises of financial support for climate investment.

This week Werner Hoyer, president of the European Investment Bank (EIB), announced during the first-ever Africa Adaptation Summit in Rotterdam that the EIB would triple its climate-adaptation finance by 2025, warning that “climate change could wipe out 15% of Africa’s gross domestic product by 2030, which would mean an additional 100m people in extreme poverty by the end of the decade”.

Last week at the G20 Energy Transitions Ministerial Meeting in Bali, Fatih Birol, executive director of the International Energy Agency, also called on G20 countries to mobilise more financing to support the clean energy transition in developing countries.

However, public sector funding remains complicated. As part of COP26, the EU, the US, the UK, Germany and France pledged $8.5bn to help South Africa transition away from coal, which accounts for 80% of its electricity generation, to cleaner energy sources. However, roughly 80% of these funds would come in the form of loans, and some may be difficult to access due to national rules that protect domestic jobs.

South Africa experienced devastating floods in April that killed 450 people and rendered thousands homeless. The storm followed three tropical cyclones and two tropical storms that hit south-east Africa in early 2022.

Debt-climate swaps

To meet the continent’s financing shortfalls, creative solutions could help African nations address the twin challenges of climate and debt.

The IMF, the Green Climate Fund and the African Development Bank are in the tentative stages of backing the use of debt-for-climate swaps through which debtor countries could use local currency to invest the money that would have gone towards the repayment of loans in climate projects.

The IMF published a working paper in August 2022 that found that these arrangements could make sense in some cases, while the Green Climate Fund, established as part of the UN Framework Convention on Climate Change to assist developing countries in mitigating and adapting to climate change, said that it could act as an intermediary.

Cabo Verde, Eswatini and Kenya are particularly keen to take part, but it remains unclear what form these financial instruments would take.

This week Amina Mohammed, deputy secretary-general of the UN, highlighted the potential role of debt-climate swaps in remarks to the Africa Adaptation Finance Forum that were intended to set the agenda for COP27.

Green and blue walls

The most innovative forms of finance to help Africa meet its climate commitments come in the form of green and blue bonds, which allow countries to finance climate projects through bonds issued by international organisations such as the World Bank and generate returns for private investors.

The Seychelles pioneered the use of blue bonds globally in 2018, raising $15m to support the sustainable development of ocean resources.

Southern and East African nations are now seeking to use blue bonds to build the so-called Great Blue Wall, an idea that emerged from COP26. It aims to protect coastal and marine areas running from Somalia to South Africa in the Indian Ocean, sequester 100m tonnes of CO2 and create 1m blue jobs by 2030.

Fishing in the West Indian Ocean is critical to African and global food security, accounting for 4.8% of global fishing.

The Great Blue Wall initiative targets the regions most in need of financing. Southern African nations require $1.1bn of funding, while East African nations need roughly $700m – a combined 72% of what Africa needs to meet its NDCs.

Less attention has been given to Africa’s Atlantic coast − where many people are losing their livelihoods due to climate change − although the World Bank’s West Africa Coastal Areas Management Programmes has helped 17 African nations that are vulnerable to erosion, flooding and pollution by building dams and coastal fortifications, restoring wetlands and filling in beaches.

In 2007 Africa also launched the Great Green Wall project, which seeks to plant trees, grasslands, plants and vegetation to stem the advance of erosion from the Sahara Desert. The project aims to restore 100 ha of degraded land, sequester 250m tonnes of CO2 and create 10m green jobs by 2030.

The adoption of green bonds has been slower in Africa than in other regions, despite vast potential for solar and wind energy, but some analysts see significant growth potential for these financial instruments given both their attractiveness and the continent’s needs.