Putting markets to work

How Ghana will fund development projects through carbon finance

February 28, 2019

Photo: UNDP Ghana

It is estimated that the private sector will have to shoulder some 85 to 90 % of the investments needed to transform our economies to zero carbon by 2050, one of targets outlined in the Paris Agreement. But these investments are currently not flowing at the pace or scale needed to bend the emissions curve.

This could be attributed to the fact that climate negotiators have so far not been able to agree on the operationalization of market-based mechanisms (Article 6 of the Paris Agreement), seen as a key entry point for private sector actors to drive real and measurable emission reductions.  

Market mechanisms are designed to stimulate the trade of certified units of emissions that have been reduced through certain projects or initiatives. The trading of these Internationally Transferred Mitigation Outcomes (ITMOs) are believed to foster cooperation and drive higher ambition for climate actions.

While we wait for COP25 to shape the roll out of mechanisms detailed in Article 6, some countries have been quietly forging ahead. Ghana for example, aims to implement a country-wide clean energy programme (PDF) for households and businesses, based on a mitigation action plan developed with UNDP’s Low Emission Capacity Building Programme and support from Germany and the European Union.

The country still counts 1.2 million households without power, particularly in remote and scarcely populated areas. Increased droughts and floods in the last two decades have had severe economic and social implications (USAID, PDF) and worsening weather events will affect food security, water resources, health, and economic growth.

A key aspect of the clean energy programme is a financing mechanism enabling local banks to offer affordable loans to consumers, including businesses. As private investment flows into clean energy projects, emissions will be reduced, generating ITMOs. Once the ITMOs are sold on international markets, a share of the proceeds will be allocated to Ghana’s flagship green growth fund to finance other projects for sustainable development and climate resilience. These projects will focus on mitigating the impacts of climate change on sectors such as land management, water harvesting strategies, forest ecosystems, and health.

In the meantime, Ghana is looking at ways to strengthen private sector’s engagement in implementing the country’s climate action plans, or Nationally Determined Contributions (NDCs). For instance, a training programme to set up an in-country climate finance incubation hub will offer learning-by-doing opportunities on how to transform projects into a “market-ready product” .

Ghana is hosting the Africa Climate Week in March, which will showcase proven climate solutions to attract private investment and introduce entry points for private sector engagement. The Ghana NDC Investment Forum taking place during the Climate Week - organized by UNDP Ghana and the Ministry of Environment - will bring together international high-level participants from public and private sectors to discuss ways to attract private sector investment at scale.

With Ghana’s country-wide clean energy programme close to implementation, the timing of the Africa Climate Week and the NDC Investment Forum couldn’t be better, as the innovative finance mechanism underpinning the programme provides a number of incentives for both investors and the public sector actors.

Using carbon finance generated from investors’ sales of ITMOs to boost the share of the national green fund is a concrete way for developing countries to reduce their dependence on bilateral climate finance, which is currently not available at the extent needed to achieve the goals of the Paris Agreement or Agenda 2030.