The Role of Climate-Positive Policies in Unlocking Finance for Inclusive Green Industrialization in Africa

Although Africa is responsible for less than 4 percent of total global greenhouse gas (GHG) emissions and bears the brunt of climate change, all 54 African countries have signed the 2015 Paris Agreement. As of May 2022, 45 African countries had submitted updated Nationally Determined Contributions (NDCs) with ambitious targets to reduce greenhouse gas emissions by 2030.

Access to external climate financing is crucial for nearly all African countries to achieve their NDCs. By 2030, Africa will require an estimated $2.8 trillion to meet its mitigation and adaptation needs. As latecomers to industrialization, green industrialization presents an opportunity for African countries to achieve their NDCs and drive sustainable and inclusive economic transformation.

A new technical paper from John Asafu-Adjaye and George Baffour Awuah for the Task Force on Climate, Development and the IMF investigates the role of climate-positive policies and reforms in generating capital to help drive green industrialization. The authors define a climate-positive policy as one that promotes energy efficiency and low-carbon use.

Main findings:

• Undertaking regulatory reforms (e.g., removal of energy subsidies) can stimulate the flow of capital to drive green industries.
  • For example, removing fuel subsidies and introducing environmental taxes is positively associated with the inflow of climate-related development finance.
• Policy instruments such as carbon pricing (e.g., a carbon tax) compel households and firms to internalize the external costs of their polluting activities, reducing their GHG emissions and helping countries to meet their NDCs.
  • Given that African countries mainly depend on fossil fuels for their energy needs, a carbon tax increases the price of electricity, leaving poorer households worse off than wealthier households.
  • Non-carbon pricing alternatives such as fuel taxes and carbon offset mechanisms could help to raise additional finance. Although not as effective as a carbon tax in reducing emissions, these could be used as a precursor to a carbon tax.
• Climate-positive policies in advanced countries, such as the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), can have adverse spillover affects on the GDP and welfare of many African countries.
• Given its vast stocks of both green carbon (stored terrestrially) and blue carbon (stored carbon in coastal and marine ecosystems), Africa can generate significant finance from the international carbon market.
  • However, African countries’ participation in carbon offset markets has been limited so far. Countries face various constraints, including limited infrastructure, poor governance, uncertain land tenure and limited capacity and awareness.

The results have several implications for African governments, the African Union (AU), the EU and multilateral development banks such as the World Bank and the International Monetary Fund (IMF).

Policy recommendations:

African governments should:

• Consider implementing climate-positive policies to help shift their economies toward low-carbon pathways to achieve their NDCs. With these policies, there is a need to establish social protection schemes using some of the revenues to address the adverse impacts on low-income and vulnerable households.
• Enhance participation in international carbon markets by introducing land tenure reforms and addressing internal governance issues, especially corruption and the rule of law.
• Enhance the capacity of the private and public sectors to develop bankable climate change projects.

Multilateral funders such as the IMF and the World Bank should:

• Accelerate the decision to reallocate unused Special Drawing Rights (SDRs) for climate finance.
• Accelerate reforms of the Debt Sustainability Framework (DSF) to account for “positive” debt, such as debt on green growth-producing assets like infrastructure investments for renewable energy, clean technologies and clean transportation that would accelerate the energy transition across the African continent.
• Scale up innovative instruments such as green finance, debt-for-climate swaps and climate-linked debt.

Overall, the technical paper underscores that while Africa faces acute financing and governance challenges, the continent also holds immense potential to mobilize capital, accelerate green industrialization and achieve its climate and development goals.