Climate Tech in Africa: Balancing Innovation with Ethical Investment

Africa, responsible for less than 4% of global emissions, is bearing the brunt of climate change. With rising temperatures, erratic rainfall, and shrinking agricultural yields, the continent is on the front lines of a crisis it did little to cause. Yet, amidst these challenges, Africa is also emerging as a hub for Climate Tech innovation. As Max Cuvellier aptly puts it, “Climate Tech is not so much a sector per se as it covers a wide range of use cases,” including agriculture, green energy, food systems, carbon, waste management, water, and electric vehicles, among others. In the first five months of 2024 alone, Climate Tech accounted for 45% of all VC funding on the continent, amounting to a staggering $325 million. This surge in investment is no surprise—Africa’s vulnerability to climate change makes it a critical region for solutions that can address both local and global challenges.

A notable trend we’ve observed is the rise of Climate Tech companies aiming to monetise carbon offsets, with some making it their primary revenue stream.

Understanding Carbon Credits and Offsets

In a cap-and-trade system, the government sets a limit, or cap, on the total emissions allowed across an industry. Companies that exceed this cap must buy additional carbon credits from the government or trade with other companies that are operating below the cap. Over time, the government gradually lowers the cap, which raises the cost of carbon credits and encourages companies to invest in cleaner practices to meet their emissions targets.

Carbon credits serve as permits that allow a company to emit one ton of CO2. These credits create a vertical flow of carbon revenue from companies to regulators. Companies with excess credits can also trade them with others. By contrast, carbon offsets enable horizontal trading between companies. For example, if a company removes a unit of carbon from the atmosphere through its business operations, it generates a carbon offset, which it can sell to other companies seeking to reduce their carbon footprint.

Typically, one carbon credit represents the reduction, sequestration, or avoidance of one ton of carbon dioxide or its equivalent in other greenhouse gases. Carbon markets, where credits are traded, allow companies or individuals to offset their emissions by purchasing credits from entities that actively reduce or remove emissions.

The primary goal of carbon credits is to accelerate the progress of polluting companies toward carbon neutrality and net-zero emissions. However, many regions are still developing frameworks to accurately measure emissions and credits, which can lead to issues like double-counting and greenwashing.

Common carbon projects include forestry and conservation, waste-to-energy initiatives, conversion to cleaner cooking fuels, and renewable energy projects.

The Ethical Dilemma: Are Carbon Credits Enough?

If global goals are to reduce carbon emissions significantly, all companies should be working toward these targets. Simply allowing companies that exceed their quotas to purchase credits from others is insufficient to address the root problem—it merely maintains the status quo. This approach is inadequate, particularly for regions like Africa, which is already disproportionately affected by climate change. The continent is warming faster than the global average, with sea levels rising more rapidly than elsewhere, according to the Intergovernmental Panel on Climate Change (IPCC).

As a VC investor, I've encountered decks—especially from Western markets—that involve purchasing arable land in African countries to capture carbon credits. The rationale is that ownership of the land would grant these companies rights to the carbon sequestration naturally performed by existing trees. However, this approach presents several risks.

First, we must ask: How much does this actually benefit the continent and its people? If the trees are already providing natural carbon sequestration, purchasing the land to monetise this process is exploitative and offers little value to local communities. While land purchases typically result in its transformation for commercial or residential use, these carbon projects do not contribute additional climate benefits beyond what would have occurred without them. A carbon project is only "additional" if the emissions reductions or removals would not have occurred without the revenue from carbon credit sales. Claiming credits for forests that would remain untouched regardless does nothing to reduce atmospheric carbon. The issue becomes more pronounced when companies, with minimal oversight, can sell carbon credits for the same region over an extended timeline.

If this approach becomes widespread, with Western companies acquiring large tracts of land in developing countries, what land will remain for African countries as they mature and try to implement the same approach? Will Africa still have land available for its own development, or will Africa be left behind when the West moves on to "newer and cleaner" carbon avoidance, reduction and sequestration measures?

Even planting trees today is insufficient. Selling ex-ante carbon credits based on the potential CO2 a sapling will sequester over a 20- to 50-year period creates a time mismatch. The planet is already at a critical juncture, and we need more immediate action. In my opinion, carbon credits should only be sold after carbon removal, avoidance, or sequestration, and not before.

The Implications for Africa

This issue isn't limited to Western companies—African leaders must also be vigilant. In 2023, Blue Carbon, a Dubai-based company, signed a Memorandum of Understanding with the Liberian government, securing exclusive rights to generate and sell carbon credits on about 2.5 million acres of Liberia's forests, which represents up to 10% of Liberia's total land area, for 30 years. Blue Carbon will retain 70% of the revenue, with the government receiving the remaining 30%. Governments in less developed countries are constantly seeking new revenue streams, and the appeal of generating income from unused land without immediate benefits can be strong. Beyond economic reasons, such projects may also be seen as a way to meet commitments to net-zero by 2050, aligning with more responsible players like China, the United States, and the Middle East, which account for 7.1%, 14.4%, and 19.5% of global carbon emissions, respectively.

However, leaders must consider the long-term consequences of contracting large expanses of land to foreigners. This could place African nations in precarious positions, hindering future growth and causing immediate hardship for citizens. In Kenya, for example, Indigenous populations like the Ogiek have been displaced from the Mau forests as a result of conservation project negotiations between Blue Carbon and the Kenyan government, aimed at generating carbon credits.

Moreover, if this trend escalates, it could lead to large-scale land acquisitions by foreign entities, depriving African countries of valuable land needed for future development and threatening the livelihoods of those who depend on the land. This mirrors historical patterns of exploitation and raises questions about sovereignty and long-term development prospects.

A Call for a New Approach

When we step back to consider the big picture, it becomes clear that most carbon credit projects in Africa are managed by foreign investors, who take the majority of the revenue, while Africans bear the brunt of climate change. These projects often impede long-term development, offering minimal benefits to the people who actually live on the land. For instance, at the carbon market auction held in Nairobi, Kenya, in June 2023, over 2.2 million tonnes of carbon credits were sold at just $6.27 per tonne—far below the government carbon allowances, which range from $90 to $150 per tonne of CO2. 

This is yet another instance of the West balancing its climate agenda on the backs of Africa. Instead of paying African nations to remain poor and “store carbon,” wealthy countries and international institutions should honour their commitments to development finance. This would enable African nations to invest in infrastructure and clean energy, and strengthen their resilience to climate change.

It's important to remember that trading carbon credits is only a stop-gap measure—a means to an end. The ultimate goal is to lower carbon emissions globally so that our planet remains habitable for future generations. This will not happen overnight, but it is essential that the world's largest polluters remain committed to carbon neutrality, investing in cleaner innovations and gradually reducing carbon caps for of their industries.

African nations must also recognise the dangers of the land-for-cash approach and the long-term consequences. The solution lies in establishing our own conservation projects, brokering carbon deals that ensure more control, fair revenue distribution, and shorter tenures, while protecting the indigenous populations who rely on conserved lands. 

This conversation extends beyond environmentalists and policymakers. It includes the startup ecosystem. As more startups seek funding to participate in climate tech, VC funds must be part of this dialogue. We need to define what makes sense for Africa and support innovative climate solutions that serve both Africa and the global community.