South Africa risks losing carbon financing flowing from the Clean Development Mechanism (CDM) as the European Union (EU) – the largest buyer of Kyoto Protocol carbon credits – has indicated it would only purchase credits from projects located in least developed countries (LDCs) from 2013.

There is concern among those involved with CDM projects in South Africa that the issue is being neglected, as other sources of funding, such as the yet to be established Green Climate Fund (GCF), appear to be gaining favour and popularity at the climate change negotiations, with developing countries hoping to tap into these ‘new’ sources of funding.

“If, in a best case scenario, we get a perfectly designed GCF, this will still take time to implement, and the markets will have to adjust to it,” states EcoMetrix Africa director Lodewijk Nell.

This could potentially leave a gap of several years after 2012, where South African emissions-reducing projects, such as CDM projects, would struggle to sell credits if the EU was only buying credits from LDCs.

Despite a slow start compared with countries such as China and India, the CDM is finally gaining traction in South Africa. There were currently three projects in the pipeline at major municipalities, which have learned the rules of the CDM game and the benefits that it can have for them.

“Current momentum in CDM project development is substantial, partly driven by the time squeeze imposed by the EU’s position on LDCs,” notes Imbewu climate change and CDM legal consultancy unit director Andrew Gilder.

He adds that according to information from the United Nations Framework Convention on Climate Change (UNFCCC), which manages CDM at the top level, there are 19 South African projects already registered and more than 100 projects in the pipeline.

It is unlikely that all these projects would be registered by the end of 2012, and thus they risk losing out on funding from those participating in the EU emissions trading scheme.

It is not certain that South Africa would be excluded by the EU, and the possibility for bilateral project collaboration existed, although this would complicate matters.

Much criticism has been levelled at the CDM because so many of the projects were located in China, and other developed countries were often neglected or struggled with the stringent technical details for submission of a project.

Of the 3 444 registered projects under the CDM worldwide, the UNFCCC stated that 1 576 of those were located in China, and 720 in India.

Evolution Markets VP Brett Jordaan explains that CDM has been well supported by the government in China, which created supporting domestic policy documents for CDM, as well as hosting numerous CDM capacity building workshops.

South Africa’s Designated National Authority, within the Department of Energy, is said to be doing a good job, although the entity could do with wider support, particularly from within government.

The so-called ‘distraction’ with new financial instruments other than the CDM, was viewed as dangerous, because they are not yet properly established, and industry experts say it would be a mistake to neglect an already established mechanism, which is gaining momentum in South Africa.

The CDM operates on a project basis, and is also viewed as a beneficial instrument because it is free from political favour, and allows the market to decide where the funding goes.

South Africa is often said to punch above its weight politically, and numerous commentators have stated that the country should not have aligned itself with the strong emerging economies of Brazil, Russia, India and China to form the Brics grouping, because it is a relatively small economy.

This alignment has meant that there is some reticence towards South Africa from the carbon markets, because alignment with the Brics countries, in some ways, signals that South Africa does not need financial support.

Traditionally, says Jordaan, buyers of carbon credits have favoured buying African credits, so as to diversify geographies where credits are bought from in order to lessen risk, as well as making it possible to claim support for clean development on the continent that is expected to bear the brunt of climate change challenges.

A problem with the EUs intention to buy credits only from LDCs is that only 25% of Africa’s gross domestic product is from LDCs, which in many cases did not have the emissions to mitigate in the first place.

In addition, the EU takes the position that it will not buy credits from forestry projects, and the majority of projects in LDCs, such as the Democratic Republic of Congo, would focus on forestry projects.

Thus, says Nell, the carbon offsets in LDCs would be valuable, but the volumes would not be enough to sustainably support carbon markets in the long term.

“The CDM is on the verge of becoming really successful [in South Africa], and now we are about to lose the opportunity. We would also lose most of the expertise that has been built up,” says Nell.

In the wake of this growing concern over the potential inability to sell South African carbon credits to EU buyers, a discussion hosted by Imbewu, EcoMetrix Africa and Evolution Markets would be held on Wednesday in Rosebank, Johannesburg, to discuss the implications of the international negotiations for the future of the South African market.