Rwanda has unveiled a ‘Practical Guide’ to help understand the carbon market and related investment opportunities.

The practical guide on carbon market was developed by the Global Green Growth Institute (GGGI) in partnership with Government of Rwanda through Rwanda Environment Management Authority (REMA).

The carbon market, established under Article 6 of the Paris Agreement, enables climate polluters to finance greenhouse gas (GHG) emissions-reduction projects in other countries or entities and count the reductions toward their own climate targets.

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The Paris Agreement aims to limit global warming to 1.5 Degree Celsius to stop climate change.

The carbon market is a global market in which carbon credits can be bought and sold in line with specific standards and guidelines.

A carbon credit represents one ton of greenhouse gas (GHG) emission reductions or removals.

How are carbon credits generated?

Carbon credits are generated from activities that reduce or remove GHG emissions.

These activities are referred to as ‘mitigation activities’ in the context of Article 6 of the Paris Agreement.

Mitigation activities must be developed in accordance with methodologies, procedures and standards established by carbon crediting mechanisms.

Mitigation activities mean activities that reduce greenhouse gas emissions to prevent climate change.

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"Well-known carbon crediting mechanisms include independent mechanisms such as the Gold Standard and the Verified Carbon Standard, as well as United Nations Framework Convention on Climate Change (UNFCCC)-managed mechanisms such as the Clean Development Mechanism (CDM),” explains the guide.

How are carbon credits traded?

Generally, there are two major practices according to the Practical Guide on Carbon Market.

The first, it explains, is through primary trading which is direct trading between project developers and buyers.

The second is through an intermediary, such as an exchange (i.e., a centralised marketplace for sellers and buyers to meet and trade) or a broker. Brokers / retailers purchase carbon credits from mitigation activity proponents and sell them to end-buyers.

Some of the projects with mitigation activities that can attract investors in the carbon market in Rwanda include forestry projects, energy efficiency and clean cooking initiative, renewable energy installations (like wind or solar power), methane capture, sustainable agricultural practices among others.

Carbon credits in Rwanda in previous projects were dominated by improved cookstove projects which accounted for 87% of total Certified Emission Reductions issued.

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In order to mobilise climate finance to implement 10-year climate action plan, Rwanda also banks on carbon market.

Rwanda seeks $11 billion of which $5.7 billion will go toward mitigation projects and 5.3 billion will go toward adaptation projects.

By 2030, Rwanda has pledged to finance 40% of these funds, known as unconditional measures, and plans to obtain the remaining funds from international and private sources as conditional measures.

Participation in international carbon markets under Article 6 of the Paris Agreement can provide an additional source of finance to support the implementation of these conditional NDC measures.

What are the different types of carbon pricing instruments?

There are three main types of carbon pricing tools.

Carbon Tax is a tax applied to all greenhouse gas (GHG) emissions in a specific sector or across the whole economy. It sets a price for emitting carbon where polluters pay a certain amount per ton of GHG emission.

Carbon Crediting Mechanism rewards companies or countries for reducing emissions by issuing "carbon credits." Each credit represents one ton of GHG emissions that have been reduced or avoided

In the Emissions Trading System (ETS) companies are given a certain number of "allowances" or permits to emit a specific amount of GHGs.

If a company produces less than its allowance, it can sell the extra allowances to others.

This creates a market for carbon emissions.

Types of carbon crediting mechanisms

International crediting mechanisms are those governed by international climate treaties and are usually administered by international institutions, such as the UNFCCC.

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Under the Kyoto Protocol, for example, mechanisms included the Clean Development Mechanism (CDM) and the Joint Implementation (JI) mechanism. Under the Paris Agreement, a new crediting mechanism has been established through Article 6.4.

Governmental (domestic) crediting mechanisms are governed by national regulation.

Independent crediting mechanisms are not governed by any national regulation or international treaties. They are administered by private and independent third-party organizations, which are often nongovernmental organizations.

Revenue potential from carbon markets

Aside from the carbon finance generated through the sale of carbon credits, which goes to ensure the financial viability of projects, Governments can mobilise resources through fees, charges, or levies set on project development.

Rwanda expects to sell 7.5 million tonnes of carbon dioxide equivalent – carbon credits – estimating that they could generate $337 million (approx. Rwf420 billion).

Given that the minimum price is $30, Rwanda could sell $45 per carbon credit (one tonne of carbon dioxide equivalent), potentially resulting in $337 million from 7.5 million tonnes of carbon dioxide equivalent.