Climate financing in Africa

Analysis in brief: The cost of financing projects to mitigate the harmful effects of climate change are beyond the means of African countries, and the private sector is not doing enough. Creative financial tools may be the answer.

The irony that the continent that contributes the lowest amount to global-warming carbon emissions but suffers the worst initial effects of climate change is not lost to Africa’s governments. They face a massive financial challenge of mounting mitigation efforts to save their environments and populations. Droughts have become disasters occurring with predictable regularity in East Africa, with the Horn of Africa particularly hard hit, while arid conditions in North Africa and the Sahel region have worsened. Storms are intensifying in Southern Africa, and the intensity of tropical cyclones striking Madagascar has grown.

Investment in efforts to mitigate the impact of climate change is also an investment in the security of all established economic sectors, from agriculture to tourism and transportation. The private sector plays a critical role in climate financing but has not been as active in Africa as in other parts of the world. However, climate funds and public-private partnerships provide means to engage the private sector.

More frequent and longer droughts have resulted from climate change
Image courtesy: United Nations

Where investment is going

For private investors, there is no lack of opportunities, from building green office complexes in South Africa to installing solar energy arrays in Morocco. When overall private sector participation in climate financing is tabulated, investment comes from large corporations and commercial financial institutions, both domestic (49%) and international (39%) with unidentified sources comprising the remaining 12%.

Africa leads the world in investment in adaptation: projects that recognise the need to adapt agriculture and other sectors to the reality of immediate and imminent climate change effects. Investment has struck a relatively even balance between monies spent on adaptation and mitigation, while about 12% of investment is in projects that have both adaptation and mitigation components. By contrast, the world’s other regions devote only 7% to 16% of their climate change spending on adaptation. One reason is that Africa produces relatively few carbon emissions and thus has less burning of fossil fuels to reduce.

Climate spending per region by type of investment
Image courtesy: Climate Policy Institute

However, while Africa does not create much of the pollution that causes global warming, one of its chief exports (oil and gas) is the cause of carbon emissions that do create climate change. This Faustian bargain – immediate cash return versus the cost of imminent economic and societal problems – is clearly embraced by foreign investors in the fossil fuel sector of Africa’s energy industry. However, motivated by government policies that offer tax incentives and other inducements to participate in clean energy initiatives, the renewable energy sector is expanding. This is evident in the giant solar arrays now operating in Morocco, which are providing electricity to Europe, and a similar gargantuan solar array announced in February 2024 for Namibia, which will export electricity to neighbouring countries. Wind farms are also proliferating throughout the continent – along coastlines and, where there are no coastlines, atop mountain ranges. Much more has to be done. Although renewable energy projects have drawn the most investor interest in climate spending, this has amounted to only US$9.4 billion, a fraction of the US$133 billion that Africa will need between 2026 and 2030 to meet its clean energy targets. Meanwhile, foreign investors have been worsening climate change by financing fossil fuel projects in Africa by an amount of US$29 billion a year between 2016 and 2021. Additional awareness of climate change’s negative impact on economies should further shift investment away from fossil fuels to renewable energies. Government policies supporting electric vehicle (EV) ownership are in place in several African countries, and nearly all African countries have targets to meet clean energy goals. These policies have components enticing the involvement of private investors to build EVs, create the road support infrastructure to enable EV use, and build a diversity of solar devices for every type of electricity consumer. Africa’s architects have moved beyond designing prototypes of Green Buildings that produce zero carbon emissions to incorporating components of such energy self-sustaining and water conserving structures into all new building plans. Local governments’ departments of urban planning can encourage this trend.

Concessional financing can fund climate change mitigations

Africa will need US$190 billion a year until 2030 to finance its first climate change mitigation projects. Climate change adaptation projects will require US$50 billion a year by 2050. One way this will be acquired will be through concessional financing, which is a financial mechanism designed to bridge the gap to private sector capital by offering ‘soft’ loans to governments on much easier terms than those offered by market loans. This important tool can be used to encourage private spending on public-private partnership projects aimed at climate adaptation and mitigation. For example, the International Monetary Fund believes that governments can use their concessional loans to insure against risks involved in projects that private businesses are wary of because of the risks involved. While the International Monetary Fund admits that concessional climate financing to governments, which in Sub-Saharan Africa comes in the form of grants or concessional loans mainly from major bilateral donors, multilateral development banks and multilateral climate funds will not be sufficient to meet all of Africa’s climate spending needs.

Africa climate investment
Image courtesy: Climate Policy Institute

It is encouraging that climate spending by multilateral development banks has tripled since 2010. Meanwhile, the growth in multilateral climate funds, first introduced in the 1990s, offers another means for Africa to access financing. Climate funds now represent US$35 billion in capital, but while US$28 billion has been approved for use in projects, less than US$11 billion has actually been disbursed. Unlocking these funds requires yet more government policy initiatives, essential as climate funds grown.

The critical points:

  • Africa contributes the least of any continent to carbon emissions but is the continent most affected by climate change disasters
  • The move toward renewable energies is slow but shows signs of accelerating
  • New financial tools are becoming available, particularly those aimed at the involvement of the private sector