Nascent Islamic Voluntary Carbon Market Takes Off in the Wake of COP27 with Two Innovative Transactions Aimed at Funding High-quality Voluntary Carbon Offsets

Whether it is because COP27 recently convened in Egypt and COP28 is scheduled to be hosted by Abu Dhabi/UAE in 2023, both Member States of the Islamic Development Bank (IsDB), carbon markets, credits, offsets, trading and pricing seems to be gaining momentum in the Islamic finance space, albeit the base is very nascent. Judging by the announcements in Sharm El Sheikh and recent agreements signed elsewhere, involving major entities, traction in this growing sector for the Islamic finance industry seems promising.

Egypt, the GCC states and the UK seems to be in pole position. In Sharm El Sheikh, Dr Ahmed Kamaly, Egyptian Deputy Minister of Planning and Development, announced that “Egypt just launched the first voluntary carbon market (VCM) in Africa, which provides us with a way to reduce carbon emissions via the issuance of carbon certificates. This will also pave the way to achieve carbon neutrality not only in Egypt but also in Africa.”

In a recent tweet, Osman Büyükmutlu, Director, Strategy, Policy and Research, at the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the IsDB Group, declared that “Islamic finance is inextricably linked to the growth of the carbon market. The industry is currently estimated to be worth around US$2-3 trillion and is expected to grow to US$4 trillion by 2025; however, only 5% of this amount is allocated to carbon markets and green financing. This provides a good opportunity to use Islamic finance as a key climate action tool.”

This may suggest that the Islamic carbon market is a given and all it needs is substantial upscaling. The reality is that the market has hardly taken off and that it will take time for actual developments and their delivery to match the rhetoric of aspiration.

Like the global conventional carbon market their remain numerous issues to be resolved – regulatory, definitional, categorisation, measuring pricing, evaluating impact especially in reducing carbon emissions. In the Islamic finance space, the added requirement is whether the carbon market is indeed consistent with Sharia’a investment and trading principles.

Notwithstanding, the two standout developments in recent weeks, are the emergence of the International Islamic Trade Finance Corporation (ITFC), the trade fund of the IsDB Group, as a successful bidder at the Voluntary Carbon Market Initiative Auction held by The Public Investment Fund (PIF), the sovereign wealth fund of Saudi Arabia; and the first-of-its-kind US$75 million Syndicated Murabaha facility in the MENA region arranged by The Arab Petroleum Investments Corporation (APICORP) for Hartree Partners Power and Gas Company (UK) Limited, to fund high-quality voluntary carbon offsets

According to the PIF, the auction resulted in 1.4 million tons of carbon credits, in the largest-ever carbon credit sale, according to their resources. ITFC was among 16 successful bidders comprising Saudi and regional entities.

Eng. Hani Salem Sonbol, CEO of ITFC, commented that “this is a remarkable achievement for ITFC towards innovation in green trade financing and development of sustainable trade, as well as supporting OIC members countries efforts in addressing climate change challenges. The credit basket contains units generated by clean and sustainable energy projects in OIC member countries”.

The VCM initiative is a continuation of PIF’s efforts to support Saudi Arabia’s green agenda and follows previous announcements by the Fund, including the completion of its US$3 billion inaugural Green Bond, and the various renewable projects PIF is spearheading as part of its commitment to developing 70% of Saudi Arabia’s renewable energy capacity, in line with Vision 2030.

Similarly, Riham ElGizy, Director of the MENA Voluntary Carbon Exchange, speaking in Sharm El Sheikh, stressed that “today’s announcement is considered an important milestone in increasing the amount of carbon credits held by Islamic Financial Institutions needed to further facilitate trade. This increases the overall global demand and hence the price for carbon credits, which in turn, incentivizes further project developers to carry out climate positive projects.”

In contrast the US$75 million Syndicated Murabaha facility led by APICORP, an energy-focused multilateral financial institution, will fund high-quality carbon offsets in support of the global energy transition and net zero emissions goals, and to develop environmentally friendly projects worldwide. Each carbon offset represents the ownership of one ton of carbon dioxide equivalent (CO2e) which offsets corresponding emissions by the holder.

The Murabaha facility in favour of Hartree Partners Power & Gas Company (UK) Limited, an affiliate of Hartree Partners LP, a global energy and commodities firm, explained APICORP “is designed with a syndication feature allowing additional banks to join and gain exposure to this attractive asset class.”

DD&Co Limited will supply London Metals Exchange approved non-ferrous base metals required to enter into each Sharia’a-compliant Murabaha transaction.

According to Khalid Ali Al-Ruwaigh, CEO of APICORP, “financial innovation plays a crucial role in ensuring a sustainable energy ecosystem. This Murabaha facility was created as part of our commitment to provide innovative financial solutions to enable a balanced energy transition, as well as support Arab countries’ aspirations to reach net zero carbon emissions in line with the 2015 Paris Climate Agreement. The precedent-setting transaction serves as a major milestone for our vision of supporting the MENA region in its journey to sustainability.”

Every year, it is estimated that more than 50 billion tons of greenhouse gases are emitted into the atmosphere. Robust voluntary carbon markets, where carbon credits are purchased voluntarily, have emerged as a cost-effective asset class enabling governments and corporations to immediately begin decarbonizing their footprints in line with the global effort to reach net zero emissions by 2050.

This particularly applies to sectors and industries where emissions are not yet fully abatable due to technological or cost feasibility. For investors, carbon offsets can also mitigate risks associated with energy transition by making their investment portfolios more resilient to evolving climate regulations. 

Regulators and rating agencies are also increasingly taking interest in climate finance and sustainability reporting disclosures by banks. In a separate posting, Jan-Willem van de Ven, Head of International Climate Policy and Carbon Markets at the EBRD remains optimistic about the potential of VCM in reducing carbon emissions.

“It is commendable to have initiated all of the initiatives around Voluntary Carbon Markets in the region; VCM is a lead-up to a more regulated (Compliance Carbon Market) eventually… Not everyone wants to reduce voluntarily, and so this offers a unique opportunity for Corporates to become acquainted with the carbon market in order to remain competitive globally.”

Similarly, APICORP’s Al-Ruwaigh remains adamant that banks and other financial institutions play an important role in the efforts to meet the Paris Agreement target because financing remains one of the most crucial challenges in the decarbonization chain. “The facility’s Sharia’a compliance and syndication features can have major implications because they make it convenient for the regional market to adopt and enable additional banks to join and gain exposure to this asset class,” he added.

APICORP’s facility will fund carbon offsets that are registered with the non-profit platform Verra, the largest global registry for nature-based offsets.

According to Stephen Hendel, Founding Managing Director of Hartree, “robustness, reliability and integrity are at the heart of Hartree’s investments in the Carbon markets, and we thank APICORP for its expertise and leadership in structuring this unique Islamic facility.”

Voluntary carbon markets are particularly relevant to the Arab region. On a per capita basis, carbon emissions are substantially higher in MENA compared to peer economies. The region is also one of the most affected by climate change impact according to the United Nations Framework Convention on Climate Change (UNFCC) as it strains its already scarce water and agricultural resources. 

The Public Investment Fund (PIF) recently announced the establishment of the Regional Voluntary Carbon Market Company with Saudi Tadawul Group Holding Company to support businesses in the region in their transition to net zero. The company as mentioned above helped facilitate the largest carbon credit auction in the world involving one million tons of carbon credits as regional businesses accelerate their quest for net zero emissions. 

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