In a carbon market, a seller is an entity that has cut its carbon emissions according to a documented and certified process. One ton of carbon dioxide equals one tradable carbon credit, or the equivalent amount of a different greenhouse gas that has been reduced, sequestered, or avoided, according to an article on the website of the UN Development Programme (UNDP).

These credits can be sold to another entity whose emissions are high but want to become carbon neutral.

Once a credit is used, it is offset and is no longer tradable.

During the launch of the voluntary carbon market in Egypt three transactions were carried out including one that involved ISIS Food Industries as the buyer and the Egyptian Bio-Agriculture Association (EBDA) as the seller and facilitated by the Belton Securities Trading Company, with 500 voluntary carbon certificates selling for LE1,040.

Another transaction saw the agribusiness company Daltex purchasing around 1,500 certificates at $18 per certificate from VNV Advisory.

According to Ahmed Rushdy, advisor to the FRA chairman on sustainable development and executive director of its Regional Centre for Sustainable Finance (RCSF), the launch of the voluntary market was made possible as a result of hard work establishing the mechanisms and regulations according to which the different stakeholders would operate.

He said that Egypt has been considering the creation of a VCM since 2020 but committed to it during the UN COP27 Climate Change Conference in Sharm El-Sheikh in November 2022.

The launch of the VCM is proof that Egypt is taking serious steps and is committed to climate action, Rushdy said. Markets of this sort can incentivise companies to cut their emissions.

He said that voluntary carbon markets are fragmented worldwide, which is why the FRA thought of providing a platform where supply can meet demand.

The FRA has regulations in place that ensure that companies go through a rigorous process to cut their emissions in which every step is documented and verified according to international best practices, Rushdy said.

 It has made sure that all the market players involved operate according to international standards, he told Al-Ahram Weekly.

“This is to make sure that every certificate issued is authentic and implies a real cut in emissions,” Rushdy said.

“The voluntary carbon market is a positive step in that it raises the level of awareness of companies of their carbon emissions and the need to become carbon neutral,” said Cherine Khallaf, director of government affairs and public policy at LYNX Strategic Business Advisors, an Egypt-based firm specialising in government relations, public policy, and investment advisory services.

“It is good for building the expertise of both regulators and companies on carbon monitoring, accounting, and verification,” she told the Weekly. However, she added that the market could be even more effective if it placed a cap on emissions.

Rushdy said that it is costly to go through the process of issuing carbon credits if companies have to employ foreign entities to validate and verify that they have cut emissions. But with FRA accrediting and local service providers, it makes it more affordable for local companies to do so and encourages them to seek carbon neutrality.

A market-based system gives companies the chance to monetise cuts in carbon emissions. The pricing of the certificates varies according to whether only carbon emissions are cut or whether the project is also useful to the community in other ways, for example helping to pave the way towards achieving the 17 UN Sustainable Development Goals (SDGs), such as community development and job creation, women’s empowerment, the prevention of child labour, or health protection.

The prices are decided by the supplier factoring in the cost of the process, Rushdy explained.

On the demand side are companies that need to cut emissions but for which the investment required could be very high, in which case they offset their emissions by buying carbon credits.

Heavy carbon emitters such as cement and fertiliser producers will continue to produce emissions even if they invest in decarbonisation, and they will typically buy carbon credits.

Other companies may need to cut emissions to access certain markets. The EU’s Carbon Border Adjustment Mechanism (CBAM), for example, “puts a price on the carbon emissions of goods imported into the EU, thus levelling the playing field between EU industry, which is subject to a carbon price in the EU emissions trading system [EU ETS], and foreign producers in countries that do not have an equivalent system in place,” according to the European Parliament.

While since October 2023 only reporting requirements have been in place, starting in January 2026 “importers will have to acquire CBAM certificates for the emissions associated with the production of imported goods that are not subject to equivalent carbon pricing in the country of origin,” it says.

Sectors covered by CBAM include cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. “Egypt’s exposure to the CBAM is high. Almost 20 per cent of exports to the EU are covered, with some sectors highly exposed. For example, 79 per cent of aluminium exports go to the EU,” said Gerassimos Thomas, director-general for Taxation and Customs Union at the European Commission, on the website of the delegation of the EU to Egypt.

The UK is also applying the CBAM, which includes the two additional sectors of glass and ceramics production.

Khallaf believes that the sectors that are most likely to be interested in trading carbon credits are the carbon intensive ones that are also affected by the CBAM. She said that in the long run it is important that Egypt’s voluntary carbon market aligns with the carbon markets of Egypt’s trading partners in order to enable companies that buy or sell certificates in Egypt to be accepted abroad.

For the time being, she expects companies exporting to the EU to buy and sell emissions credits in the EU carbon market in order to ensure that their carbon offsetting is accepted.

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* A version of this article appears in print in the 22 August, 2024 edition of Al-Ahram Weekly