Repost: Whose carbon?

In June 2024 the Kenyan government signed an investment framework with KOKO Networks, a trail-blazing start-up backed by Vitol and the World Bank. The agreement would have allowed the firm to sell Article 6 compliant credits into CORSIA, the airline carbon compliance scheme.

KOKO had reportedly invested $300 million building a network supplying almost 1.5 million low-income households in Kenya with bioethanol at around half the market price. The company also sold bioethanol cookstoves for about $12, less than one-tenth of the $115 it would normally sell for. Bioethanol stoves are significantly more efficient than traditional biomass stoves, avoiding an estimated ~5 tonnes CO2 per device per year. The sale of the carbon credits to airlines - CORSIA futures are currently trading at ~$15 per tonne CO2 - was crucial if the business model was going to be viable.

Clean cooking projects are one of the most cost-effective ways of cutting carbon emissions. The International Energy Agency (IEA) estimates that universal clean cooking by 2030 could reduce GHG emissions by 800 Mt CO2e per year, plus an additional 700 Mt CO2e per year due to avoided deforestation. The more efficient stoves also reduce the indoor air pollution that can be so hazardous to human health. Around four in every ten people in in Africa are exposed to indoor air pollution from solid biomass fuels, with Sub-Saharan Africa most exposed to the risk (see Escaping hells kitchen: Advanced cookstove methodologies offer a promising recipe to slash emissions and cut air pollution).

However, on Friday KOKO was forced to lay off its entire workforce of 700 people after the Kenyan government failed to provide the necessary Letters of Authorisation (LoA) enabling KOKO to sell its carbon credits. Although there has been very little in the way of an official statement, it appears that the Kenyan authorities were concerned that by exporting the carbon credits via KOKO, they would be putting achieving their own Nationally Determined Contribution (NDC) under the Paris Agreement at risk.

Fortunately for KOKO the World Banks Multilateral Investment Guarantee Agency (MIGA) had provided the start-up with the world's first carbon linked political insurance coverage, albeit only covering 60% ($180 million) of its investment, and bearing in mind the high chance of a dispute as to whether the insurance conditions have been triggered. However, the whole saga is likely to increase concern as to whether compliance schemes such as CORSIA (and individual project investments by corporations) can overcome the carbon sovereignty claims by individual countries.

In a world where the worlds carbon short position looks set to widen, governments are understandably reluctant to sell their carbon assets off too soon, and too cheaply. It creates a stand-off where viable carbon projects do not get the funding they need, despite the attractive carbon return on investment present in many emerging economies. That points towards an even larger supply deficit of CORSIA eligible credits over the next few years. In the mean time millions of low-income Kenyan households will go without clean cooking fuels.

“The biggest issue in this market is revenue sharing…If we got 50% we would be very happy, those are the figures we are looking at as well.” - Zambian environment minister

Resource nationalism is when a government seeks greater control or value from its country’s natural resources at the expense of the private sector. This can range from outright expropriation – when a government takes away a private company’s assets – to more creeping forms of appropriation – such as higher taxation or tougher regulation.

The commodity industry is no stranger to resource nationalism. In 1938, the Mexican oil industry was nationalised. Seen in the context of its people, it was viewed that, at last, a poor country, long buffeted by predatory foreign powers, had exercised its right to own the wealth of its subsoil, seeing off rich countries that treated access to these resources at low cost as their right. Meanwhile, in 1951, the Iranian government nationalised the assets of the Anglo–Iranian Oil Company (now known as BP). The decision was enormously popular within the country and seen as a long overdue staunching of its national wealth that could now be harnessed to fighting poverty in Iran. More recently, in Venezuela, the late Hugo Chávez grasped strategic assets to propagate his Bolivarian revolution. Bolivia and Ecuador followed his cue.

It’s not just a feature of the oil industry. It can also affect those resources that are critical to the energy transition. In April 2023, newly elected president of Chile, Gabriel Boric announced plans to nationalise the country’s lithium industry, with the state taking a majority stake in all new contracts. Chile is the worlds second largest producer of lithium after Australia. Only a year earlier, the Mexican government announced sweeping nationalisation of its bountiful lithium resources, even though it has yet to extract any ‘white gold’.

Governments must tread a fine line between outright resource nationalism on the one hand, and ensuring a fair deal for their country on the other. One of the defining features of resource nationalism is that it’s often prompted by a sense of unfairness, whether perceived or actual. Contracts between governments and foreign private sector operators may have been signed before the government realised the underlying value of the resource - a case of asymmetric information. Deals may have been done when the economy was on its knees and the government was desperate for cash, or secured during the depths of a recession when commodity prices were weak.

High commodity prices have been a significant driver of resource nationalism in the past, with foreign multinationals often accused of pocketing excessive windfalls or not doing enough to extract a valuable and scarce resource. However, a decline in commodity prices doesn’t necessarily signal the end of resource nationalism. If a resource dependent country suffers a slowdown in economic growth, its government may try and get a bigger share of the shrinking pie to help prop up its revenues.

The degree to which resource production is concentrated in a small number of countries also influences resource nationalism risk. This is especially important when the commodity is seen as being of strategic importance. The higher the concentration, the greater leverage a single government can have over private sector operators. In contrast, a diverse geographical distribution reduces the chances that any one government will be able to exercise its power.

Resource nationalism has a cost though. Although a government may appear to be good, transparent and welcoming to foreign producers, years later – once a mine or an oil well has opened – they may change their tune. This time inconsistency and resulting uncertainty may reduce longer term investment in the country’s resource productivity; leading to a loss of skills and capital from the private sector, reducing production, and potentially leading to higher economic volatility.

Carbon nationalism on the rise

There are signs that a new form of resource nationalism may have begun to rear its head in the global voluntary carbon market. Carbon nationalism as its known is when a government asserts its control over the emissions abatement or carbon storage potential available within its national borders, at the expense of the private sector.