Whither Egypt’s voluntary carbon market? The Financial Regulatory Authority (FRA) and EGX are hastening steps to launch Africa’s first voluntary carbon market, most recently with the mid-July issuance of rules and mechanisms for trading carbon certificates and futures contracts.

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This step reflects a real maturing of FRA policy toward the voluntary carbon market, says Reham Elgizy, CEO of Riyadh-based Voluntary Carbon Market, one that will help the market grow locally and in Africa. According to Elgizy, carbon trading offers a means for mitigating the impacts of climate change — such as desertification — alongside an avenue for expanding green projects in Egypt.

Assuring the liquidity of carbon certificates is crucial to activate the market, CIB board member and former FRA head Sherif Samy tells Enterprise, noting the increasing awareness of the importance of greening the economy and the potential profitability of the carbon trading market for green project owners. Samy added that the challenges facing the carbon market are similar to those facing the EGX, including its attractiveness to investors and its competitiveness with regional markets. Yet, Samy affirms that the market is a significant addition that can be built upon going forward.

While it’s still too early to make predictions about the level of market demand, there are several indications that the market has significant momentum, says Samy. There is increasing interest among public and private entities in issuing sustainable debt, alongside interest from banks and EGX-listed companies in sustainability, according to Samy. In addition, significant numbers of private institutions are now receiving green financing from international institutions, he adds.

There are already players on the verge of entering the market: The EGX has entered discussions with Go Green for Agricultural Investment and Development to issue carbon certificates in parallel with the company’s efforts to list on the EGX. The bourse also plans to approach four listed entities to issue carbon certificates, head of the EGX Ahmed El Sheikh told Hapi Journal. El Sheikh adds that companies may take up to 18 months to complete the project authorization procedures and certify the issuance of carbon certificates, while other companies have already issued certificates but have thus far only offered them in foreign markets.

Just days until the market’s first transaction: The voluntary carbon market will witness its first issuance and trading of carbon certificates between seller Egyptian Biodynamic Agriculture Association and buyer ISIS Organic, with Beltone Financial Holding executing the transaction, according to unnamed sources cited by Hapi Journal.

The incoming European carbon tax is a major driver of demand for carbon certificates and their futures contracts among Egyptian exporters in energy-intensive and high carbon-emitting sectors as they prepare for the implementation of the EU’s Carbon Border Adjustment Mechanism by 2026, says Samy. The law is expected to have a significant impact on Egyptian exports, especially those that consume significant energy, including steel, aluminum, cement, and fertilizers. Goods such as chemicals, polymers, mineral oils, pulp and paper, and others may also face pressure to decarbonize in the face of this legislation by the end of the decade.

Demand is already quite strong: Officials from seven companies have expressed their intention to apply for the FRA’s approval to trade in carbon emissions reduction certificates and futures contracts in the voluntary carbon market, including CI Capital’s CIBC, Mubasher Financial Services, Arab African International Securities, Bank Audi’s Arabeya Online brokerage, Pioneers Brokerage, Cairo Financial Holding’s brokerage arm Cairo Capital Securities, Osool ESB, and Beltone Securities Brokerage, according to Al Mal.cod

HOW WILL THE NEW CARBON TRADING MARKET WORK?

The new market aims to incentivize carbon reduction projects: Like carbon trading markets the world over, this market will allow companies in Egypt and Africa that work on emission reduction projects to sell certified carbon credits to companies seeking to offset their emissions. The hope is that the market will encourage companies to up their engagement in activities that reduce carbon emissions while achieving financial returns, according to the FRA.

What are carbon certificates? Carbon certificates are tradable financial instruments representing units of greenhouse gas emissions reductions, with each unit representing one ton of CO2 emissions in this case. In Egypt, they will be issued to the developer of the emissions reduction project after being verified according to international standards by FRA-registered local or international entities.

And the futures contracts? These are ownership contracts for carbon emissions reduction certificates that will be issued in the future, to be delivered to the buyer at a time determined by both parties. These contracts will be traded on the exchange according to the listing and delisting rules for carbon emissions reduction certificates issued by the FRA in March.

New rules restrict issuers to a single market: The rules for trading carbon certificates require the applicant to transfer the certificates to the account of the settlement company, abide by the legal controls governing their handling, and not offer the listed certificates on any other market database during the listing period. The applicant must also continuously and immediately update all project and certificate data on the new market’s website.

Setting trading sessions: Trading session dates will be determined by the exchange, and will be announced on the exchange’s website, including the date and time of the session, the name of the project issuing the carbon certificates, a link to the project on the voluntary carbon registry site, the number of certificates available for trading, the trading mechanism, and transaction data for the certificates and their futures contracts.

The EGX has specified three mechanisms for trading carbon certificates and futures contracts, including trading through a pre-agreed trading mechanism, through an auction, or through a continuous auction. Trading will be conducted through a pre-agreed transaction mechanism if the the brokerage companies involved request it, while the trade will occur via an auction mechanism — English or Dutch — if there is one party selling or buying facing multiple parties on the opposite side. In the case of multiple parties on both the buy and sell sides, trading will be conducted through a continuous auction.

Trading of unlisted certificates: The regulations also allow trading of unlisted certificates and their futures contracts, but only through the pre-agreed transaction mechanism, provided that the trading parties adhere to the cash and paper settlement of the transaction.

Price priority determines the execution of registered buy and sell orders, and if orders are equal in price, execution is carried out according to order registration time in the trading systems.

The FRA has set conditions for brokerage firms: Brokerage firms’ issued and paid-up capital must be no less than EGP 15 mn with equity not lower than their paid-up capital at the time of applying for the authority’s approval to trade in these certificates and contracts, among other conditions.

A carbon pricing law might be next: The government is in the final stages of preparing the country’s first draft law for carbon pricing, a government official in the renewable energy sector told Enterprise last month. The draft law is expected to be completed by the end of this year and will be presented for discussion with key players in high-emissions industries before a comprehensive bill is submitted to the House.

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