Summary

Through the FiCS Innovation Lab, the Development Bank of Southern Africa (DBSA) developed one of the three (3) novel climate finance instruments to support South Africa’s voluntary carbon market (VCM) between 2025 and 2026 (3). The proposed instruments, a carbon repurchase facility and a carbon bond, aim to resolve demand-supply imbalances caused by a lack of early-stage financing, high capital costs, and weak secondary market liquidity. Demand for carbon credits is projected to significantly outpace supply, highlighting the need for market-based mechanisms to support bankable carbon projects. DBSA proposes to address this by introducing structured financial instruments that mobilise commercial bank financing, requiring robust governance, registry transparency, and independent verification.

Context

South Africa’s carbon market activities began in the mid-2000s (5) but faced a downturn after 2012 (5) when the European Union restricted international offsets. The national carbon tax introduced in 2019 (5) created structured demand, allowing companies to offset up to 5-10% (5) of taxable emissions. Under Phase 2 (2026-2030) (5), this allowance increases to 15% (5) for combustion emissions and 10% (5) for industrial processes. During the first compliance cycle in 2020 (5), demand was roughly three times (5) higher than credit supply. Supply is constrained by financing gaps, long development times, and a mismatch in pricing expectations. Furthermore, South Africa lacks the necessary market infrastructure, and carbon credits are not classified under the Financial Markets Act, restricting institutional capital access. DBSA aims to mobilise climate finance to build bankable mitigation projects, having previously raised more than USD 525 million (7) from the Green Climate Fund.

Instrument Structure And Strategy

The Carbon Credit-Backed Bond, proposed as a senior unsecured note, will raise capital for business loans to carbon projects. Investors receive cash interest alongside a carbon-linked coupon following the sale of carbon credits. Bond proceeds leverage private capital, with DBSA providing one-third (9) of debt allocation and commercial intermediaries contributing two-thirds (9). The Carbon Repo Facility offers short- to medium-term finance. Project developers can sell carbon credits for immediate working capital and repurchase them on a later date (10). Alternatively, commercial banks can utilise the facility to temporarily offload credits to meet the Basel III requirement of holding capital corresponding to 60% (10) of its value.

Incubation And Implementation

The instruments were designed through stakeholder engagement with major commercial banks, VCM ecosystem analysis, and supply-demand modelling through to 2035 (14). Projections across five socioeconomic pathways showed divergent dynamics, with some indicating persistent supply shortfalls. Financial modelling tested pricing dynamics and risk allocation, integrating dual revenue streams from project income and carbon credits. If approved, implementation will follow a phased approach: a pilot phase to validate the model, an initial deployment phase issuing the first bond, and a scale-up phase to expand issuance volume and integrate into domestic capital markets. To address potential risks, the report recommends supporting pipeline development, aligning with internationally recognised standards, strengthening governance frameworks, and engaging regulators regarding the formal classification of carbon credits.

Replication And Catalytic Potential

DBSA’s operations in 22 geographic regions (20) in sub-Saharan Africa provide the reach to scale these financial instruments internationally. The Southern African Power Pool countries present further opportunities through household cookstove adoption, renewable energy, and avoided deforestation. Regionally, South Africa supports the African Carbon Markets Initiative, which targets 300 million (20) African credits issued or retired each year by 2030 (20).