Prospects for Carbon Markets in Africa: Ethiopia as a Case Study

Executive Summary

Carbon markets facilitate the buying and selling of carbon credits, allowing entities that capture or reduce carbon dioxide (CO2) to earn revenue through credit sales. By increasing carbon sequestration through practices, such as reforestation, sustainable agriculture, and soil conservation, landowners can generate credits that companies or governments can purchase to offset their emissions. When well-designed, these activities may also support increased agricultural productivity by improving soil health and reducing erosion.

Africa is home to rich ecosystems and extensive terrestrial biomes. The continent’s forests, grasslands, and agricultural lands have the potential to store significant amounts of carbon, which would contribute to atmospheric CO2 removal while supporting biodiversity, soil health, and water resources. Global climate and development agreements rooted in frameworks such as United Nations Sustainable Development Goals (SDGs) provide platforms for discussing carbon markets, policy incentives, and technical support.^[1] By engaging in these frameworks, African countries can attract investments in carbon offset projects integrating carbon trading into economic development strategies.

The legal and regulatory architectures in African countries should be considered when examining the functionality and growth of potential carbon markets. To implement a functional carbon market in Africa, local issues, such as legal and regulatory constructs related to land ownership as well as varied land-use patterns and socioeconomic structures, need to be considered. While there is a diversity of socioeconomic and governmental structures in Africa, many African countries do not have private land ownership. This leads to a model of land management that is significantly different than that of the U.S., for example, and this has implications for how carbon markets can be implemented in African contexts. This report uses Ethiopia as a case study for African countries that do not have private land ownership.

Land ownership is a significant issue that can determine who benefits from carbon credit transactions when land is used for carbon sequestration. Understanding land ownership and government administrative structures is therefore important for effective decision-making and management of potential investment risks. Land in Ethiopia is owned by the state, and private landholders have land-use rights that preclude them from selling or changing the land. Absent an agreement with the government that explicitly allows the landholder to modify the land’s use to generate carbon credits, it is unlikely that a carbon market can develop in this context.

Another characteristic of land management in Ethiopia is the absence of a single central administrative unit. Currently two ministries — the Ministry of Agriculture (MoA) and the Ministry of Urban Development and Construction (MUDC) — are responsible for rural and urban land administrations, respectively. Long-term uncertainty for carbon market investment can exist if urban development competes with rural agricultural activity on marginal lands. This can be especially true when urbanization is occurring rapidly, and cities are expanding, because the central authority governing land-use can be in question. In Ethiopia, the fast pace of urbanization places rural land and protected areas at a high risk of land conversion, thus posing a potential challenge to some land-based carbon market investments. Hence, alignment across ministries’ regulations is crucial for mitigating uncertainties that can impeded successful carbon market development.

The majority of Ethiopia’s land — 78.1% (888,121 km2) — while government-owned, is held privately. This land could support, under a favorable regulatory architecture, private investment for carbon market development. Most of the remaining land — 20.5% (232,780 km2) — is in protected areas that are held and managed by the government. Protected lands in Ethiopia could be used to pilot government investment aimed at establishing model carbon market contractual agreements. Such an approach can establish a precedent for further expansion of carbon markets, which could help the planning and implementation of carbon market investment become more feasible and scalable.

The dynamic relationship among land administration, conservation, and economic development underlines the importance of a systems-level approach for the success of carbon markets in Ethiopia and Africa. Effective land administration provides a structure for clear property rights and land-use policies, which can support conservation efforts by protecting ecosystems and promoting sustainable land use. In turn, conservation can provide economic and ecosystem benefits. This highlights an interconnectedness that creates positive system-wide effects that can allow Ethiopia and other African nations to build resilient carbon markets that align with sustainable development objectives.

For carbon markets to thrive in Africa, it is essential to build frameworks that consider governance structures, national development needs and priorities, and local environmental conditions. Success will ultimately be determined by the extent to which carbon market investments rooted in sustainable land management practices are attractive. To this end, appropriate legal and regulatory frameworks are a necessary condition for capital inflow and market growth.

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Notes

^[1] United Nations Department of Economic and Social Affairs (DESA), “Sustainable Development Goals,” accessed March 2025, https://sdgs.un.org/goals.

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