DBSA: Financial instrument design for an effective carbon market in South Africa

The Development Bank of Southern Africa (DBSA), supported by the Climate Policy Initiative (CPI) and Promethium Carbon, has designed two financial instruments—a carbon credit-backed bond and a carbon repo facility—to address the supply-demand imbalance and liquidity challenges in South Africa's voluntary carbon market (VCM). These instruments aim to transform carbon credits into investable assets to mobilize private capital for climate mitigation projects.

• South Africa's carbon market faces a significant supply-demand gap, where demand for credits is projected to outstrip supply due to a lack of early-stage financing for developers. In the first carbon tax compliance cycle of 2020, demand was approximately three times higher than the available supply of credits.
• The DBSA has developed a Carbon Credit-Backed Bond to be issued as a senior unsecured note. The capital raised would be deployed as business loans to carbon projects, with repayments consisting of cash interest and carbon credits generated by those projects.
• A Carbon Repo Facility has been designed to provide short- to medium-term financing secured by issued carbon credits. This allows project developers to obtain working capital or commercial banks to reduce their capital adequacy ratio by selling credits and agreeing to repurchase them later at a higher price.
• Several structural barriers hinder the scaling of South Africa's carbon market, including the fact that carbon credits are not formally classified under the Financial Markets Act (FMA), which limits their ability to be listed on exchanges and restricts access to institutional capital.
• Secondary market liquidity for voluntary carbon credits in South Africa is thin and opaque, making credits a non-standard asset class that does not align with the risk frameworks of commercial banks. This is exacerbated by Basel III requirements, which necessitate banks hold capital of approximately 60% of the value of carbon credits.
• The proposed instruments are intended to be catalytic and replicable across other regions where DBSA operates in sub-Saharan Africa, including Namibia, Botswana, Kenya, and Mauritius, provided there is regulatory readiness and proactive DFI involvement.

APA

Sharma, J., & Lin, J. (2026). DBSA: Financial instrument design for an effective carbon market in South Africa. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2026/04/DBSA_FiCS-Incubator-Report.pdf

Chicago

Sharma, Jyoti, and Joyce Lin. DBSA: Financial instrument design for an effective carbon market in South Africa. Climate Policy Initiative, 2026. https://www.climatepolicyinitiative.org/wp-content/uploads/2026/04/DBSA_FiCS-Incubator-Report.pdf.

Wikipedia

{{cite report |last1=Sharma |first1=Jyoti |last2=Lin |first2=Joyce |title=DBSA: Financial instrument design for an effective carbon market in South Africa |publisher=Climate Policy Initiative |date=2026 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2026/04/DBSA_FiCS-Incubator-Report.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{sharma2026dbsa, author = {Sharma, Jyoti and Lin, Joyce}, title = {{DBSA: Financial instrument design for an effective carbon market in South Africa}}, institution = {Climate Policy Initiative}, year = {2026}, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2026/04/DBSA_FiCS-Incubator-Report.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }