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 and Promethium Carbon, has developed two financial instruments to scale the voluntary carbon market (VCM) in South Africa. A proposed carbon credit-backed bond would raise capital for project loans, with repayments consisting of cash interest and carbon credits. A Carbon Repo Facility would provide short- to medium-term liquidity by allowing developers and banks to sell carbon credits with an agreement to repurchase them later. These tools aim to bridge the gap between high demand for offsets—driven by the national carbon tax—and a limited supply of bankable projects caused by high early-stage costs and regulatory ambiguity.

• South Africa's carbon market faces a significant supply-demand imbalance, where demand for credits is projected to far exceed supply, particularly as the national carbon tax tightens in Phase 2 (2026-2030).
• Carbon project developers, especially SMEs and those in land-based sectors, struggle to secure early-stage capital due to long lead times and high validation and verification costs, causing potentially bankable projects to stall.
• The secondary market for carbon credits in South Africa is illiquid and opaque, lacking standardized products for hedging or price referencing, which discourages commercial banks from participating.
• A lack of formal classification for carbon credits under the South African Financial Markets Act (FMA) restricts the ability to list carbon-linked instruments on exchanges, limiting access to institutional capital.
• The proposed Carbon Credit-Backed Bond would be a senior unsecured note where proceeds are deployed as loans to carbon projects, with investors receiving both a cash interest coupon and a carbon-linked coupon.
• The proposed Carbon Repo Facility aims to provide working capital for developers and help commercial banks manage Basel III capital adequacy ratio (CAR) requirements by temporarily transferring legal ownership of credits.
• Environmental and social modeling indicates that carbon credit generation in South Africa is heavily dominated by agriculture, forestry, and other land use (AFOLU) projects, primarily contributing to SDG 13 (Climate Action) and SDG 15 (Life on Land).

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} }