South Africa’s national carbon tax has been a major turning point for domestic carbon markets, creating an increased demand for carbon credits. As the tax enters phase two, the country is likely to see surging demand. However, limited access to early-stage investments and high capital stall momentum for domestic carbon mitigation projects.  

Built on key design principles 

The Development Bank of Southern Africa (DBSA), in partnership with the FiCS Innovation Lab Incubator, Climate Policy Initiative, and Promethium Carbon, has developed two novel financial instruments designed to transform carbon credits from complex assets into de-risked, bankable products. The two instruments, now undergoing internal review at the DBSA, are:  

• A Carbon Repo Facility, designed to provide liquidity to borrowers selling carbon credits to the facility for immediate cash, with an agreement to repurchase the credits later at a pre-determined price. 

• The Carbon Bond could be issued by the DBSA as a senior unsecured note, with proceeds used to fund loans for carbon projects. Borrowers would repay via a mix of cash interest and the actual carbon credits generated by underlying projects. 

Key insights  

• South Africa is expected to see an increase in structural demand for carbon credits as its carbon tax tightens. However, a lack of early-stage capital for carbon projects limits supply. 

• In addition, illiquidity and weak pricing in secondary markets reduce the attractiveness of carbon credits as financial assets.

• PDBs can enable carbon markets by introducing well-structured financial instruments that mobilize private financing from commercial banks into carbon projects.  

• Market credibility is a prerequisite for mobilizing capital into carbon markets at scale. Trust in carbon-linked instruments requires robust governance and registry transparency, underpinned by independent verification. 
   

Leveraging financial innovation for effective carbon markets 

These innovative instruments align with the DBSA’s mandate to catalyze infrastructure that drives sustainable growth while accelerating South Africa’s transition to a low-carbon economy. If approved, they would position the bank as a key intermediary in mobilizing the public and private finance required for high-impact climate action. 

The instrument design can also offer a groundbreaking blueprint for public development banks in other emerging economies to leverage financial innovation to support carbon markets.  

Access the report to learn more about the instruments’ development and the insights that emerged during the process.

Explore the report