by: Geoffrey Imende, Wambui G. Muigai & Brenda Nyabinge
Introduction
In the wake of the unprecedented devastation caused by the recent floods in Kenya, the impact of climate change on our weather patters can no longer be ignored. Cycle after cycle, we are reminded that our conservation efforts through afforestation and reafforestation are insufficient to address the climate change disaster and the need for us to charter a new path to mitigate these escalating environmental challenges is ever so present. Enter – the carbon markets.
When the Africa Carbon Markets Initiative (ACMI) launched its ambitious goal of producing 300 million carbon credits annually by 2030, and 1.5 billion credits annually by 2050, Kenya was one of seven countries that signed on to the project and announced their commitment to scaling voluntary carbon markets domestically. This commitment was followed up by the Climate Change Act (Amendment) 2023 which sought to provide a statutory underpinning for Kenya’s entry into the global carbon credits market and achieve its goal of net-zero by 2050.
On 17th May 2024, Kenya made yet another significant stride in the carbon markets space by when the CS, Ministry of Environment, Climate Change and Forestry approved the Climate Change (Carbon Markets) Regulations 2024. As far back as January, the Regulations were published to the public for comments pursuant to Sections 23A, 23E and 23I of the Climate Change Act 2016. The Regulations shall provide an operational framework for the implementation of domestic carbon markets projects and trading. Join us as we consider the salient provisions of these new regulations and their import to Kenya’s carbon credits trading marketplace.
The Climate Change (Carbon Markets) Regulations 2024
Unlike the Climate Change (Amendment) Act 2023 (“the CCAA”) which envisaged a unified carbon market, the Climate Change (Carbon Markets) Regulations kick off by bifurcating the carbon credit market in two: the compliance carbon market and the voluntary carbon market.
Under the Regulations, the compliance carbon market is defined as “the regulated market where carbon credits that represent certified emissions removals or reductions of greenhouse gases in the atmosphere are traded” and the voluntary carbon market on the other hand is “a market where private investors, governments, non-governmental organizations, and businesses voluntarily buy and sell carbon credits that represent certified emissions removals or reductions of greenhouse gases in the atmosphere.” Though differently worded, this aligns with the definition of “carbon market” in the Climate Change (Amendment) Act (the “CCAA”) which adopts a universal definition.
Clause 3 of the Regulations sets out its objectives as to provide a framework for implementation of carbon projects, create incentives to support greenhouse gases emissions reduction and removal targets in line with Nationally Determined Contributions, as well as to provide guidance on the annual social contribution for carbon projects. In line with this mandate, Clause 5 provides the carbon markets principles that shall govern projects under the Regulations including the goal of ensuring that each carbon project adheres to environmental integrity. This requirement will compel the institutions governing the carbon credits marketplace to ensure that the carbon credits purchased in Kenya actually contribute towards combating climate change.
Regulatory and Supervisory Framework
Under the Regulations, the carbon credits marketplace shall be heavily supervised by four institutions; the Designated National Authority, the Climate Change Directorate, the Multi-Sectoral Committee and Ad Hoc Committees. The robust supervisory mechanism was put in place to address the concerns that the carbon credits market would result in the exploitation of local communities by project proponents, would give credence to skewed benefit-sharing arrangements, would result in the false reporting or measurement of carbon emission reductions.
The first point of call shall be the Designated National Authority (DNA) which is established under Section 8(2A) of the Climate Change Act 2016. In a nutshell, the primary role of the DNA is tripartite; to approve, monitor and guide. Firstly, the DNA shall approve projects by issuing letters of approval to project proponents and letters of no objection to carbon project concept notes. The DNA shall then monitor registered carbon projects and project proponents to ensure compliance and throughout the process, the DNA shall provide guidance on the requirements of the Paris Agreement as well as project viability.
The Climate Change Directorate on the other hand, shall play an oversight role by advising the government on the measures taken to ensure stakeholder compliance with the regulations, the coordination of the various stakeholders as well as to conduct public participation efforts and facilitate research in carbon markets. The Climate Change Directorate was established under Section 9 of the Climate Change Act as the lead government agency on national climate change plans and actions and so the functions vested under the Regulations align with this mandate.
The Regulations also establish the Multi-Sectoral Committee comprising members from various ministries, counties, departments, and agencies to provide technical assistance and guidance to the DNA on carbon project assessment. The Multi-Sectoral Committee shall provide invaluable assistance to the DNA particularly in the discharge of its mandate of guiding parties as to the viability of their carbon projects.
Lastly, the Regulations establish ad hoc committees under Clause 10 whose function is to review project design documents and provide recommendations to the DNA and, similar to the Multi-Sectoral Committee, to provide technical advice to the DNA on carbon projects. The ad hoc committees shall be comprised of five members and shall be constituted on an as – needed basis by the DNA under Clause 7.
As such, carbon projects undertaken under the Regulations shall have to pass the scrutiny of the 4 agencies in one way or another which shall ensure that the interests of the various stakeholders are protected. However, there have been some concerns from industry players that this multi-institutional framework shall make the system more complex to navigate and shall require robust cooperation between the institutions to ensure that carbon projects are not frustrated by government bureaucracy.
The National Carbon Registry
Under Clause 11, the Regulations designate the DNA as the head of the National Carbon Registry that was established under Section 23G of the Climate Change Act. As the National Registrar, the DNA shall be tasked with maintaining Carbon Register, to implement measures to ensure the confidentiality of information collected under the Regulation; and to submit quarterly reports of the information maintained in the register to the Cabinet Secretary.
The Regulations envisage that sector specific registers shall be established by the Cabinet Secretary covering the energy, transport, agriculture, forestry and land use, industrial processes and product use and waste sectors which shall be headed by sector Registrars.
The Carbon Markets
Under Part IV, the Regulations provide the operational framework for the carbon market in Kenya as provided under Section 23C of the Climate Change Act.
Firstly, the regulations address the minimum viability requirements for carbon projects registered under the Act. To be viable, a carbon project must be subjected to certification and validation by independent auditor at the inception of the project and once finalised. The project shall also specify whether it shall contribute to the Nationally Determined Contribution to minimize the risk of double counting (Under the Paris Agreement, Nationally Determined Contributions are individual national climate pledges made by state parties to the Paris Agreement, detailing the measures they will adopt to meet the global goal of capping global warming at 1.5°C).
Further, under the regulations, carbon projects shall require the support of the local communities in which they are conducted, and this shall be done in two major ways: where the projects are to be implemented on community land, project proponents shall have to procure community development agreements to be viable. The second way is at the county level – whether conducted on public land or private land, carbon projects shall require the approval of the respective counties in which they are undertaken.
Thirdly, project proponents are required to indicate how the carbon projects shall contribute environmental integrity as well as the expected benefits such projects shall have on the communities in which they are undertaken including employment opportunities and contributions to sustainable development and the eradication of poverty.
Under the Regulations, a project proponent is defined as a legal entity that is capable of meeting the financial implications of a carbon project and shall be responsible for availing all necessary information on a carbon project to the DNA. Lastly, carbon projects conducted under the Regulations shall have to undergo an Environmental Impact Assessment presumably by NEMA (it is not specified) and adhere to sector specific standards and safeguards which adds yet another point of scrutiny for the projects.
Procedures for the Implementation of Carbon Projects
Lastly, the Regulations outline the procedure for the implementation of carbon projects in Kenya in extenso at Part V. The process shall commence at the DNA where project proponents shall apply for a letter of no objection in accordance with its mandate under Clause 7. The letter of no objection shall be viable for 1 year upon issuance during which time the project proponent is required to develop a project design document and submit it to the DNA for approval.
In the event that a project proponent is unable to develop the project design document within the specified period, they can request the DNA for an extension of up to 1 year stating the reasons for the delay but no more. The project design document is to be accompanied by the county government approvals, stakeholder report, community development agreement and the valuation report of an independent auditor. Upon receipt of the Project Design Document (PDD), the DNA shall constitute an ad hoc committee to consider the project and to submit its recommendation on the viability of the project.
Where the mitigation outcomes of a project are to be internationally transferred, a project proponent is required to obtain the authorization of the DNA under the Regulations. This is a critical step that shall further mitigate the risk of double counting and ensure integrity in the process. Once all approvals are granted, a project proponent is required to implement the project within 24 months.
Annual Social Contributions and the Climate Change Fund
Since the CCAA was passed last year, the introduction of the annual social contributions was a point of contention – the annual social contribution being the sharing of annul benefits accruing from carbon projects. The Act provided a fixed rate of contribution of 40% of aggregate earnings for carbon projects involving the use of land and 20% for other projects.
Stakeholders challenged this provision on the argument that it failed to appreciate nuances of each project that would otherwise be overlooked by applying a flat rate. The fixed rate would ignore the requirements of differing sectors and business models as well as need to recover the upfront costs of implementing the projects.
The regulations have clarified the position by providing that firstly, the contributions are only applicable to projects involving public and community land and secondly, that the flat rate is applicable to aggregate earnings less the cost of doing business. Clause 30 anticipates that these contributions shall be collected by the DNA and a percentage of the proceeds shall be remitted to the Climate Change Fund established under Section 25 of the Act.
Conclusion
Kenya’s decision to venture into the carbon markets space has been welcomed by public and private actors alike as unlocking Kenya’s carbon credit potential could offer the country incredible opportunities to access billions for the financing of our climate needs while expanding our access to energy, creating jobs, and protecting our environmental biodiversity and heritage. We therefore welcome the proactive steps the state is undertaking to provide a clear framework for industry players to tap into the market whilst also ensuring local communities are protected.