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Kenya: Development of Carbon Project and Trading Legal Framework: Enactment of the Climate Change (Amendment) Act, 2023

19 September 2023
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Overview

  • In a significant development for the carbon space in Kenya, the Climate Change (Amendment) Act (Act) was passed by both Houses of Parliament and assented into law by the President days before the inaugural Africa Climate Summit 2023.
  • The Act, which will regulate carbon projects and trading in Kenya, came into force on 15 September 2023 and imposes various requirements on stakeholders in the carbon market.
  • The Act, coupled with the possible introduction of a carbon tax and environmental excise taxes to combat emissions, as elaborated by the Government in the draft Medium Term Revenue Strategy, continue to highlight the current administration’s efforts towards mitigating the adverse effects of climate change.

The Climate Change (Amendment) Act, 2023 (the Act) was enacted on 1 September 2023 and came into force on 15 September 2023. It is worth mentioning that both Houses of Parliament passed the Act with minimal amendments and the enacted law mirrors the Climate Change (Amendment) Bill, 2023 discussed in our previous alert available here.

Some of the key considerations for existing and proposed carbon credit projects and carbon trading in the Act include:

  • the requirement to obtain an environmental impact assessment for all carbon credit projects;
  • the requirement to enter into community development agreements for all land-based projects; and
  • registration with the National Carbon Registry.

The controversial and heavily debated annual social contribution (40% in land-based projects and 25% in non-land-based projects) has been retained in the enacted law, in each case applicable to aggregate earnings. Various stakeholders had highlighted that this proposal failed to appreciate various considerations applicable on a case-by-case basis – including (i) the different business models adopted by different projects incurring significant investments in technology and infrastructure, (ii) the large upfront investments made by project developers and financiers, (iii) the additional (and non-revenue based) benefits some projects already share with communities (iv) that not every project has a “community” element e.g. private “offset” projects or non-land based projects with no clear geographic community; and (v) that in some cases, the primary objective or income generating activity of a project is not carbon related and the sale or use of any incidental carbon credits generated simply helps finance and support the ongoing sustainability efforts of the project.

Whilst there is a need to ensure affected communities are not sidelined from potential benefits that could arise from carbon projects, a balanced approach that appreciates the fact that (i) benefits to communities extend beyond revenue disbursements and (ii) bankability is a key factor for developers to structure economically viable projects and access financing for the same.

In addition to the Act, the Government continues to step up its commitment towards net zero ambitions as noted in the draft Medium Term Revenue Strategy (MTRS) released by the National Treasury on 12 September 2023. The MTRS is intended to provide a framework for tax reforms and develop a strategy for the Government to enhance revenue mobilization and improve the efficiency of the tax system and tax administration.

The MTRS states that the government will explore the possibility of introducing a carbon tax based on the carbon content of fossil fuels. At this stage, it is unclear how this will be done. While the carbon tax seems largely aligned with the Government’s intentions under the draft National Green Fiscal Incentives Policy Framework released earlier this year (see our highlights on the same here) and would give effect to the polluter pays principle, it is unclear how the carbon tax would be designed and whether there would be an opportunity for carbon trading by net emitters to mitigate the carbon tax.

The Government also intends to use environmental excise taxes to regulate emissions that contribute to air pollution by exploring the following:

  • gradual increase of excise taxes on vehicles that use fossil fuels and in particular imported vehicles;
  • excise taxes on equipment that uses fossil fuels such as tractors, forklifts, excavators, and earthmovers; and
  • a motor vehicle circulation tax that will be payable annually by motor vehicle owners at the point of acquiring an insurance cover at a graduated amount based on the vehicle’s engine capacity.

In what would be a welcome pronouncement for organisations in the clean energy sector, the MTRS suggests that the Government will review tax incentives that promote the use of green energy and the current taxes on electric vehicles that are environmentally friendly. The public has until 6 October 2023 to submit comments on the MTRS.

Conclusion

As noted, the Act was passed with key outstanding issues not being fully addressed. The Africa Climate Summit provided a platform to bring together the Government and various stakeholders, where the Act featured prominently in various discussions. Many will be hopeful that following those discussions, and concerns that were highlighted during the public participation process, expected regulations under the Act and future amendments to the law will address these matters if Kenya’s carbon sector is to be competitive in Africa and globally.

Additionally, the position taken by the Government under the MTRS will largely inform next year’s discussions on the budget and legislation which may have an impact on the carbon market with the possible introduction of carbon tax and environmental excise taxes.

Bowmans will continue to monitor the regulatory developments impacting businesses in the carbon trading sector.