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What The Carbon – Kenya opens a path to carbon trading

9 June 2023
– 8 Minute Read
| ESG

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Overview

  • Kenya has made noteworthy developments towards fulfilling its net-zero goals as it seeks to position itself as a world leader in combating climate change. To this end, the Ministry of Environment, Climate Change and Forestry developed the Draft Climate Change (Amendment) Bill, 2023 to incorporate carbon markets in the current Climate Change Act, 2016.
  • If enacted, the Bill will significantly impact carbon projects in the market and enhance the growth of carbon markets in Kenya.
  • However, the impact of the proposals in the Bill will require careful consideration of the developments in voluntary carbon markets and the roles and interests of key stakeholders.

The Bowmans ESG and Projects, Energy & Infrastructure teams continue to make strides as thought leaders in various sectors, including in the Environment, Climate Change & Natural Resources Practice which specialises in carbon transactions, among other matters. The lawyers in the team continue to advise on various aspects of carbon projects, including the development, structuring and financing of carbon transactions.

We hope that you will find the features informative. If you require further information, please do not hesitate to contact either Aleem Tharani, Christina Nduba-Banja or Matthew Arrumm.

Kenya opens a path to carbon trading: Proposed Climate Change (Amendment) Bill, 2023

Carbon credits are increasingly playing a significant role in the decarbonisation efforts of impact organisations, companies, and governments. Even so, the lack of legal characterisation and regulatory status of carbon credits in most jurisdictions globally remains a challenge.

As a signatory to the Paris Agreement, Kenya has made noteworthy developments towards fulfilling the Paris Agreement’s objective of limiting global temperature to 1.5 °C – see our previous articles on the developments in Kenya’s carbon space here and here. In particular, Kenya committed to developing domestic legislation and institutional frameworks to govern her engagement in the carbon market and non-market mechanisms in her Updated Nationally Determined Contribution, 2020.

It is against this backdrop that the Ministry of Environment, Climate Change and Forestry (the Ministry) developed the Draft Climate Change (Amendment) Bill, 2023 (the Bill), which is intended to incorporate carbon markets in the current Climate Change Act, 2016 (the Act). If enacted, the Bill intends to foster and entrench an Environmental, Social and Governance (ESG) corporate culture for both public and private entities doing business in Kenya.

Key highlights of the Climate Change Bill include:

National Climate Change Action Plan

The Bill proposes that the National Climate Change Action Plan (NCCAP) under the Act includes measures for engaging carbon markets by:

  • guiding the description of an annual carbon budget;
  • identifying past, current and projected sector-based greenhouse gases emission profiles;
  • setting out a proposed carbon credit project pipeline based on the whitelist – whilst the term whitelist is provided for in the definitions section, the definition is yet to be articulated, and as such, it is not clear what projects are intended to be included on the whitelist;
  • reviewing and recommending the level of compliance with international climate commitments; and
  • identifying priority actions to explore carbon trading.

Regulation of carbon markets

The Bill introduces a regulatory framework to govern participation in carbon markets. Some salient features of this new framework include:

Scope of the carbon market policy

The Cabinet Secretary will be mandated to provide guidance and policy direction on carbon markets to stakeholders on pertinent issues on carbon projects and prescribe:

  • carbon reduction credits aimed at reducing carbon emissions through projects;
  • carbon removal or sequestration credits;
  • technologies and projects on the whitelist. (see earlier comment in 1.3 above); and
  • emission credits not taken into account, including previously used emissions, emission reductions achieved in violation of human rights, emission reductions that have had significant negative social and environmental impacts and emission reductions achieved and/or registered before 1st January 2013.

Participation in carbon markets

Trade in carbon credits as anticipated under the Bill is required to result from any of the following arrangements:

  • a bilateral or multilateral trading agreement;
  • trading with a private entity; or
  • in a voluntary carbon market.

The government may participate in carbon markets where the Cabinet Secretary enters a trade agreement with another state party or a private entity or in an internationally accredited carbon market, with the approval of the Cabinet. The Cabinet Secretary may also enter into an agreement with a private entity to offset carbon emissions with the approval of the Cabinet.

Environmental impact assessment

The Bill makes it mandatory for carbon trading projects to undergo Environmental and Social Impact Assessments (ESIAs) in accordance with the Environmental Management and Coordination Act, 1999 (EMCA). This would mean that all carbon trading projects will require to undergo ESIAs regardless of their scalability, which may not be practical for some projects.

Additionally, Reduced Emissions from Deforestation and Forest Degradation (REDD+) and other forest conservancy and management projects will also be required to undergo REDD+ safeguard standards assessments.

Environmental, economic or social benefits

Entities undertaking projects pursuant to the Bill will also be required to specify their projects’ anticipated environmental, economic or social benefits.

Environmental benefits espoused in the Bill include:

  • removal of greenhouse gases from the atmosphere and avoidance of emission of greenhouse gases;
  • incentives that promote offset projects;
  • increase of carbon abatement consistent with the protection of Kenya’s national environment;
  • improved resilience to the effects of climate change;
  • achievement of Kenya’s greenhouse gas emissions targets.

Execution of a community development agreement

The Bill requires every project to be implemented through a community development agreement. This agreement must outline the relationships and obligations of the proponents of the project with affected communities, including:

  • an annual social contribution of at least 25% of the aggregate earnings to the community;
  • sharing of the benefits from the carbon markets and carbon credits between the project proponents and the impacted communities; and
  • proposed development of communities around the project.

Notably, the Bill provides the National Government and respective County Governments with the mandate to oversee and monitor the agreement negotiations between project proponents and impacted communities/ stakeholders.

The Bill does not define who or what constitutes a “community” for purposes of the Bill which could occasion some ambiguity for project developers or investors regarding who to engage with on their project. Additionally, not all projects are undertaken in collaboration with communities which could impact private players seeking to develop projects as part of their offset schemes.

Whilst benefit sharing aims to recognise and reward local communities for their contributions to emission reductions and encourage future contributions to climate change mitigation activities, a delicate balance between the distribution of benefits and the return on investment to the sponsors of carbon projects needs to be maintained to incentivise future investments in carbon projects.

We understand that there is a possibility of a proposed Carbon Credit Trading and Benefit Sharing Bill, 2023, which if published (and enacted), also seeks to guide carbon credit trading end equitable benefit sharing. It is not clear at this moment how these different draft legislations will correlate or interplay with each other in relation to benefit sharing in carbon projects.

Carbon registry

The Bill seeks to establish a carbon registry, the National Carbon Registry, to be maintained by the Designated National Authority.

If established, the National Carbon Registry shall, in addition to keeping records of community development agreements, be responsible for records on the following:

  • carbon credit projects and programmes implemented to reduce greenhouse gas emissions in Kenya;
  • a REDD+ carbon registry;
  • authorisations granted to participate in an initiative/project/programme under the Bill;
  • the carbon budget and the greenhouse gas reduction units;
  • the number of carbon credits issued or transferred by Kenya;
  • the number of carbon credits issued to emission reduction projects and programs recognised by Kenya from the national greenhouse gas registry account;
  • the transfer of carbon credits and any carbon credits issued or recognised by Kenya from a national greenhouse gas registry account;
  • the cancellation of carbon credits and any other carbon credits issued or recognised by Kenya from a national greenhouse gases registry account; and
  • any other carbon credits issued or recognised by Kenya from a national greenhouse gases registry account.

Conclusion

While there are some amendments needed to the draft Bill, the development of the Bill is a significant step in the right direction to enhance the growth of carbon markets in Kenya. As Kenya continues to position herself as a world leader in combating climate change, the rest of the world will be watching the development and implementation of the regulatory framework governing carbon markets in Kenya (particularly considering recent developments in carbon markets in other African jurisdictions). Therefore, the impact of the proposals in the Bill will require careful consideration of the developments in voluntary carbon markets and the role and interests of key stakeholders including protecting the interests of project proponents, investors and ongoing initiatives to promote carbon trading globally whilst driving a low carbon resilient economy.

The Ministry has recently concluded engaging stakeholders and has received comments from various bodies and members of the public as part of the legally mandated public participation process in law-making. As a key player in the environment, climate change and sustainability space, Bowmans participates in the stakeholder process and will continue to keep an eye on further developments made in this regard.