Kenya’s Emerging Regulation on Carbon Trade
Tue, Jun 27, 2023
Countries in Africa are increasingly embracing carbon trading legislation to regulate and tap into the vast potential that carbon trading bears for countries in the global South. Notable examples include Namibia, South Africa, Tanzania, Zimbabwe, and the list keeps growing by the day. Kenya has taken cue and it is in the process of amending the Climate Change Act 2016, to establish a legal framework to regulate carbon trading.
Carbon Trading in Kenya
Kenya presents one of the most vibrant budding carbon markets in Africa. At the time of writing this article, Kenya had just auctioned carbon offsets worth about $13.5 million to several Saudi Arabia firms in a voluntary auction. Carbon trading in Kenya however remains as arcane as it is unregulated. There is therefore impetus for awareness creation in view of the collective action nature of climate change.
What then is carbon trading? Carbon trading refers to the sale of carbon offsets which are permits that represent one ton of carbon dioxide equivalent sequestered or prevented from being emitted into the atmosphere. Trading takes place within voluntary or compliance markets.
In voluntary carbon markets (VCM), carbon offsets may be purchased by emitting entities to make up for their actual or future emissions. Conversely in compliance markets, governments set a cap on carbon emissions. For entities that emit beyond the set cap to continue in business, they must purchase extra carbon credits from entities that have not yet reached the cap.
Most carbon trading in the global south takes place within voluntary markets. The best example of a compliance market is the European Union Emissions Trading System (EU ETS). Carbon trading is predicated upon certain fundamental principles such as additionality, effective governance, minimum leakage, no harm rule, permanence, tracking, and transparency.
In view of the prevailing regulatory gap in Kenya, the Ministry of Environment, Climate Change and Forestry has deemed it fit to substantially amend the Climate Change Act 2016, to establish a legal framework to regulate hitherto unregulated carbon trading.
The absence of regulation in Kenya has resulted in negative outcomes that have been publicized in the recently published blood carbon report. The proposed draft Bill seeks to cure impacts of unregulated carbon trade. To this end, the draft Climate Change (Amendment) Bill, 2023 has been published and circulated by the ministry for public participation pending its formal introduction into Parliament.
In this article, we analyze the practical impact of the proposed amendments on carbon trading should they be assented into law. This article sensitizes players in the carbon market to adjust their sails to accommodate the blowing regulatory winds.
Proposed Climate Change (Amendment) Bill
The draft Climate Change (Amendment) Bill, 2023 is presently a proposal by the Ministry of Environment, Climate Change and Forestry. The proposed draft is undergoing public participation pending formal introduction into Parliament. A priori, as the draft wends its way to becoming law, it will undergo changes that may significantly alter its present form. This commentary therefore relates to the incipient draft of the proposed Bill.
The proposed draft Bill bridges several gaps precipitated by the absence of specific law on carbon trading. Nevertheless, it fails to address other pertinent carbon trading priorities, possibly due to the inchoate nature of carbon markets in Kenya. The laudable aspects of the draft Bill and its discernible omissions are discussed in tandem.
Positive Attributes
- Structured Trading
The draft Bill establishes a structured regime of carbon trading by incorporating specific measures and mechanisms in the National Climate Change Action Plan (NCCAP). These include a description of the annual carbon budget for each year contemplated within the five-year reporting cycle; proposal of a carbon project pipeline premised on a whitelist; and identification of primary carbon trading actors. The inclusion into the NCCP of the said measures and mechanisms creates market long-term stability and preempts carbon market volatility. The annual carbon budget allows a long-term view of Kenya’s obligations and enables the country to set a baseline against which performance can be periodically measured through identified actors.
The establishment of a National Carbon Registry (NCR) will be instrumental in enabling carbon market players to track, manage and trade in carbon offsets while aiding the government to verify actual emission reductions. The NCR shall among others include the carbon credit projects in Kenya and the REDD+ carbon registry. The Designated National Authority, which is appointed by the Cabinet Secretary, is the custodian of the NCR.
- Environmental Impact Assessment
Carbon trading projects, contrary to expectation, may carry with them veritable environmental risks and the potential for environmental degradation. To this end, the draft Bill stipulates that carbon trading projects authorized under the Act must undergo environmental and social impacts assessments in conformity with the Environmental Management and Coordination Act (EMCA) No. 8 of 1999. REDD+ projects are to be subjected to a safeguard standards assessment.
- Community Development Agreements
Community interest and benefit sharing constitutes one of the thorny issues in negotiation and implementation of extant carbon projects. The Governor of Kajiado county, Mr, Joseph Ole Lenku has recently revoked existing carbon credit contracts in the county concluded between private entities and indigenous communities for being opaque and detrimental to the interests of community group ranches.
The draft Bill requires that all projects undertaken under the Climate Change Act must be implemented through a Community Development Agreement (CDA). The CDA must stipulate the relationships and obligations of project proponents with impacted communities. Additionally, the National and respective County governments will oversight negotiation of CDAs with project proponents and other stakeholders. On the minimum, a CDA must declare all project stakeholders; the annual social contribution to the community from a project; mode of engagement with impacted communities; benefit sharing; and the manner of biennial review and amendment of the CDA. The CDA will have to be recorded at the NCR. Community rights negotiated under the CDA shall be enforced by the National government and respective county governments.
As drafted, the proposed Bill fails to consider certain critical aspects of carbon offsets which are noteworthy.
Pain Points
- Absence of A Clear Monitoring Reporting and Verification (MRV) Framework
The proposed Bill provides for the recording and meticulous documentation of every offset project through verifiable accounting methods sanctioned under the UNFCCC and other standard bodies. Further, the cabinet secretary is required to approve measurement, reporting and verification of greenhouse gas emissions. The proposed Bill however fails to stipulate principles of a clear MRV framework that can be further defined by way of regulations to be adopted under the Act.
- Lack of Carbon Markets Policy
A substantive national policy on carbon markets has not yet been adopted in Kenya. Consequently, the proposed law will leapfrog pertinent policy considerations that should have informed the enactment of the legislation. It was necessary for instance to consider possible carbon market offences that would be sanctioned by law as well as the basis for cancelling registered carbon credit projects. A lot of policy loopholes are discernible in the proposed Bill as presently drafted.
- Dispute Resolution System
Carbon credit projects run into billions of dollars and might give rise to complex and protracted litigation. The proposed Bill provides for referral of disputes relating to regulation of carbon markets to the Cabinet Secretary with a further right of audience before the National Environment Tribunal (NET) if the dispute is not resolved within 30 days. The proposed Bill should consider arbitration as a viable and apt forum for settling complex environmental disputes.
Next Steps
Once the Ministry of Environment, Climate Change and Forestry concludes public participation on the proposed Bill, it will formally be introduced into the National Assembly as a legislative proposal by the leader of majority as its sponsor. The Bill then matures after 14 days and is then officially gazetted and given a designated number.
The Bill then goes through 1st reading, parliamentary public participation, 2nd reading, committee stage, 3rd reading before it is further submitted to the Senate for a similar process since climate change issues affect county governments. If approved the Bill is assented to and it becomes law. The Bill might also be rejected altogether as it goes through the parliament.
Dr. Omondi R. Owino is an Advocate of the High Court of Kenya and is a Partner at Acorn Law Advocates – LLP. He is an expert in Environmental and Energy Law, as well as Climate Change and Natural Resources Law.
Dr. Omondi R. Owino can be reached on omondi@acornlaw.co.ke.
ACORN Law Advocates-LLP is a limited liability partnership registered in Kenya under registration number LLP-LJ1G6B. It is regulated by the Law Society of Kenya.