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Navigating the Landscape of Kenya's Carbon Credit Trading: Perspectives on Regulation and Market Dynamics



Carbon credit trading

Kenya has emerged as a significant player in the global carbon credits market, leveraging its natural resources and commitment to sustainability to attract investment and foster environmental stewardship. However, as the market grows, questions arise about the regulation of Kenya's carbon credit trading and the dynamics shaping its landscape.


Regulating Kenya's Carbon Credit Trading: Which Way for Parliament?

The legal structure governing Kenya’s Carbon Credits market is in its nascent stage of evolution and is continually changing. This framework is shaped, in large part, by the national parliament, which is responsible for ensuring the legislative framework provides for the maintenance of transparency, accountability, and environmental integrity by the proponents of carbon credit projects. Further, as highlighted in our recent article, there is a pressing need for robust legislation that provides clarity on issues such as project eligibility, monitoring, and enforcement mechanisms.


However, finding a balance between encouraging investment in carbon credit initiatives in Kenya

while protecting against potential abuses and loopholes has proved to be a major difficulty for

parliament in its quest to regulate Kenya’s Carbon markets. On the one hand, in the absence of

sufficient regulation, carbon market project proponents may engage in “greenwashing” by claiming to lower emissions while in fact providing no real environmental benefits. On the other hand, over-regulation may discourage investor participation in Kenya’s carbon credit markets.


In order to resolve this, legislators must work with representatives of the business community,

environmental specialists and members of civil society to create laws that encourage real carbon reductions while prohibiting persons from abusing the system. Furthermore, effective regulation should prioritize the inclusion of local communities and indigenous groups in decision-making processes, thereby ensuring that carbon offset projects not only mitigate climate change but also contribute to sustainable development and poverty alleviation in affected areas.


Other Market Shapers

In addition to the legislative factors described above, Kenya’s carbon market dynamics are also

shaped by the involvement of various stakeholders including multinational corporations looking to offset their carbon emissions. As per an article by the Business Daily Africa, these multinational corporations include the likes of Netflix, Delta and Natwest. Further, the World Bank Group’s Carbon Market Guidebook for Kenyan Enterprises ranked the country as the second largest issuer of voluntary carbon market (VCM) carbon credits in Africa.


On the one hand, the large-scale corporate investment demonstrates the country’s ability to draw funding for climate-friendly initiatives that promote environmental sustainability and economic prosperity. On the other hand, the concentration of carbon credit purchases in large corporations has raised concerns over the likely crowding out of smaller players and the restriction of the equitable distribution of the benefits derived from carbon market projects.


Additionally, the integrity of Kenya’s carbon market depends on the accountability and openness of carbon credit transactions. As highlighted in the Business Daily Africa article, there have been instances where the origin and impact of purchased credits were unclear, raising questions about the credibility of certain projects. To address this, stakeholders must prioritize transparency in reporting and verification processes, ensuring that carbon credits represent genuine emissions reductions that contribute to Kenya's climate goals.


Navigating the Way Forward

Thankfully, the Government of Kenya has begun taking steps towards the effective regulation of

Kenya’s carbon markets through the enactment of the Climate Change (Amendment) Act, 2023 and the draft Carbon Market Regulations, 2023 which provide for, among other things, the institutional framework for the regulation of carbon markets, procedures for developing carbon market projects and social contributions to the community where carbon market projects are instituted. These and other future legislation could be useful in addressing the gaps in the regulation of carbon market projects in Kenya.


Another step in the right direction for Kenya in its quest to unlock its carbon market’s full potential is the draft Kenya Green Finance Taxonomy (the Taxonomy). The Taxonomy is a classification system that enables investors, proponents of economic activities and financial institutions to determine whether a project is environmentally sustainable and, therefore, taxonomically aligned by assessing it against the Taxonomy’s assessment criteria.


This includes examining an economic activity’s:


a) familiarization with the principles of the taxonomy, which is to say that the project must

substantially contribute to either climate change mitigation or adaptation, do no significant

harm to any of the other objectives of the Taxonomy and meet minimum social safeguards;


b) contribution towards an environmental objective which requires a project to significantly

contribute to either climate change mitigation or adaptation either objective through its own performance or by enabling other activities to substantially contribute to the environmental goals of climate change mitigation or adaptation;


c) assessing whether the economic activity is contemplated under PART C of the Taxonomy as

one of the various economic activities that are eligible for assessment under it;


d) assessing the economic activity’s performance against technical screening criteria provided

for under PART D of the Taxonomy;


e) ensuring that the economic activity does not do any significant harm to any other objective

of the Taxonomy while achieving its significant contribution to either climate change

mitigation or adaptation; and


f) ensuring the economic activity takes into account minimum social safeguards, including

compliance with Kenya’s labour laws and international labour standards prescribed by the

International Labour Organization.


The hope is that the Taxonomy will attract climate finance, increase climate investment and enable the creation of a robust framework to maximize climate finance mobilization.

Unfortunately, the initial draft of the Taxonomy does not expressly mention carbon markets and

carbon credits as one of the economic activities eligible for assessment under its provisions.


However, the Taxonomy does recognize activities like forestry and land rehabilitation, which reduce emissions from deforestation and forest degradation (REDD+). Further, carbon market projects may be added in later versions of the Taxonomy as they contribute significantly to climate change mitigation by reducing and offsetting carbon emissions.


Conclusion

Unlocking the full potential of Kenya's carbon credit market requires a balance between market dynamics and regulation. Policymakers, business stakeholders, and civil society organizations must collaborate to create a regulatory framework promoting accountability, openness, and fair benefit distribution. Furthermore, initiatives taken to improve the legitimacy and openness of carbon credit transactions will boost investor confidence and promote Kenya's carbon market's long-term sustainability. By navigating these challenges thoughtfully and inclusively, Kenya can position itself as a leader in climate finance, driving positive environmental impact and sustainable development for generations to come.


References:


2. World Bank Group’s Carbon Market Guidebook for Kenyan Enterprises:


Please note that this is not legal advice and is intended primarily for information purposes. If you require tailored advice or further information, please contact us on sarinke@mckayadvocates.com.

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