Kenya’s Carbon Markets: The Goose That Lays The Golden Egg?

Discourse on (global) carbon markets have dominated the COP 28, the Africa Energy Forum held in Kenya in June 2023, and the inaugural Africa Climate Summit, also held in Kenya in September 2023.

The Africa Climate Summit culminated in the adoption of the ‘African Leaders Nairobi Declaration on Climate Change and Call to Action’ (Nairobi Declaration), under which African Heads of State and Government agreed to call for inter alia, a new global financial architecture to provide accessible and affordable green finance and the introduction of a global carbon tax.

In light of the foregoing, Kenya has developed domestic legislation and institutional frameworks to govern engagement in the carbon market in pursuance of Kenya’s intention to use voluntary cooperation under Article 6 of the Paris Agreement [2].

Carbon Trading In Kenya

It is reported that Kenya is ranked 8th in the world for 12 per cent of the world's nature-based solution credit issuances [3]. Notable carbon projects in Kenya are:

• The award-winning Northern Rangeland Trust Carbon Project in Northern Kenya, which claims to be the world’s largest soil carbon removal project anticipated to remove 50 million tons of Carbon Dioxide (Co2) over 30 years [4].
• The Kasigau Wildlife Corridor REDD+ Project, the first project to issue voluntary forestry carbon credits in Kenya [5].
• The Mikono Pamoja Project, a community led mangrove conservation and restoration project in Gazi Bay, which Kenya claimed to be the world’s first ‘blue carbon’ project [6].
• Burn Manufacturing, a clean cookstove manufacturer that has issued a sub-Saharan Africa green bond whose proceeds will be used to increase its clean cookstove manufacturing capacity in Kenya [7].

CYNK, Africa’s first verifiable emissions reduction platform, is also reported to have carried out a carbon forwards trade of over two million credits to be produced by Tamuwa, a biomass company in Kenya verified by Gold Standard [8].

At an auction held in Nairobi in June 2023, 16 firms based in Saudi Arabia bought more than 2.2 million tonnes of carbon credits, 70 per cent of which were generated from projects in various African countries (including Kenya) [9].

Legislative And Institutional Status Of Carbon Markets In Kenya

Before the amendment of the Climate Act, as discussed below, carbon finance and carbon markets in Kenya operated in a legal lacuna. It is therefore not surprising that there exist claims and allegations of exploitation of Kenyan farmers and local communities by carbon project proponents, skewed benefit-sharing arrangements, wrong reporting or measurement of carbon emission reduction, forceful evictions and cultural disruption.

Such allegations led to the temporary suspension of issuance of carbon credits to the award-winning Northern Rangeland Trust offset project by Verra for quality control review, which is now reported to have been concluded [10].

According to media reports in June 2023, the Governor of Kajiado County in Kenya issued a notice revoking all carbon credit contracts between private entities and local communities in Kajiado County in Kenya. However, in light of the principle of privity of contract, the efficacy of such notice would be questionable.

In September 2023, the Climate Change Act, No 11 of 2016 (Laws of Kenya) (the Climate Act) was amended to provide express regulation of carbon markets in Kenya [11]. The Climate Act was amended in particular to provide guidance in the development and implementation of carbon markets in compliance with international obligations, to provide policy direction on carbon markets, and to develop benefit-sharing mechanisms in carbon markets.

The amended Climate Act now provides for the establishment of a national carbon registry in Kenya and regulates trade in carbon credits. Carbon trading projects are now required to undergo mandatory environmental and social impact assessment under Kenya’s environmental laws.

Further, the amended Climate Act provides for the introduction of community development agreements to regulate the relationship and obligations of the project proponents with impacted communities in carbon trading projects. Community development agreements must expressly provide for: i) an annual social contribution of at least 25 per cent of the aggregate earnings of the previous year to the community, to be managed and disbursed for the benefit of the community; ii) sharing of the benefits from carbon credits between the project proponents and the impacted communities; and iii) development of communities around the project.

Under the amended Climate Act, it is now an offence under Kenyan law to willingly conduct unauthorised trade in carbon credits, give misleading information relating to environmental or financial gains from the carbon market, engage in money laundering through carbon trading, knowingly sell carbon credits to unauthorised entities, or fail to maintain carbon credit records.

Other Proposed Legislative Changes

Additionally, a proposed Carbon Credit Trading and Benefit Sharing Bill, 2023 (the Carbon Trading Bill) is currently undergoing legislative process in Kenya. The object of the Carbon Trading Bill is to establish a regulatory framework for the trading of carbon credits and benefit-sharing in carbon credit trading, establish a Carbon Trading and Benefit Sharing Authority, provide for the registration and regulation of carbon trading business, and establish a Carbon Credit Trading Tribunal.

The Carbon Trading Bill proposes:

i. The introduction of carbon trading permits for persons intending to carry on carbon credit trading business in either the voluntary carbon market or the carbon compliance market. Carbon credit trading business under the Carbon Trading Bill includes the business of operating a carbon trading exchange.
ii. The introduction of benefit-sharing ratios between the Carbon Trading and Benefit Sharing Authority, the national government, the relevant county government, the community, and the project proponent depending on the carbon resources.
iii. The establishment of a Carbon Credit Trading Register for carbon credit trading permits, carbon credit trading projects, community development and benefit-sharing agreements, as well as carbon credit trading purchase agreements.
iv. The introduction of greenwashing offences against making of a) false statements in the required environmental and social impact assessment; and b) false representations or concealment of material facts to procure or attempt to procure a carbon credit trading permit.
v. The establishment of a Carbon Trading and Benefit Sharing Authority mandated to issue carbon trading permits, provide policy direction and guidance to both levels of governments on carbon credit trading business, regulate carbon credit trading business in Kenya, ensure fair and equitable sharing of benefits among stakeholders, ensure development of investor protection standards with respect to carbon credit trading business, and promote the development of the carbon credit trading sector in Kenya.
vi. The establishment of a Carbon Credit Trading Tribunal with jurisdiction over disputes arising out of regulatory functions under the Carbon Trading Bill, with all disputes arising from carbon credit trading operations under a carbon credit trading agreement being referred to alternative dispute resolution mechanisms in the first instance and thereafter to arbitration in accordance with the United Nations Commission on International Trade Law Arbitration Rules.

However, there may be some areas of overlap/conflict between the proposed Carbon Trading Bill and the amended Climate Act, particularly as regards the content of community development/benefit sharing agreements, and the proposed benefit-sharing ratios. However, the Carbon Trading Bill is at the early stages of legislative process and may be subject to significant change.

Trade On African Exchanges

There have been recent calls for carbon credits to be traded on African based exchanges [12]. In line with this, Kenya’s Capital Market Authority (CMA) has indicated that it intends to regulate platforms through which carbon credits are traded in Kenya, guided by international securities commission policies on the regulation of carbon markets and the role regulators should play. The CMA has also stated that it would provide the Nairobi Securities Exchange (NSE) with the relevant support to open a carbon credits exchange [13].

This comes against the backdrop of a 2022 memorandum of understanding signed by NSE, the Nairobi International Finance Centre Authority and AirCarbon Exchange (a Singapore based global carbon exchange), to jointly develop Kenya’s first carbon exchange [14].

Moving Forward

From a legal perspective, the regulation of Kenya’s carbon market is well underway. However, whilst the substantive law has been enacted, the enabling regulations are yet to be published and tabled before parliament. Also from a practical perspective, establishing the carbon trading registry and other administrative functions may take significant time.

However, with Kenya at the fore of climate change diplomacy, renewable energy transition and climate finance access, there is deep political will to establish robust carbon markets in Kenya in the hope that the carbon market proves to be the goose that lays the golden egg.

1  https://www.president.go.ke/wp-content/uploads/REMARKS-BY-H.E.-WILLIAM-SAMOEI-RUTO-IN-SHARM-EL-SHEIKH-EGYPT-1.pdf
2   Kenya's First NDC (updated version).pdf (unfccc.int)
3   Voluntary Carbon Market Update 2023 – Climate Focus Voluntary Carbon Market Update 2023 - H1: A Period of market consolidation - Climate Focus
4   Northern Kenya Rangelands Carbon Project (northernkenyacommunitycarbon.org)
5   Verra https://registry.verra.org/app/projectDetail/VCS/562
6   Welcome to Mikoko Pamoja! - https://www.planvivo.org/mikoko-pamoja
7   https://fsdafrica.org/press-release/burn-issues-usd-10m-green-bond-to-support-clean-cooking-in-sub-saharan-africa
8   https://cynk.io/
9   https://www.reuters.com/sustainability/saudi-firms-bid-2-mln-tonnes-carbon-credits-kenya-auction-2023-06-14/
10   https://registry.verra.org/app/projectDetail/VCS/1468
11   https://nation.africa/kenya/counties/kajiado/lenku-quashes-opaque-deals-on-carbon-credits-4260672
12   First African Offsets Platform Begins With Record Trade - Bloomberg
13   CMA to Support Creation of Kenya's Carbon Credit Markets (kenyanwallstreet.com)
CMA revs up carbon credits law - People Daily (pd.co.ke)
14   https://nifc.ke/pressrelease/kenya-announces-the-official-launch-of-the-nairobi-international-financial-centre-nifc/

Nkatha Murungi - Omondi
Nkatha is a Partner with ENSafrica, Nairobi, specialising in projects, banking and finance, and energy and climate finance. She has several publications related to sustainable finance, carbon trading and climate change in Africa, and has won awards such as the Next Generation Partner for Banking and Finance and the Recommended/Key Lawyer for Privatisation and Projects in The Legal 500 EMEA 2023.