Kenya is no stranger to carbon trading. In fact, the Berkeley Carbon Trading Project Voluntary Registry Offsets database ranked Kenya as the second-largest issuer of voluntary carbon market credits in Africa in 2022, trailing the Democratic Republic of Congo.

In the world of carbon markets, you will undoubtedly encounter references to Article 6 of the Paris Agreement which stipulates how State Parties should cooperate towards climate mitigation and adaptation.  Article 6.2 is particularly relevant as it provides for the international transfer of climate mitigation outcomes under bilateral agreements, while Article 6.4 unlocks financial support for developing countries through tools such as the Paris Agreement Crediting Mechanism.  Put together, these provisions form a foundation for the transfer of credits in international compliance carbon markets.

In a bid to enhance carbon market penetration, Kenya amended the Climate Change Act in 2023 to authorize trade in carbon credits in 3 ways: first, Kenya could enter into bilateral or multilateral agreements with other State Parties; second, Kenya could enter into agreements with private entities to offset carbon emissions; and third, Kenya could participate in voluntary carbon markets.

Although voluntary market participation currently dominates the carbon market in Kenya, international compliance carbon markets under Article 6 of the Paris Agreement are rapidly expanding worldwide. There is a growing trend of countries in Africa signing bilateral agreements based on Article 6.2 with demand for carbon credits driven by nations like Singapore, Japan, and Switzerland. By way of example, in November 2022, Ghana launched a project to generate authorized emission reductions in exchange for payment for the carbon credits, by Switzerland.

Kenya has opportunity to equally benefit from greater participation in international compliance carbon markets, but some crucial factors must be borne in mind.

First is the question of authorisation. Emission reductions that have been authorized for transfer by the selling country’s government (host country) may be sold to another country (investor country), but only the investor country may count the emission reduction toward its Nationally Determined Contributions (NDC). This avoids double counting. Authorization therefore creates increased demand for carbon credits from investor countries and generates revenues for the host country. The effect is that Kenya will not count such authorised carbon credits toward its NDCs meaning that it will have to look elsewhere to meet its own NDC commitments.

Second, host countries such as Kenya would be well advised to prioritise trading carbon credits from hard-to-abate sectors, like the power, cement, steel or transportation industries, where emission reduction would be difficult to achieve without financing from investor countries. This would have double advantage for Kenya as it would serve the twin objectives of achieving its own NDCs through investor country financed emission reductions and using its budget to scale up its own emission reduction efforts.  Furthermore, assuming the cost of reducing emissions from hard-to-abate sectors is lower in Kenya than in the investor country, this would allow companies in the investor country to achieve greater emission reductions for the same dollar amount, which is a plus for global climate change. 

Third, host countries should ensure that they put in place a fair benefit sharing mechanism for local communities to derive value from carbon projects developed in their locality. In this regard, with respect to Kenya, what is required is compliance with the benefit sharing rules provided in the 2024 Carbon Markets Regulations including the need to execute a community development agreement where the carbon project is undertaken on public or community land.  We also note that the regulations provide for annual social contributions to be paid by the carbon project developer to such community, based on a percentage of the net profit from the previous year.

Fourth, host countries such as Kenya should consider mapping out carbon removal or reduction projects that are ideal for specific locations and sectors, to encourage uptake of such projects.  While there are numerous agriculture and forestry related carbon projects in Kenya, there are other types of projects that could be considered such as blue carbon projects for coastlands and wetlands, and clean water projects for example providing filtered water to avoid emissions associated with boiling water.

Provided that the considerations above are taken into account, Kenya can benefit significantly from the transfer of credits in international compliance carbon markets. Kenya’s recent amendments to the Climate Change Act and introduction of regulations are a step in the right direction but there is also need to equip the implementing agencies and sensitise the carbon market players both on the legal position and the opportunities presented by participation in the international compliance carbon markets.

The article was published in the Business Daily on 8 October 2024.