New Dawn in Operating Kenya’s Carbon Markets: Highlights of the Carbon Market Regulations 

Institutional Framework

Designated National Authority
Under the Amendment Act the Designated National Authority (DNA) is the body in charge of regulating carbon projects and overseeing the various climate change obligations under Kenya’s climate change framework. The Regulations detail the specific functions of the DNA, which include issuing letters of approval and monitoring compliance of the registered projects with the Regulations and with the conditions of approval. Notably, while Kenya designated the National Environment Management Agency (NEMA) as its DNA to approve participation in Clean Development Mechanism (CDM) projects under the United Nations Framework Convention for Climate Change (UNFCCC), the current framework refers to the “Designated National Authority” in general terms, without specifying NEMA as the agency playing this role. The Regulations detail the specific functions of the DNA, as the body in charge of regulating carbon projects. Some of its core functions include issuing letters of approval and monitoring compliance of the registered projects with the Regulations and with the conditions of approval.

The Amendment Act also expanded on the roles of National Climate Change Council which provides an overarching national climate change coordination mechanism. The Climate Change Directorate serves as the secretariat of the National Climate Change Council. Under the Regulations, the Climate Change Directorate will also advise the government on carbon market activities and coordinate and mobilise sectoral stakeholders for the effective control and management of carbon markets.

Multi-sectoral technical committee and Ad hoc committee
Additionally, the Regulations have established a muti-sectoral committee consisting of members with various technical expertise from various sectors such as energy, transport, buildings, industry, agriculture, forestry, and waste management (the Multi-sectoral technical committee). Five members of the Muti-sectoral technical committee will be appointed on an ad hoc basis (the Ad hoc committee) to undertake the review and approval of each carbon project submitted to the DNA. The Ad hoc committee will be responsible for the review of the project design document and will provide technical expertise and issue recommendations to the DNA.

Categorisation of Carbon Projects and Cost Implications
The Regulations establish two types of carbon projects: land-based and non-land-based projects. Land-based projects include all activities related to land use, land management, and ecosystem conservation or restoration aimed at reducing greenhouse gas emissions or enhancing carbon sequestration. Non-land-based projects, on the other hand, are those that reduce greenhouse gas emissions through technology without requiring land for execution.

The Regulations also set out a classification framework for private carbon projects, public carbon projects, and community carbon projects based on the type of proponent and the type of land registration. Private carbon projects are run by a private entity or involve land-based projects on private land. Public carbon projects are undertaken on public land or involve non-land-based projects where a public entity is the project proponent. In contrast, community carbon projects are those undertaken on community land. The classification of a carbon project influences the mandated percentage of annual social contributions that a project proponent must remit to the Government. Specifically, private carbon projects are exempt from annual social contributions.

Annual social contributions are defined under the Regulations as sharing of annual benefits accruing from carbon projects. Moreover, the Regulations provide that annual social contributions are to be calculated as a percentage of aggregate earnings. Aggregate earnings are defined in the Amendment Act as the total of all income in a carbon project without adjustment for inflation, taxation or types of double counting. For community carbon projects, annual social contributions shall be paid to the community through the community development agreement committee. However, for public carbon projects annual social contributions shall be remitted to the Designated National Authority.

Annual Social Contributions and Payment Mechanisms
For carbon projects on public and community land, the Amendment Act mandates a minimum contribution of 40% of aggregate earnings for land-based projects and at least 25% for non-land-based projects. The Regulations stipulate that these contributions are calculated after deducting the cost of doing business. This provision ensures that project proponents can account for their operational expenses before making the required contributions, thereby accommodating the typically high development costs associated with carbon projects.

For non-land based projects, the DNA shall remit annual social contributions to the Climate Change Fund (CCF) established under the Amendment Act. The CCF shall be administered by the National Climate Change Council and managed by the Principal Secretary in charge of climate affairs. The CCF is intended to: provide grants for climate change research and innovation in industrial, technical, scientific and academic research, as well as policy formulation, provide grants and loans to businesses, academia, civil society and any other stakeholders that benefit from the development of innovative actions, finance through grants and loans the implementation of climate change adaptation and mitigation actions and provide technical assistance to county government funds. Annual social contributions made for community land-based projects shall be managed and disbursed by community project development committees established under Community Development Agreements entered into between project proponents and the relevant communities.

The community project development committee shall always maintain an odd number of members comprising a wide range of representatives from the community, the county and national governments, as well as the project proponent, to ensure efficient use of annual social contributions. Community development agreements shall have a list of community projects that are to be funded by the contributions remitted by the Project proponent. This will allow the community to benefit from projects that focus on increasing literacy levels, improving existing infrastructure, protecting ecological systems and supporting or establishing small-scale and micro enterprises, among others.

Carbon Project Prerequisites
The Regulations outline extensive compliance requirements for carbon projects.  Proponents of these projects are required to demonstrate how they ensure environmental integrity, sustainable development and alleviation of poverty. Noteworthy, while project proponents should indicate whether a given carbon project contributes to Kenya’s Nationally Determined Contributions (NDC) emissions reduction targets, the Regulations do not make it mandatory for carbon projects to contribute to Kenya’s NDC targets.

The Regulations also impose stringent requirements for land-based carbon projects. Where the land is owned by third parties, the project proponent is to provide agreements demonstrating the property owner’s consent for use of the property in the carbon project. Similarly, where the project is a community land-based carbon project, there is a requirement to provide documentation of free, prior and informed consent and entering into community development agreements with the community. The Amendment Act refers to “impacted communities” but does not define the term. Project proponents shall therefore be required to identify which communities would be considered “impacted communities” in relation to a particular project before obtaining prior and informed consent. Furthermore, in a bid to implement the carbon market principles, carbon projects are further required to certified and validated by an independent auditor before the project commences. Carbon projects will also be required to undergo an environmental and social impact assessment.

The Regulations also require project proponents to obtain a letter of support from the respective county where the carbon project is situated. Other prerequisites in the Regulations include adherence to national priorities, ecological, social and cultural and economic safeguards, as well as alignment with national policies, laws and strategies.

Timelines for Implementation and Operationalisation of Projects
The Regulations provide a process flow for the approval, implementation and operationalisation of a carbon project. The entire process requires numerous engagements between the project proponent and the DNA. A project proponent intending to set up a carbon project in Kenya can anticipate that the process for the conceptualisation, approval and commencement of a carbon project may extend up to fourteen months, with project proponents having up to twelve months from the date of receiving a letter of no objection to submit a project design document for approval, before commencement of the project.

We have outlined the approval timeline as set out in the Regulations, below:

Conclusion
While the enactment of these Regulations is a step in the right direction for efficient operation of carbon markets in Kenya, their success will ultimately depend on how effectively they are implemented. The Regulations empower the Cabinet Secretary to issue guidelines for their implementation, which will be a key determining factor in their impact.

Should you have any questions about this legal alert, do not hesitate to contact Dominic Rebelo or Wangui Kaniaru.

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Contributiors
1. Kimberly Mureithi –  Associate
2. Mdathir Timamy – Associate
3. Sharon Muoki – Associate
4. Fenan Estifanos – Trainee Lawyer