Potential and Pitfalls for Carbon Entrepreneurs: Is the Kenyan Carbon Market a Hoax?

Introduction

With the increasing global focus on climate change, the carbon market has emerged as a significant opportunity for nations, especially in Africa, to contribute to climate solutions while generating economic benefits. Carbon offset initiatives offer African countries the chance to support sustainability, yet many have faced barriers in leveraging this market due to policy and regulatory gaps. Kenya’s new Carbon Markets Regulation 2024 seeks to structure the country’s carbon market by aligning with international standards, like the Gold Standard while ensuring community involvement and environmental responsibility. However, this regulation brings financial and procedural requirements that can present hurdles for entrepreneurs. This article delves into these requirements and explores potential strategies to improve accessibility and foster market participation.

Key Requirements for a Carbon Project

The Carbon Markets Regulation 2024 requires that the PP not only adhere to the national registry requirements but must also identify a suitable international carbon standard to apply to the project.

  1. National Registry Requirements & Other Local Costs

    • Submission of a Project Concept Note (PCN): Project proponents must develop and submit a PCN to outline the project’s objectives and anticipated impacts. This submission carries a fee of KES 100,000 ($1,000).

    • Project Design Document (PDD): Following PCN approval, the next step is a detailed PDD, which involves a deeper dive into the project’s design and expected carbon savings. The PDD submission costs KES 200,000 ($2,000).

    • Administrative Fee upon PDD Approval: An additional KES 300,000 ($3,000) administrative fee is required.

    • Environmental Impact Assessment: This is 0.1% of the total project cost paid to the DNA (Designated National Authority)

    • Per Credit Issuance Fee: For carbon credits issued, there is a per-ton fee of $0.10 for the first 15,000 tonnes, with an increase to $0.20 per tonne for volumes above 15,000 tonnes annually.

    • Yearly Audits by Designated National Authority (DNA): Each year, the Designated National Authority (DNA) conducts audits to ensure compliance, which comes with additional, potentially variable costs.

    • Profit Sharing: For LUF projects on public or government land, 40% of the profit from the carbon sales is given to the local community, and for non-land use projects 25%.

  1. International Certification Standards: The Gold Standard

International certification is critical to ensuring a carbon project meets globally accepted standards, with the Gold Standard chosen as the benchmark for this article. Requirements include:

  1. Project Preliminary Review: An initial review costing approximately $3,500 ensures the project aligns with the standard’s fundamental requirements.

  2. Project Design Review: The Gold Standard mandates a project design review to examine the technical aspects, costing approximately $3,000.

  3. Annual Monitoring and Reporting: Every year, projects must submit a report for $3,000 to validate ongoing compliance.

  4. Gold Standard Issuance Fee: An issuance fee of $0.10 per tonne of verified carbon credit is charged annually.

  5. It is also important to note that some of the above costs will vary depending on the scope and the project design.

Opportunities and Concerns

The structured approach outlined in Kenya’s regulation brings clarity and standardization, potentially attracting more international investors. However, these requirements also bring significant challenges for small to medium-sized project proponents. Key Challenges for Project Proponents include:

  1. High Initial Costs: The costs of complying with both national and international standards can deter new entrants, especially those without substantial upfront capital.

  2. Complexity of Compliance: Meeting dual requirements from the national registry and international standards can be challenging, particularly for local entrepreneurs with limited regulatory experience.

  3. Extended Timelines for Carbon Credit Issuance: Projects in land-use categories, such as forestry, often take several years before generating carbon credits, creating a financial gap for project proponents who must sustain operations in the interim.

  4. Profit-Sharing Requirements on Public Land: The mandate to return a percentage of profits to the community might strain project budgets, especially for projects in nascent stages. This financial obligation could reduce the profitability and viability of projects on government land. Although this approach promotes social responsibility, it inadvertently discourages investment due to reduced returns for re-investment making carbon projects unsustainable.

  5. Unclear Scope of Incentives: Section 26 allows the Cabinet Secretary to grant fiscal and non-fiscal incentives for carbon projects which opens a “grey area” due to the broad discretion it grants and the lack of specific criteria or limitations. This vagueness could lead to inconsistent or selective application potentially favoring certain projects or organizations over others, survival of less sustainable projects, and ultimately undermining the goal of equitable market access.

Path Forward: Making Kenya’s Carbon Market More Accessible

To enable more robust participation in the carbon market, Kenya might consider several reforms:

  1. Introducing Tiered Fee Structures: A fee system based on project size and impact could make it easier for smaller projects to comply without compromising quality.

  2. Clear Incentivization Criteria: Clear, predictable incentives could provide confidence to project developers and investors as seen in other successful carbon markets.

  3. Simplifying Compliance Processes: Streamlining the dual compliance process, perhaps by integrating national and international requirements where possible, would reduce administrative burden and make the market more accessible.

  4. Extending Timelines for Profit-Sharing: For projects requiring significant lead time to issue credits, Kenya might allow flexible timelines for community profit-sharing or provide initial financial relief to support the early stages of project development.

  5. Further stakeholder engagement: To enhance the carbon market regulations, further stakeholder engagement is crucial to ensure policies are comprehensive and practical, and address the needs of all affected parties.

Conclusion

Kenya’s Carbon Markets Regulation 2024 has the potential to position the country as a leader in Africa’s carbon market. However, to fully realize this potential, the regulatory framework may need adjustments to attract a wider range of investors and support local entrepreneurs. A more accessible and incentivized market structure could unlock Kenya’s vast carbon sequestration potential, benefitting both the economy and the environment.

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