Kenya’s private sector looks to claim a share of carbon market

The private sector is key to realising the aspirations of the Paris Agreement, which marks a transition in the use of international carbon markets to mitigate the effects of climate change. Article 6 of the Agreement lays the foundation for international market-based approaches to facilitate realisation of resilience targets communicated by countries in their Nationally Determined Contributions (NDCs).

Also, it establishes a decentralised mechanism through which Internationally Transferred Mitigation Outcomes (ITMO) can be generated in one country and acquired by another.

Article 6.4 creates a centralised crediting mechanism governed by the United Nations Framework Convention on Climate Change (UNFCCC). Akin to the Clean Development Mechanism (CDM), it establishes a carbon market under international supervision where public and private actors can engage.

Kenya is one of the countries that submitted an updated NDCs progress report in adherence to the reporting mechanisms of UNFCCC. The Kenya Private Sector Alliance (Kepsa) has been deliberate in its carbon market initiatives, hosting innovative projects through the compliance and voluntary markets which includes 16 registered CDM projects as of June 2013 in reforestation, geothermal, wind and hydro; 16 CDM programme of activities in the uptake of renewable energy.

The Kenya Agricultural Carbon Project, supported by the BioCarbon Fund and SCC-VI Agroforestry, is the first project in Africa to sell carbon credits under the voluntary market for sequestering carbon in the soil. The Kasigau Wildlife Corridor REDD (reducing emissions from deforestation and forest degradation) Project is the first activity to issue voluntary forestry carbon credits.

Kepsa emphasises that Kenya is deficient of access to the EU Emissions Trading Systems (EU-ETS) compliance market. The EU-ETS introduced restrictions on the use of international credits, such that certified emission reductions (CERs) from projects registered after December 2012, which are only eligible if they are hosted by Least Developed Countries (LDCs) or in countries that have a bilateral agreement with the European Union.

Despite the prevailing policy-related challenges, Kenya has the potential and capacity, through the private sector, to claim its stake in the carbon credits. To close the emissions gap and realise the transition required to align the global economy to a 1.5°C scenario, it is estimated that annual investments of $6.3 trillion will be needed until 2030, and $6.9 trillion per year thereafter — implying a vital shift in finance flows, in stark contrast to the incremental change.

Article 2.1(c) of the Paris Agreement reinforces this necessity by directing finance flows towards low greenhouse gas emissions and climate-resilient development. Progress on initiatives such as sustainable green finance taxonomy, green bond standards, green banking regulations, and mandatory climate-change-related reporting for institutional investors is a driver of sustainable capital markets.

Notably, a big financing gap remains. In light of the restricted availability of public resources that has been further strained by the onset of the global Covid-19 pandemic, there is an urgent need to promote financing mechanisms that can effectively unlock private finance at scale whilst carbon finance delivered through international carbon markets has proven to be an effective means for shifting the risk-return profiles of climate-friendly investments.

To this end, to explore how to bridge this gap, the Corporate Commitment on Climate Change in Kenya (4C-Kenya) will be held on the sidelines of COP26 in Kenya, at the Safaripark Hotel, Nairobi on November 10, 2021, to serve as a launching pad for exploring mechanisms for carbon trading besides strengthening private sector commitment on their climate resilience initiatives.

Conclusively, environmental integrity will be a central principle for using Article 6 mechanisms under the Paris Agreement. Buyers will require that international transfers of emission reduction units realised under cooperative approaches translate into at least the same, and preferably lower aggregated global emissions, eliminating the risk of transferring “hot air” or the double-counting of emission reductions.

If this is not ensured, trade in emission reductions could jeopardise climate action efforts and increase the cost of mitigating climate change over the long term.

Critically, achieving the temperature goals of the Paris Agreement will require a shift and massive scale-up in green finance flows. Recognising that public resources alone will not be sufficient to realise the transition, governments need to urgently look for ways to incentivise private sector investments. Notably, facilitating access to lower abatement cost investments, carbon markets can play an instrumental role in helping countries to raise ambition.

The impact of post-2020 carbon markets can further be strengthened if climate finance and carbon finance are blended to support a green recovery in a post-Covid-19 world. Targeted deployment of concessional climate finance aligned with carbon market development needs can effectively promote private sector engagement by de-risking investments or reducing market price risk.

Marangu is a communication & public policy analyst