Why the emissions trading system is crucial for Kenya

The call to take action against global warming is only getting louder, driven by the havoc in countries that have been on the receiving end of erratic weather patterns that endanger human life as well as property and adversely impact economies.

The clarion call is for all countries to join forces to reduce emissions and keep global warming below the 1.5 degree celsius target which portends catastrophic effects if exceeded.

Kenya has heeded the call and ahead of the UN Climate Change Conference held in Glasgow in late 2021 (COP26) and submitted its updated national climate change action plan containing its Nationally Determined Contributions (NDCs).

Kenya’s updated NDCs target abatement of greenhouse gas emissions (GHG) by 32 percent which is an increase from the previous 30 percent target by 2030 in the energy, transportation, industrial processes, agriculture, land use, forestry and waste sectors.

As part of the initiatives to reduce emissions, the National Treasury and Planning Cabinet Secretary Ukur Yatani, while speaking at an EU Green Diplomacy webinar in May 2021, announced that Kenya was at an advanced stage of establishing the Kenya Emissions Trading System (KETS).

Once it is operational, KETS will allow companies and organisations to buy and sell emission allowances.

It is undeniable that an emissions trading system is beneficial at a global and national level as it creates urgency around emission reduction. At a company level, an emissions trading system also has some advantages such as revenue generation for the sellers of emissions allowances.

In addition, for companies which are subject to strict internal or external emissions limits, the ability to purchase emissions allowances provides an avenue to avoid the negative consequences of breaching the limits.

Countries have the option to adopt a compliance approach or a voluntary approach when designing their emissions trading systems.

Compliance markets often adopt a cap-and-trade structure where a limit is set on the amount of emission allowances permitted in sectors that are high emitters of GHG such as manufacturing and aviation. The cap for emission allowances decreases annually to ensure that total emissions reduce over time.

In compliance markets, the emissions trading system is legislated and the relevant authority either sells the emission allowances (carbon credits) by auctioning them or allocates them for free.

Firms that have not reached the levels of permitted emissions for their sectors may then sell their surplus carbon credits to other firms that are at risk of exceeding the limits.

In contrast, voluntary markets allow, rather than mandate companies, to purchase emission allowances by investing in environmental projects that reduce the amount of GHG in the atmosphere.

The private sector, driven by their ESG and CSR goals often constitute the majority of emission allowance purchasers in a voluntary market.

The sellers include developers of renewable energy projects and farmer groups engaged in improved agricultural land management techniques such as soil carbon sequestration.

A compliance-based approach is likely to have a sharper impact on reducing emissions but also calls for a robust legislative and institutional framework to set the rules and to monitor compliance and enforce penalties or sanctions for offending or delinquent organisations.

It would take time to pass the laws required and to set up the framework and structures to oversee the implementation of a compliance-based emissions trading system.

It may also inflict costs and an administrative burden on smaller enterprises whose carbon footprint is fairly low with the result that their costs outweigh the benefits of compliance.

One benefit to a government of adopting a compliance-based approach is that the government can generate revenue from auctioning emissions allowances, but the revenue potential has to be weighed against the business risks of increasing costs for embattled sectors like aviation and manufacturing of cement and minerals.

A voluntary approach to emissions trading may therefore be more appealing especially in light of the growing pressure for organisations to demonstrate that they are earnestly joining the battle against climate change.

One challenge with the voluntary approach is that the entities which opt to buy emission allowances may not necessarily be the ones which are releasing the highest GHG emissions, which creates a mismatch that limits the success of a voluntary system.

Another point for Kenya to consider on the issue of emissions trading is whether it should pursue emissions trading at a national or regional level.

Carbon trading can be implemented on a regional scale as seen with the EU Emissions Trading System (EU ETS) which was the world’s largest emissions trading scheme before China’s Emissions Trading System became operational in 2021.

For Kenya, the most natural regional bloc to establish an emissions trading system would be the East African Community (EAC). One advantage of setting an EAC-wide emissions trading scheme is that there would be a wider pool of buyers and sellers of emissions allowances within the same trading system.

The downside is that regional initiatives necessarily take time to set up and given the urgency to drastically reduce emissions by 2030, we may not have the luxury of the time required to develop, seek consensus on and implement a regional emissions trading system.

For an emissions trading system to be effective, there has to be a means of tracking and verifying the authenticity and ownership of emissions allowances. In the KETS context, the CS mentioned that the system will be managed through the soon-to-be-established National Carbon Credits and Green Assets Registry.

Beatrice Nyabira, is a Partner and Head of the Projects, Energy & Restructuring Practice at DLA Piper Africa, IKM Advocates and Judy Muigai (Director) and Angela Wanjiku (Associate) work within the same practice.