International Lawyers Project

Dec 3, 20248 min read

Kenya’s Road to Just Transition (Part 2): Inclusive Climate Action

by Carter Cheng

Trainers Elise Edson and Alex Marcopoulos (A&O Shearman), in partnership with ILP and EAWLS, delivered the second session of the three-part training on carbon markets trading to stakeholders from Kenya.

Executive Summary

For Global South countries like Kenya, carbon trading is a two-edged sword. On the one hand, it brings the potential to finance carbon projects and drive national climate goals. On the other, it is riddled with structural problems such as high costs, power imbalances and difficulties for local and indigenous communities to participate meaningfully. These challenges threaten to exacerbate existing inequalities and environmental injustice.

Capacity building is essential to address this imbalance, as recently provided by the East African Wild Life Society (EAWLS), in partnership with International Lawyers Project (ILP) and A&O Shearman. This article concludes our two-part series on the duality of carbon trading and uses Kenya’s experience to illustrate the challenges faced by Global South countries when accessing global carbon markets. Part 1 can be read here.

Introduction

In our quest to achieve net zero, carbon trading has emerged as an important tool - a market-driven approach designed to reduce emissions by putting a price on carbon emissions, allowing them to be traded like any other commodity. But for many Global South countries, carbon trading is more complex than it first appears. It presents a web of structural challenges and power asymmetries that cannot be ignored.

Consider Kenya, a Global South country rich in natural resources and biodiversity. While Kenya stands to benefit from selling carbon credits, its experience in navigating the global carbon markets reveals troubling realities. As high-income nations and large corporations dominate the scene, local communities and indigenous groups often find themselves sidelined, vulnerable to exploitation, and unequipped to participate on equal terms.

Legal foundations of carbon trading: international frameworks

The burgeoning global carbon trading system is built on a complex web of international agreements designed to coordinate global climate efforts. The 1992 United Nations Framework Convention on Climate Change (UNFCCC) is the foundational piece which led to subsequent frameworks like the Kyoto Protocol and the Paris Agreement.

Adopted in 1997, the Kyoto Protocol introduced the concept of market-based mechanisms, including the Clean Development Mechanism (CDM). Empowered by Article 12 of the Protocol, countries with an emission-reduction or emission-limitation commitment might implement emission-reduction projects in developing countries and earn saleable certified emission reduction (CER) credits to be counted towards meeting the Kyoto targets. The CDM was later hailed as a trailblazer of carbon trading.

Then, the 2015 Paris Agreement introduced more flexible mechanisms for carbon trading. Specifically, Article 6 of the Agreement enabled the creation of the Internationally Transferred Mitigation Outcomes (ITMOs). While the Kyoto Protocol focused primarily on industrialised countries, the Paris Agreement called for contributions from all countries, allowing carbon markets to be more inclusive - and truly global.

Global South countries in the global carbon market: a Kenyan perspective

Endowed with a wealth of natural resources such as forests and wetlands, Kenya possesses great potential for carbon sequestration - the process of capturing and storing atmospheric carbon dioxide. While high-income countries and powerful corporations have the financial capability to purchase carbon credits, the promise of carbon markets for Global South countries like Kenya lies in generating revenue by selling carbon credits.

Kenya’s domestic legal framework for carbon trading

In recent years, Kenya has created and developed a legal and regulatory framework for carbon trading. The Climate Change (Amendment) Act 2023 sets out the ground rules of Kenya’s carbon markets. Beyond setting parameters as to what count as carbon projects, carbon credits and carbon offsets, the 2023 Act establishes two key institutions: the National Climate Change Council and the Climate Change Directorate. While the Council, chaired by President of Kenya, is tasked to oversee the development of carbon markets in Kenya, the Directorate is responsible for climate policy coordination across various government agencies.

Another crucial development is the enactment of the Climate Change (Carbon Markets) Regulations 2024. They provide detailed guidelines on how carbon credits will be generated, certified and traded in Kenya. Put together, the legislation outlines the roles of various stakeholders, including the government bodies, private sector, civil society, and local communities, in the emerging carbon markets.

Entry barriers

However, participating in these markets is not a simple task for countries such as Kenya. The financial and administrative burdens of certification, compliance and verification often place local communities and smaller projects at a disadvantage. This structural challenge is particularly obvious as data collection and reporting can be inconsistent and incomplete in Global South countries.

Unequal bargaining power

Simultaneously, both the compliance and voluntary markets are still largely shaped by high-income countries and large corporations. While local communities, grassroots organisations and smallholder farmers often struggle to navigate the complex verification and trading procedures, they also possess limited, if not minimal, bargaining power in the rulemaking and agenda-setting processes of carbon markets.

Impacts on local communities and indigenous groups

One often neglected aspect is carbon markets’ impacts on local and indigenous communities. From reforestation to geothermal energy projects, most carbon projects require acquisition of land. If not handled properly, these acquisitions could easily turn into encroachments threatening the land security, livelihoods and cultural heritage of local and indigenous communities. These risks are particularly acute for indigenous groups who are often excluded from the policy and corporate decision-making processes which determine the destiny of their ancestral lands.

In line with the UN framework on Reducing Emissions from Deforestation and Forest Degradation (REDD+), both the Kenyan Climate Change (Amendment) Act 2023 and Climate Change (Carbon Markets) Regulations 2024 include provisions about benefit-sharing. Under the 2023 Act, project proponents are required to reach a Community Development Agreement (CDA) with impacted communities. The CDA should describe the benefit sharing ratios between project proponents and impacted communities. In 2016, Kenya also passed the Community Land Act, a legislative milestone to secure indigenous land rights.

In theory, these legislative efforts should serve to ensure at least a basic level of protection of local and indigenous communities’ interests. But after their enactments, reported cases of forced evictions continue to arise in Kenya, often due to carbon offsetting schemes.

Dire need for capacity-building

The single factor connecting all the discussed challenges is limited capacity of carbon markers stakeholders. For countries such as Kenya to engage meaningfully in the global carbon markets, it requires more than legislative and regulatory frameworks. It demands a pool of well-trained experts with up-to-date institutional knowledge capable of navigating the intricacies of carbon accounting, certification and trading. It also demands a well-functioning civil society with sufficient fluency in the area to monitor policies and hold the government accountable.

Despite being the most affected by carbon offsetting projects, local communities and indigenous groups are often excluded from capacity-building initiatives, leaving them unequipped to defend their rights. Moreover, instead of being treated as equal partners in the decision-making processes, they are frequently viewed merely as stakeholders to be consulted. This deficiency of capacity and the absence of free, prior and informed consent at the grassroots level not only marginalises these communities but also intensifies their vulnerabilities to land encroachments and economic exploitations.

The training organised by EAWLS, in partnership with ILP and A&O Shearman, was to fill this gap. Previously, ILP also organised similar trainings for the Narasha Community Development Group and the Ogiek Peoples' Development Program from Kenya to equip local communities and indigenous groups with the essential knowledge to defend their land and environmental rights in the face of land encroachments driven by development projects.

Other risks of carbon trading

While carbon trading holds potential, there are also unneglectable risks that all stakeholders need to be cautious about:

Regulatory risks: as carbon trading is a fast-evolving area and governments are working to fill the regulatory gaps, sudden regulatory shifts may bring disruptive impacts to ongoing projects and those in planning.
Market risks: given carbon credit’s nature as an intangible asset, their value may fluctuate to reflect regulatory trends and wider economic conditions.
Operational risks: this category of risk includes those arising out of mishandling and malpractices, such as accounting error, fraud, and data manipulation. All these incidents may affect the credibility of carbon credits.
Technological risks: carbon trading relies heavily on complex technology systems for its accounting, reporting, and trading processes. Factors such as cyberattacks, computational errors, and technological obsolescence can all affect the value and credibility of carbon credits.

Future of carbon trading: key trends

Peeking into the future, several trends are likely to alter the landscape of the global carbon markets.

New voluntary carbon markets

One of the most significant trends is the emergence of new voluntary carbon markets. In addition to Kenya, numerous emerging economies have joined the league. Most notably, 15 countries - Chile, Costa Rica, Cote d’Ivoire, Democratic Republic of Congo, Dominican Republic, Fiji, Ghana, Guatemala, Indonesia, Lao PDR, Madagascar, Mozambique, Nepal, Republic of Congo, and Viet Nam - joined the World Bank’s Forest Carbon Partnership Facility last year and are expected to produce as many as 126 million carbon credits (worth up to $2.5 billion in right market conditions) by 2028. While the rise of these new voluntary markets may well accelerate the standardisation across these markets, the influx of capital into these markets also sets to drive technological innovation for carbon capture and offsets alongside traditional renewable energy projects.

Carbon nationalism

Another interesting trend is the rise of ‘carbon nationalism’. Increasingly seeing carbon credits as sovereign assets, more and more governments are looking to tighten their grip over carbon trading within their borders. Recent examples include India’s ban on the export of carbon credits until its climate goals are met and Zimbabwe’s taxes on carbon credits to ensure that a portion of carbon trade profits would flow back to the state. Under the lure of the massive economic returns from the booming voluntary carbon markets, more national governments are expected to follow suit to impose stricter regulations on carbon trading.

Technological innovation

Hailed as the driving forces of the fourth industrial revolution, artificial intelligence and data-driven solutions may help enhance efficiency and accountability in the tracking and verification of emission reductions. For instance, a 2023 World Economic Forum report has highlighted blockchain’s potential to ‘democratise ownership, improve transparency and integrity, and enable real-time visibility into emissions reduction and sequestration efforts’.

Pressure on companies to directly cut emissions

Falling far behind on our efforts to achieve net zero by 2050, states, international organisations and civil society are increasingly urging companies to reduce emissions directly rather than relying heavily on carbon credits. Expected to induce stricter emissions regulations and more stringent reporting requirements, this trend is likely to bring increased reputational risks to companies which overly rely on carbon credits.

Conclusion: an inclusive path forward

Kenya’s story offers a compelling case of what Global South countries may encounter in their venture into global carbon markets. On the one hand, Kenya’s rich natural endowment brings the country promising economic prospects for carbon sequestration. On the other hand, the inherent problems of carbon trading, including high certification costs, a high bar for specialised knowledge for local and indigenous communities to participate meaningfully, outsized influence of higher income countries and large corporates, and the exclusion of local and indigenous voices, threaten to exacerbate existing inequalities and induce environmental injustices.

Despite being the most affected group of stakeholders, indigenous peoples and local communities are often sidelined in the policymaking and corporate decision-making processes in carbon projects. Having incorporated some concepts of benefit sharing, Kenya’s recent legal developments, including the Climate Change (Amendment) Act 2023 and the Climate Change (Carbon Markets) Regulations 2024, represent crucial steps to address these concerns. But legal frameworks, no matter how progressive, are only as effective as their implementation. Now in Kenya, the gaps remain.

Central to these gaps is the dire need for capacity-building at the grassroots level. Only with true and holistic understanding of carbon markets can there arise free, prior and informed consents to carbon projects from local and indigenous communities. Moving forward, capacity building efforts must expand beyond foundational knowledge to ensuring that local and indigenous communities are equipped with the negotiation and advocacy skills to engage effectively with government entities and powerful corporations. In its upcoming capacity building initiatives, ILP is committed to creating a level playing field for local and indigenous communities to challenge these structural inequalities. Stay tuned.

Carter Cheng is a Legal Fellow at ILP and a Master of Public Policy student at the University of Cambridge. Carter has developed broad experiences in climate action at various UN agencies, including ESCAP, SDSN, and the UNCCD Youth Caucus. For more information or to support ILP’s work, visit our website or contact us.