The Climate Change (Amendment) Act, 2023 was enacted on 1st September 2023 and came into force on 15th September 2023. The Act entrenches the need for Carbon Projects to specify the anticipated environmental, economic and social benefits of the project and outlines key considerations for existing and proposed carbon credit projects and Carbon Trading.
Carbon Credits are defined as the equivalent of one tonne of carbon dioxide or any other greenhouse gases that an organisation can emit into the atmosphere. While Carbon trading on the other hand is the buying and selling of permits of carbon credits that allow the holder to emit a certain amount of carbon dioxide and other greenhouse gases. Some of the key considerations for existing and proposed carbon credit projects and carbon trading in the Act include:
- Obtaining an environmental impact assessment for all carbon credit projects;
- The requirement to enter into community development agreements for all land-based projects;
- Registration with the National Carbon Registry.
The Act provides for the establishment of a Carbon registry that would be accessible to the public with registers on information relating to carbon credit projects and the amount on carbon credit issued or transferred from Kenya. A designated National Authority as established under the Act will be the custodian of the records.
The Act goes further to protect community resources by requiring that every land-based project carried out under the Act must be put into action through a Community Development Agreement that outlines the connections and responsibilities of the project’s proponents on the public and community land where the project is being developed.
The Act however does not provide a clear definition of what constitutes a land-based versus non-land based project. Land-based projects are required to include a provision in the Community Development Agreement for annual social contributions of at least forty percent (40%) of the projects aggregate earnings. On the other hand, non-land-based projects are required to include at least twenty-five per cent (25%) of their aggregate earnings as the annual social contribution to the community. These annual social contributions are to be managed and disbursed for the benefit of the community.
Any dispute that would arise under a land based project will be subject to the dispute resolution mechanism as specified in the Community Development Agreement and ought to be resolved within thirty (30) days of lodging the dispute. If the dispute is not resolved within thirty (30) days of submission, the dispute may be referred to the National Environmental Tribunal. Any other dispute that is not land-based and not subject to the Community Development Agreement is to be resolved through alternative dispute resolution.
What Carbon Credits mean for Companies?
Essentially, companies are awarded credits to allow them to continue to pollute up to a certain limit, often on a reducing basis. While some businesses are able to cut their emissions, others are not able to do so. For some, their emissions might even increase in the course of a given period.Those that cannot reduce their emissions are, however, allowed to continue operating, but usually at a higher cost.
In some instances, businesses are unable to exhaust their credit limits even after operating for the marked duration. These are called ‘‘surplus’’ or ‘‘excess’’ credits. When a business is left with unutilised credits, it can sell them to other businesses. The business may also choose to keep the surplus credits for future use.
The Difference between Carbon Credits and Carbon Offset?
While carbon credits and carbon offsets are sometimes used interchangeably, they are different commodities with the same goal of reducing the emission of carbon and other greenhouse gases into the atmosphere.
Carbon credits are limited to within an area and are regulated by a governing body. It is this governing body that is also responsible for creating and distributing them to companies operating within that jurisdiction.
Carbon offsets are neither created by a specific entity nor distributed by a particular body. Instead, they are traded freely on ‘‘voluntary markets.’’ Carbon offset projects can be realised through activities that either reduce the emission of greenhouse gases or those that increase carbon sequestration. Some of these activities may involve investment in renewable energy forms to displace fossil fuels that emit carbon and reforestation to increase the number of trees that serve as carbon sinks.
Offenses
The Act has also introduced offences such as;
- Conducting unauthorized carbon trade willingly;
- Giving false or misleading information knowingly for environmental or financial gains in the carbon market investment;
- Manipulating carbon credit measurements to claim additional measurements;
- Engaging in money laundering through carbon trading;
- Knowingly selling carbon credits to unauthorised entities; &
- Failing to maintain carbon records.
The penalty for the offences upon conviction is a fine not exceeding five hundred million shillings (KES 500,000,000) or imprisonment for a term not exceeding ten (10) years, or both.
Conclusion
Carbon Credits are relatively new, the legal consequences and tax ramifications of this proposed new currency for dealing with global warming likewise is new, unsettled and in many cases untested. In light of the fact that there is no legal precedent on point, it is incumbent upon parties wishing to participate in this emerging business opportunity to seek competent legal counsel.
Managing Partner
Senior Partner