Friday, 14 March 2014

OPTIMAL AND A TAX EFFICIENT BUSINESS MODEL IN KENYA



When setting up business n Kenya, it is advisable to set up with an OPTIMAL AND A TAX EFFICIENT BUSINESS MODEL, which necessitates professional and structured guidance.

As such, EVEN BEFORE a local or foreign investor INCORPORATES A COMPANY, we would advise that one obtains Business Setup and Tax Structuring & Business Model Optimization Advisory.

You may call us on +254 715 310 677 or email us on info@stralexgroup.co.ke for guidance.


For: Strategic Legal Solutions Group LLP



TAXLEX CONSULTING GROUP - a participating tax and accounting consultancy firm in the SLS GROUP of consultancies

Tuesday, 1 October 2013

LEGAL, POLICY AND INSTITUTIONAL FRAMEWORK FOR CARBON/EMISSIONS TRADING IN KENYA

INTRODUCTION

This paper is concerned with the legal, policy and institutional framework for carbon trading in Kenya. It seeks to interrogate the law and regulations governing carbon trading and the institutions involved in the actualization of carbon trading.

Carbon trading as a concept can be traced from the negotiation and eventual signing of the Kyoto Protocol. The Kyoto Protocol is an international law that legally binds all its signatories to reduce emissions into the atmosphere. It was first adopted in December 1997 and entered into force in February 2005.The first commitment period applied between 2008 to 2012, the second commitment period applies to emissions between 2013 to 2020.The amended Kyoto protocol that includes the second commitment period has not yet entered into force. It however has the legal strength that was in the initial protocol[1].The protocol establishes three means through which all signatories are obligated to meet their targets. These are:

·         Clean Development Mechanisms;
·         Joint Implementation; and
·         International Emissions Trading, the latter being the subject concern of this analysis.

Clean Development Mechanisms

Clean Development Mechanisms is provided for under Article 12 of the Kyoto Protocol. It allows for Annex B parties (developed states) to implement projects in developing states that reduce emission. These projects earn credits that are equal to one tonne on carbon dioxide and can be counted towards meeting the target in the Protocol. It provides for developed countries an alternative means of reducing their emissions[2].

Joint Implementation

This is provided for in Article 6 of the Protocol. It permits for Annex B parties to implement projects individually or in partnerships with developing states that aim to increase the number of emissions sinks. These projects include the increase of forest cover and earn the Annex B parties emission reduction units. These units are used to offset emissions that are in excess of the emission targets set[3].

International Emissions Trading

Parties under the Protocol have obligations assigned to them according to their levels of emissions; those with commitments to reduce emissions are provided for in Annex B. These commitments to reduce emissions are expressed in the form of allowed emissions or assigned amount units[4]. Emissions’ Trading is carried out under a market approach called ‘CAP and TRADE’. All parties that have obligations to reduce their individual amount of emissions set a cap on their emissions .This means that once a party exceeds its cap, it will have to purchase the difference between their cap and their emission. This is the ‘cap’ aspect of the market approach. The ‘trade’ aspect of the market approach is instanced where those parties who have managed to emit less than their cap have emission units to sell. Carbon is the most emitted greenhouse gas in the world this has led to the notion that it is the only gas emitted. This is how the term ‘carbon trading’ in reference to emissions trading came about.

HOW DOES EMISSION TRADING WORK

In the international arena, Emission Trading is provided in the Kyoto Protocol’s Article 17[5]. Emission targets for developed countries are expressed as levels of allowed emissions or assigned amounts.These amounts are expressed in tonnes known informally as ‘Kyoto Units’[6]. The unit of trade in the emission trading is known as carbon credits. As carbon financial instruments, they can be bought and sold in international markets at the prevailing market prices[7].Carbon credits are what are generated by developing parties and are bought by developed parties who have exceeded their assigned amounts.

There are two kinds of markets:

1.       the compliance market; and
2.       the voluntary markets.

In the Compliance Market, obligated parties are bound by the Protocol to buy carbon credits to offset their exceeded assigned amounts.

The Voluntary Market is mostly used by large multinational companies who do not have the obligation to offset any excess assigned amounts. However, they buy carbon credits because of their carbon footprint and for corporate social responsibility reasons[8].

LEGAL FRAMEWORK FOR CARBON TRADING IN KENYA

There are legislations operational in Kenya that establishes the legal framework for carbon trading. These are:

a)       The Constitution of Kenya (2010);
b)       Kyoto Protocol to the United Nations Framework Convention on Climate Change (“Kyoto Protocol”);
c)       Energy Act(No. 12 of 2006) and Energy Management Regulations (2012); and
d)      Environmental Management and Coordination Act (No. 8 of 1999) (EMCA)

THE CONSTITUTION OF KENYA

There is no express mention of carbon trading in the Constitution of Kenya. However:-

·         Article 2(6) provides that every treaty and convention that Kenya is a party are part of the law of Kenya. This includes the Kyoto Protocol and well as the United Nations Framework Convention on Climate Change, ‘UNFCC’ under which the Kyoto Protocol was concluded.

·         Article 42 provides that every person has the right to a clean and healthy environment, while Article 69(1) provides for protection of the environment for the benefit of future generations. These rights and protections are to be achieved through the State’s sustainable exploitation and conservation that ensures not only protection but also the accrual of benefits that are to be shared out equitably. When read together with the Energy Act (2006), these provisions are understood to make reference to carbon emission trading as well as other means of sustainable utilization of the environment.

THE KYOTO PROTOCOL

Kenya ratified the Kyoto Protocol to the UNFCC in February 2005. The Protocol came into force on 26th May 2005. The Protocol establishes an opportunity for carbon trading in its various provisions some of which are highlighted below:-

·         Article 3 provides that developed states (Annex 1 parties) shall have a duty to ensure that their carbon emission do not surpass their assigned amounts;[9]

·         Article 6 provides that carbon emission credits can be bought, transferred or sold amongst parties to the Protocol[10]. Kenya as a Developing State does not have an assigned amount; it is only obligated by the Protocol to ensure that there is utilization of renewable sources of energy. These include the use of solar and geothermal energy instead of hydroelectric power, use of energy efficient charcoal stoves as well as reforestation among others. Kenya is therefore able to generate carbon credits that it can sell to developed states that need the credits to offset their excess carbon emissions;

·         Article 12 provides for the clean development mechanism under which carbon credits maybe traded from environmental friendly projects. This Article also provides for the elaboration of modalities and procedures with the objective of ensuring transparency, efficiency and accountability through independent auditing and verification of the said projects’ activities; and

·         Article 17 also provides for the provision of relevant principles, modalities, rules and guidelines in particular for verification, reporting and accountability for emissions trading. This Article also cautions that carbon trading is merely supplemental to other domestic actions for the purpose of meeting quantified emission limitation and reduction commitments.

THE ENERGY ACT (2006) AND THE ENERGY MANAGEMENT REGULATIONS (2012)

The Energy Act 2006 in section 103(2) (g) avails to the Minister (now Cabinet Secretary) of energy and petroleum, the power to harness opportunities for clean energy. This includes the various forms of generation of carbon credits and their sale in the world market. Whereas the Act does not specify in what form this generation should take place, various stakeholders in the energy sector have implemented projects that have successfully generated credits. The Kenya Electricity Generating Company (KENGEN) for example has registered six CDM projects. These projects will ensure the displacement of 0.66 million tonnes of carbon dioxide annually. The projects were documented to have earned the company up to 500 million shillings annually until 2012[11].

The Energy Regulations provides for clean development mechanisms which permit the roll out of emission reducing projects in developing states. Section 8(2) that “An owner or occupier to whom these Regulations apply may investigate the inclusion of the relevant components of an energy investment plan into a project to be registered under the clean development mechanisms or any other carbon finance mechanism which may be in place from time to time,” It is notable that although it provides for the creation of carbon credits, it is neither mandatory nor is it enforceable against energy producers who fail to do so. These projects are expected to earn the developing states carbon credits that can be traded in world markets the returns of which are beneficial to a production state (non Annex B party)[12].

ENVIRONMENTAL MANAGEMENT AND COORDINATION ACT (EMCA)

The Environmental Management and Coordination Act (EMCA) establish the National Environmental Management Authority. NEMA is tasked with the coordination of various environmental activities that will ensure sustainable utilization of environmental resources[13].The Act enables the Authority to do this through the requirement that all projects that have a bearing on the environment proceed after issuance of an Environment Impact License[14]. The license is issued after an environmental impact assessment in which NEMA investigates the benefits and possible hazards that the project may have on the environment. This ensures that NEMA is cognizant of ongoing projects and can monitor them in order to ensure sustainable and beneficial utilization of the environment. The Act however makes no reference to carbon emission credits generation but works hand in hand with other legislations that make reference to carbon credits generation.

POLICY FRAMEWORK OF CARBON TRADING IN KENYA

The Ministry of Finance in fiscal year 2011/2012 prepared a National Policy on Carbon Investments and Emission Trading. This was in response to the advancements that were being made in the carbon credits trade and the need to have a mode of regulation of carbon trading that was already ongoing. The ministry of finance circular that was issued on carbon trading thereafter laid out the following strategy:

·         That all new carbon credit eligible projects in all sectors must be implemented in accordance with Clean Development Mechanisms. This was  in order to facilitate the project’s approval by  the executive board of the United Nations Framework Convention on Climate Change;

·         All carbon credits generated would be used for the recapitalization of the projects and could only be traded in with the direct approval of the Treasury[15].

This policy strategy was aimed at ensuring that the Treasury remained in control of carbon trading in Kenya and had a centralized database of all projects that were capable of generating carbon credits.

The National Policy on Carbon Investments and Emission Trading also recognized the need to have a forum for the private investors’ involvement in carbon trading in Kenya and Africa. This led to the establishment of Africa Carbon Exchange (ACX) headquartered in Nairobi in 2010. The ACX was founded in order to:

·         provide the players in the carbon market with an opportunity to exchange ideas on the best practices of the trade;
·         to build and utilize capacity in the carbon trade industry;
·         to collectively gather, analyze and disseminate information to the industry players; and
·         to offer interactive forums between governments and agencies involved in the formulation and implementing of climate change policies[16]

INSTITUTIONAL FRAMEWORK

There are both public and private industry players in the carbon trading industry: the government and private companies respectively. The Government through the various ministries is responsible for the projects proposals implementation and sale of carbon credits. The Ministry of Finance is in charge of the overall regulation of carbon trading because it is the ministry charged with overall financial system in the country.

The National Environmental Management Authority (NEMA) established by the Environmental Management and Coordination Act (EMCA) is Kenya’s Designated National Authority. It is the national authority responsible for assessing whether a prospective project contributes to sustainable development under the Clean Development Mechanism (CDM). NEMA alongside the Ministry of Finance ensures that a project is a viable venture to generate carbon credits. In addition, NEMA maintains an updated website with background information on the CDM[17].

PARTICIPATION IN CARBON TRADING

Any person who wishes to sell carbon credits has to have a project registered under the UNFCC as CDM Project. The process of registration of a project undergoes the following broad steps:- [18]

·         Project Development;
·         Project Validation;
·         Project Registration;
·         Project Implementation;
·         Project Monitoring;
·         Project Verification;
·         Credit Issuance; and
·         Commercialization

The review and guidance of a project to qualify as a CDM Project is carried out by UN third party project auditors referred to as Designated Operational Entities.  This is in co-ordination of NEMA as Kenya’s Designated National Authority.
  
CONCLUSION

It is commendable that there has been progress in carbon emissions trading and that Kenya is a pioneer in East and Central Africa region. Carbon trading offers great prospects for social and economic empowerment of the people of Kenya especially in areas where no viable agriculture can take place. For these reasons, the legal, policy and institutional framework for carbon trading should be streamlined. It is recommended that stakeholders initiate discussions towards the drafting and eventual enactment of an independent legislation expressly dealing with carbon emissions trading.

We trust that the above will be useful in your decision making processes regarding carbon/emissions trading. However, should you have any further queries regarding carbon/emissions trading in Kenya, please do not hesitate to contact us at info@stralexgroup.co.ke or on + 254 715 310 677 for clarification.

Yours faithfully,
For: Strategic Legal Solutions Group Limited

 


 





Centre for Environmental Law & Policy – a participating consultancy firm in the SLS Group of consultancies. 



[1] http://unfccc.int/kyoto_protocol/items/2830.php accessed 23rd September 2013 0800hrs
[3]Supra note 2
[5]The Conference of the Parties shall define the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability for emissions trading. The Parties included in Annex B may participate in emissions trading for the purposes of fulfilling their commitments under Article 3. Any such trading shall be supplemental to domestic actions for the purpose of meeting quantified emission limitation and reduction commitments under that Article.
[9] The Parties included in Annex I shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A do not exceed their assigned amounts, calculated pursuant to their quantified emission limitation and reduction commitments inscribed in Annex B and in accordance with the provisions of this
Article, with a view to reducing their overall emissions of such gases by at least 5 per cent below 1990 levels in the commitment period 2008 to 2012
[10] For the purpose of meeting its commitments under Article 3, any Party included in Annex I may transfer to, or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy, provided that:
(a) Any such project has the approval of the Parties involved;
(b) Any such project provides a reduction in emissions by sources, or an enhancement of removals by sinks, that is additional to any that would otherwise occur; It does not acquire any emission reduction units if it is not in compliance with its obligations under Articles 5 and 7; and
(d) The acquisition of emission reduction units shall be supplemental to domestic actions for  the purposes of meeting commitments under Article 3.
[11] http://www.kengen.co.ke/index.php?page=business&subpage=cdm
[12] Definitions: 3.In these Regulations, unless the context otherwise requires—“clean development mechanism” means a mechanism that allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits each equivalent to one tonne of CO2, which can be traded and sold, and used by industrialized countries to  meet a part of their emission reduction targets under the Kyoto Protocol
[13] Section9(2)(a)
[14] Section 63
[15] Treasury circular no. 9/2011: carbon projects preparation and carbon credits trading
[16] www.acxafrica/features-accordion.html -accessed 24th September 1530hrs
[18] http://carbonmarketwatch.org/learn-about-carbon-markets/cdm-project-cycle/