Kenya is gearing up to setting up the first carbon credits market in the region.
The exchange is expected to bring closer home a platform for the trade-in carbon credits that have always felt alien for many, especially small businesses and organisations making climate-friendly investments.
The move is expected to attract investments worth $2 billion (Sh236 billion) by 2030. While carbon credits and the ways to earn them such as the clean development mechanisms (CDMs) created a big buzz locally a decade ago, this hype seems to have died down and with it the promise of money, particularly for the small-scale investors.
The trade-in of carbon credits is one of the ways designed to clean up the planet.
In a way, the mechanism offers big polluters, mostly from the developed world, a platform to offset their carbon footprint by buying carbon credits from companies and individuals, mostly from the developing world, whose investments are environmentally friendly and play part in reversing the damage to the environment caused by the polluters. The trade could, however, become a reality for many Kenyans, with the country considering setting up a carbon market.
The Nairobi International Financial Centre Authority (Nifca), the Nairobi Securities Exchange, and the Air Carbon Exchange Group of Singapore last week signed an agreement to set up the first carbon exchange in the region.
The exchange, once up and running, will bring closer to the region a platform where firms and individuals making climate-friendly investments can sell carbon credits.
The carbon exchange will be among the platforms that define Nifca in its bid to deepen Nairobi as a hub for financial services. The three firms are working with a deadline of later this year to have the exchange up and running.
AirCarbon Exchange President and Chief Operating Officer, Middle East and Africa Mr Kevin Iwanaga said this would be a short period to set up an exchange as a lot needs to be in place before it is up and running. He said there are options of having platforms that could enable buyers and sellers of carbon credits to transact before the actual exchange becomes operational.
“A very soft target has been set to have the exchange operational by the end of the year, but it is a very aggressive target because there are so many unanswered questions like what is the regulatory environment, including who will regulate it as well as what are the laws in Kenya for creating a custodianship for carbon assets,” said Mr Iwanaga.
“Other than the creation of the physical exchange, the technology and platform, in parallel you have to build a whole ecosystem around it – bring on board members, sellers and buyers.
All these things need to be thrashed out in the formation of the joint venture that will set up the exchange.
He added that the country could learn from other markets that start with such platforms as auctions that allow investors to trade in carbon credits even as authorities put in place the mechanisms to enable the setup of an exchange.
Brazil is one of the countries where Air Carbon played part in the creation of a carbon exchange market. “What we did in Brazil at the onset was to have what you might call a soft launch where we created a carbon auction. It was not a traditional real-time spot trade but an auction where a seller with large volumes of credits, would bring them to the auction where our buyers globally would have an opportunity to bid,” said Mr Iwanaga.
“In the case of Kenya, if we had a large company with a huge inventory of credits or want to buy a large inventory of credits, we will host an auction and then we can say that Kenya has launched its credit market. The spot trading can come a month or two after we have seen most countries start with a simple auction.”
A spot trade, also known as a spot transaction, is when a trader buys or sells a financial instrument, commodity, or foreign currency on a specific date – spot date.
He noted that the country and the region have huge potential for projects that could easily be traded on the global carbon credit exchanges, making it ideal to have a carbon exchange in the region.
Among the local firms that have monetised their projects through the sale of carbon credits include KenGen.
The firm, has as of last year earned Sh360 million from six of its power plants.