Finance

Analysis of the Carbon Market

Landscape in Kenya

Prepared by Carbon Africa for Adam Smith

International
 Analysis of the Carbon Market Landscape in Kenya

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The views expressed in this publication are not necessarily those of the agencies cooperating in
the National Climate Change Action Plan process. The designations employed and the
presentations do not imply the expression of any opinion whatsoever on the part of the
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Mention of a commercial company or product in this publication does not imply endorsement
by the Government of Kenya. The use of information from this publication concerning
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This document is an output from a project funded by the UK Department for International
Development (DFID) and the Netherlands Directorate-General for International Cooperation
(DGIS) for the benefit of developing countries. However, the views expressed and information
contained in it are not necessarily those of or endorsed by DFID, DGIS or the entities managing
the delivery of the Climate and Development Knowledge Network*, which can accept no
responsibility or liability for such views, completeness or accuracy of the information or for any
reliance placed on them.

© 2012, All rights reserved

* The Climate and Development Knowledge Network (“CDKN”) is a project funded by the UK
Department for International Development (DFID) and the Netherlands Directorate-General for
International Cooperation (DGIS) and is led and administered by PricewaterhouseCoopers LLP.
Management of the delivery of CDKN is undertaken by PricewaterhouseCoopers LLP, and an
alliance of organisations including Fundación Futuro Latinoamericano, INTRAC, LEAD
International, the Overseas Development Institute, and SouthSouthNorth.

1
Table of Contents
1.   Introduction ........................................................................................................................................................................................................... 3  
2.   Summary facts and figures ............................................................................................................................................................................... 4  
3.   Carbon market regulatory environment ...................................................................................................................................................... 5  
3.1.   Policies and regulations ............................................................................................................................................................................ 5  
3.2.   Key institutions............................................................................................................................................................................................. 5  
3.3.   The Designated National Authority ....................................................................................................................................................... 5  
4.   Carbon markets in Kenya ....................................................................................................................................................................................7  
4.1.   The Clean Development Mechanism ..........................................................................................................................................................7  
4.2.   Voluntary market projects .......................................................................................................................................................................11  
4.3.   Carbon developers and buyers ............................................................................................................................................................... 12  
5.   Barriers to CDM project development ....................................................................................................................................................... 15  
5.1.   Barriers to successful CDM participation ....................................................................................................................................... 16  
5.2.   Barriers to underlying project development ................................................................................................................................... 16  
6.   Potential for carbon market growth .......................................................................................................................................................... 18  
6.1.   Post-2012 ......................................................................................................................................................................................................... 18  
6.2.   New initiatives underway or proposed to attract carbon or climate finance ..................................................................... 19  
7.   Recommendations ................................................................................................................................................................................................. 21  
 Analysis of the Carbon Market Landscape in Kenya

1. Introduction
This short paper provides an analysis of the carbon credit market in Kenya, with a focus on the Clean Development Mechanism
(CDM), but also on other voluntary market standards. A brief overview of the regulatory environment is followed by a detailed
look at the carbon credit pipeline, including projects that are registered and those under development. Key parameters such as the
project developer, the number of emission reductions and the carbon buyer are identified where possible for each project, although
some of this information is found in an annex rather than in the body of the report. An assessment of the barriers to carbon
project implementation is included. The paper gives an outlook of the carbon market potential in Kenya and concludes with a list of
recommendations for the expansion of the sector.

This analysis has been prepared by Carbon Africa Limited based on a desk review of publicly available information and data in
addition to the consultants’ own industry knowledge.

3
2. Summary facts and figures
This analysis is summarized in the following table.

Regulatory and » Kenyan regulatory environment is sufficient to attract carbon finance and investment although there is
institutional room for improvement.
environment » There is relatively good capacity in carbon project development and transaction management available in
Kenya. This is found primarily in the private sector.
» Any changes to the regulatory treatment (including tax) of emission reduction projects in Kenya should be
carefully planned so as not to discourage private sector participation.
CDM status » The first CDM project in Kenya was registered in September 2008.
» Currently there are five registered CDM projects, and 21 CDM projects and six CDM Programme of Activity
(PoA) sub-projects under request for review or validation.
» Four of the registered CDM projects are commissioned and operational.
» The sectoral and regional distribution of CDM projects in Kenya is fairly diversified although key sectors
and regions have yet to participate.
» Total aggregate emission reductions by projects in the CDM pipeline in Kenya are expected to exceed 18
million tonnes of carbon dioxide equivalent (tCO2e) by 2020.
CDM finance » The CDM may be able to facilitate project financing and investment in Kenya of more than $1.5 billion by 2015.
» Total revenue from certified emission reductions (CERs) should exceed 90 million by 2020.
Voluntary market » The voluntary carbon market is important in Kenya in terms of piloting new approaches to emission
reductions (e.g. reduced emissions from deforestation and forest degradation (REDD)), attracting carbon
finance for certain types of projects, including pre-registration carbon credits and could play an even
bigger role as the only major carbon market available for Kenyan project developers post 2012.
» At present there are 14 voluntary Gold Standard projects in the pipeline in Kenya and seven forestry sector
voluntary projects.
Barriers » CDM specific barriers include (a) lack of awareness of CDM requirements by project developers, (b) high
CDM development costs and lack of funds or appetite to pre-pay for such, (c) absence of methodologies and
baseline data in some sectors of special interest to Kenya (e.g. ethanol or petrol blending), (d) mistakes in
project development, (e) abandonment of the underlying project, and (f) the bureaucracy and ‘bean-counting’
of designated operational entities (DOEs).
» Main project barriers among many are (a) lack of access to underlying project capital, (b) project developer
inexperience, (c) sectoral risks, and (d) political and institutional risks.
Future market outlook » The CDM pipeline is expected to increase considerably in the short-term rush to meet the 2012 registration
“deadline” for continued access to the EU market.
» Kenya is set to become the number two CDM country in Africa after South Africa.
» Once the 2012 deadline has passed, further CDM development will be stifled in Kenya, resulting in a loss of
momentum for project-based approaches (except those for the voluntary market) due to EU market rules.
» However, carbon and climate finance activities will continue under sub-projects that can be added to
registered CDM Programmes of Activities, voluntary markets and new approaches such as nationally
appropriate mitigation actions (NAMAs) and forest funds. This might see new sectors benefit that are
absent from the CDM, such as transport and REDD.
Recommendations » Nine near and mid-term suggestions are provided to help facilitate increased CDM project uptake, diversify
into new areas and position Kenya to continue to access carbon finance and climate investment,

4
 Analysis of the Carbon Market Landscape in Kenya

3. Carbon market regulatory environment

3.1. Policies and regulations
Kenya does not have specific legislation relating to climate change or carbon credit markets. However, as a developing country,
th
and having ratified the United Nations Framework Convention on Climate Change (UNFCCC) on 30 August 1994 and acceded to the
th
Kyoto Protocol on 25 February 2005, Kenya is able to host Clean Development Mechanism projects.
Certain laws and policies, such as the Forest Act (2005), make reference to climate change and the role of greenhouse gas emissions
but do not provide directly on for the CDM or voluntary carbon markets. Only the Energy Act (2006) provides explicitly for the
Minister of Energy to use the CDM and carbon trading to promote renewable energy.
Vision 2030, Kenya’s development plan to transform the country to middle-income status by the year 2030, includes a goal under
environmental management to attract “at least five Clean Development Mechanisms (CDM) projects per year in the next five years.”
However, measures to be taken to implement this are not elaborated.
In April 2010, Kenya finalized its National Climate Change Response Strategy (NCCRS), which was a collaborative effort led by the
Ministry of Environment and Mineral Resources (MEMR). The strategy includes a budget with proposed climate change projects
and programmes as well as recommendations on CDM and Reducing Emissions from Deforestation and forest Degradation.
Currently, the MEMR has divided further development of the strategy into an elaborate Action Plan through eight sub-components,
which have been contracted out to external consultants.
The Ministry of Finance in 2011 prepared a draft National Policy for Carbon Investments and Trading, which could bring significant
changes to the Kenyan market and should have more inputs from stakeholders before it is adopted.

3.2. Key institutions

The Ministry of Environment and Mineral Resources is in charge of climate change issues and is the country’s focal point to the
UNFCCC. An inter-ministerial committee on environment coordinates climate change issues between government bodies and other
stakeholders, and includes technical committees such as the National Climate Change Activities Coordination Committee (NCCACC),
for which the National Climate Change Coordinating Office in MEMR is the secretariat.
The National Environment Management Authority (NEMA), established under EMCA 1999, acts as the principal instrument for the
implementation of government policies relating to the environment. NEMA is housed in MEMR, and hosts the Designated National
Authority (DNA), which is responsible for CDM regulation and promotion in Kenya.
The Kenya Forest Service (KFS) is designated as the government body responsible for REDD in the country. Kenya is participating
in both the World Bank Forest Carbon Partnership Facility (FCPF) and the United Nations REDD Programme (UN-REDD), and is
formulating a National REDD Readiness Plan, strategy and implementation framework under the former.
The Climate Change Coordination Unit (CCCU) in the Office of the Prime Minister is playing a supervisory role as a key promoter of
climate change mitigation and adaptation activities in Kenya. While the CCCU does not involve itself directly in CDM projects, the
Office of the Prime Minister is responsible for administering the Water Towers Conservation Fund established in 2010 to help
finance forest protection initiatives. This and other similar funds may in the future be linked to climate finance.
The Ministry of Finance is responsible for formulating financial and economic policies. At present there are no specific fiscal or
taxation requirements for CDM projects and carbon credit revenues, although Ministry officials have indicated that such may be
implemented in the future. In 2010, the national budget speech by the Minister of Finance included plans for a carbon credit
investment framework in Kenya, with the establishment of an emission trading scheme as one of the priorities for fiscal year
2010/2011.
The Kenya Investment Authority (KIA) has an indirect role in promoting investment in the underlying assets of CDM and REDD
projects in Kenya.

3.3. The Designated National Authority

Kenya’s DNA office became operational around 2005. The Director General of NEMA is the official contact point for the DNA,
which is staffed by a secretariat of NEMA personnel. The 2001 Kenya National Guidelines on the CDM provide guidance for the
eligibility of CDM projects in Kenya and set out the institutional framework for a CDM National Clearing House (NCH) for the
processing of CDM proposals and the issuance of Letters of Approval by the DNA.
On the basis of a CDM Project Idea Note (PIN) or draft Project Design Document (PDD), the DNA can issue a Letter of No
Objection, normally within one to two months. The Letter of Approval and/or authorization can take a bit longer (three to four

5
months) and is usually obtained prior to or during the CDM validation process, although the project proponent must also show
that they have received the Environmental Impact Assessment License, if applicable.
Kenya’s DNA office has more than five years of experience in the appraisal and approval of CDM projects. The process is fairly
standardized. A list of sustainable development criteria against which a project can be assessed is available. A record of meeting
minutes and DNA decisions can be provided upon request. The DNA has no requirements with regards to voluntary market carbon
projects.
The DNA does face human resource challenges in terms of a busy work schedule and high staff turnover, which often results in
loss of institutional memory and delays in approving projects. The DNA has also not been as proactive as it could be with regards
to, for example, identifying a list of small-scale technology types that could be classified as automatically additional (as permitted
under CDM rules) or the determination of baseline emissions in different sectors. However, in general the regulatory environment
in Kenya supports the development of CDM projects and the use of carbon finance. This is also due to the country’s broader
investment laws and climate.

6
 Analysis of the Carbon Market Landscape in Kenya

4. Carbon markets in Kenya

4.1. The Clean Development Mechanism
In November 2006, the first Kenyan project began the CDM validation process. Almost two years later in September 2008, it became
Kenya’s first registered CDM project, the “35 MW Bagasse Based Cogeneration Project” by Mumias Sugar Company Limited. The
next project was not registered until March 2010, but since then there have been an increasing number of new projects and
Programmes of Activities applying for CDM registration.
Figure 1: Number of new CDM projects and programmes starting validation in Kenya

12

10
Number of projects

0
2005 2006 2007 2008 2009 2010 2011

CDM projects Year

CDM programmes Total CDM

The sudden jump in CDM projects starting validation in 2009 was due to seven World Bank-supported small-scale reforestation
projects by the Greenbelt Movement entering the pipeline at the same time.
st
As of 1 November 2011, the country has five registered CDM projects: two geothermal power plants, one wind farm and one
reforestation project in addition to the aforesaid biomass cogeneration project. Another 16 projects are undergoing validation,
and one project is currently subject to a request for review. Furthermore, at least 20 projects have submitted CDM Prior
Consideration forms indicating that they intend to apply for CDM registration. In total, CDM projects that are registered,
requesting registration or under validation are expected to reduce greenhouse gas emissions by 2.45 million tCO2e before the end of
2012 and by more than 16 million tCO2e by the end of 2020.
The pipeline in Kenya is expected to increase dramatically between November 2011 and mid-2012 due to the number of projects
rushing to meet the 2012 CDM registration deadline for continued access to the European Union Emission Trading Scheme (EU-ETS).
Carbon Africa estimates at least 15 new projects and programmes entering validation in the last quarter of 2011 and the first two
quarters of 2012, increasing the current pipeline by about 35 .
Table 1: Registered CDM projects in Kenya
CDM Name Type Registration Owner Annual Carbon buyer
number date emission
reductions
(tCO 2 e)

1368 “35 MW Bagasse Based Biomass energy 2 Sep 2008 IPP 129,591 Japan Carbon
Cogeneration Project” by Finance (Japan)
Mumias Sugar Company Limited
(MSCL)

4740 Olkaria III Phase 2 Geothermal Geothermal 4 Mar 2010 IPP 177,600 n/a
Expansion Project in Kenya

2448 Olkaria II Geothermal Expansion Geothermal 4 Dec 2010 Govt 149,632 World Bank
Project

6404 Lake Turkana 310 MW Wind Wind 28 Feb 2011 IPP 736,615 n/a

7
 Power Project

5123 Aberdare Range/ Mt. Kenya Reforestation 11 Jun 2011 NGO 8,542 World Bank
Small Scale Reforestation Biocarbon Fund
Initiative - Kamae-Kipipiri Small
Scale A/R Project

In addition to single CDM projects, there are five CDM Programme of Activities currently under validation in Kenya, and a
Ugandan-based PoA that includes one of its first sub-projects in Kenya. Project proponents are developing PoAs for a variety of
reasons:

» Reduced unit transaction costs

» Better applicability to smaller scale or decentralized activities
» It is possible to include multi-country activities
» Post-2012 EU market eligibility for registered PoAs in Kenya
» PoAs are seen as the precursor to sectoral approaches and NAMAs
Table 2: CDM Programme of Activities under validation with at least one sub-project in Kenya
CDM ID Name Type Validation Managing ERs to Carbon buyer
start entity 2012

PoA0062 Improved Cook Stoves for EE stoves 11 Nov 2010 Uganda Carbon 0 in Kenya n/a
East Africa Bureau

PoA0070 Efficient Cookstove EE stoves 25 Dec 2010 Co2balance 65,600 n/a

Programme: Kenya

PoA0118 KTDA Small Hydro Small hydro 27 Aug 2011 Kenya Tea 0 n/a
Programme of Activities Development
Agency

PoA126 Barefoot Power Lighting Solar LEDs 7 Sep 2011 Barefoot Power 20,300 n/a
Programme

PoA154 Kenya Improved EE stoves 22 Oct 2011 Climate Pal 16,400 EcoAct (France)
Woodstoves project

PoA156 Green Light for Africa EE lighting 25 Oct 2011 Standard Bank 19,900 Standard Bank
(UK)

Kenya’s current CDM pipeline of single CDM projects makes up 11.6 of the total African pipeline and is the biggest on the continent
after South Africa. The CDM PoA pipeline is similar, with South Africa leading with 20 projects and Kenya in second place with
six.
Table 3: African CDM project pipeline (PoAs and countries with less than 4 projects not shown)
Country Registered At validation Total

South Africa 20 31 51

Kenya 5 17 22

Egypt 10 7 17

Morocco 6 11 17

Uganda 5 9 14

Nigeria 5 8 13

8
 Analysis of the Carbon Market Landscape in Kenya

Tanzania 1 6 7

Tunisia 2 3 5

Senegal 1 4 5

DR Congo 2 2 4

Madagascar 1 3 4

Ghana 0 4 4

Rwanda 3 1 4

Cameroon 2 2 4

A broad range of sectors are covered by CDM projects and PoAs in Kenya. In terms of renewable energy, technologies include
wind, large and small hydro, geothermal, biomass (fuel switch and cogeneration) and solar LED lighting. Household level energy
efficiency and renewable energy projects (cookstoves, lighting and biogas) are next in importance. One site in particular
(Aberdares National Park) has a number of small-scale CDM reforestation activities, although forest and agriculture-related
mitigation is more covered by the voluntary carbon markets in Kenya. One cement clinker replacement project rounds out the CDM
pipeline in Kenya. Sectors that are absent include those involving industrial gases, mining, transport and municipal waste
management, the former two due to the lack of such activities in Kenya and the latter perhaps because they traditionally fall under
the public sector and have more complex institutional requirements.
Figure 2: Distribution of CDM project and programme pipeline in Kenya by type

Solar Methane
4% avoidance
Cement
Reforestation
4%
24%
Geothermal
7%

Hydro
11%

Wind
11% Biomass energy
21%

EE households
14%

The regional breakdown of CDM projects and CDM Programmatic Activities (CPAs) under a PoA in Kenya is provided below, and is
somewhat representative of where renewable energy resources (for power plants) and higher population densities (for household
efficiency projects) are found. There is a notable absence of projects in Coast Province, which does have good CDM potential in
areas such as fuel switch in industry, waste heat recovery, renewable energy, cement, biomass cogeneration and household energy
efficiency. Coast Province does, however, have a number of voluntary market carbon projects and is expected to enter the CDM
pipeline soon as developers move to beat the 2012 “deadline” for CDM registration.

Name of province Number of projects or programmes in CDM pipeline

9
Central 10

Coast 0

Eastern 6

Nairobi 0

North Eastern 0

Nyanza 1

Rift Valley 3

Western 4

More than one province 4

Of the four registered CDM projects in Kenya that involve substantial investment, three are already commissioned and operational.
The investment costs of these as per the CDM project documentation are as follows:

» $20 million – 35 MW Bagasse Based Cogeneration Project at Mumias

» $76.3 million – 48 MW Olkaria III Phase II Geothermal Expansion Project
» $90.2 million – 35 MW Olkaria II Geothermal Expansion Project
As such, to date more than $185 million of investment in renewable energy in Kenya has been facilitated in part by the CDM.
Looking forward, if all other projects in the Kenyan CDM pipeline are successfully registered by 2012 and implemented, this would
lead to additional investment of at least – since not all information is available for all projects – $887 million by 2013. As the CDM
pipeline is expected to increase by 35 or more from the current level to beat the 2012 registration deadline, it is possible that
total project financing under the CDM in Kenya could reach $1.5 billion by 2020. However, project developers will have to work
diligently and the Kenyan DNA may need to fast-track its approval procedures in order to achieve this potential.
In terms of total revenue from the commercialization of CERs in Kenya, if we assume a very conservative price of 5.00 per CER, for
projects already registered by the CDM alone aggregate annual income will be more than 6 million and will exceed 52 million in
total by 2020.
If CDM projects and Programmes of Activities with first CPAs under validation or requesting registration are included, total
emission reductions by 2020 in Kenya will reach 18 million tCO2e and generate more than EUR 90 million in revenue.
The above figures do not consider carbon credit revenue from voluntary market projects, so with the conservative price it is
reasonable to assume more than EUR 100 million in carbon credit income to projects in Kenya by 2020.

Figure 3: Investment in underlying projects in the CDM pipeline in Kenya according to Project Design
Document data and timelines

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 Analysis of the Carbon Market Landscape in Kenya

600

488
500
Investment in USD (millions)

400

300

170
200

100
47

0
2008 2009 2010 2011

Year

4.2. Voluntary market projects

The two voluntary market standards most widely applied in developing countries around the world are also preferred by project
developers in Kenya, namely the Gold Standard (GS) and the Verified Carbon Standard (VCS). The Climate, Community and
Biodiversity Alliance (CCBA) Standards are also often added to VCS forestry projects to provide third-party certification of the
social and biodiversity benefits.
A small number of CDM projects in Kenya are pursuing parallel registration under voluntary market standards to achieve price
premiums, such as the Lake Turkana 310 MW Wind Power Project (Gold Standard), the Nairobi River Basin Biogas Project (Gold
Standard) and the Aberdares small-scale reforestation initiatives (CCBA). These projects are, however, the exception, especially
as the additional value of CDM plus voluntary standard registration is not what it used to be (although recently the average Gold
Standard carbon price exceeded that of secondary market CDM certificates). Instead, project developers in Kenya who use
voluntary market standards do so for other reasons:

» No applicable CDM methodology exists

» Project is not likely to achieve CDM registration (e.g. 2012 deadline issue)
» Lower carbon project development costs
» Project is too small to make the CDM worthwhile
» Developer has already targeted a voluntary market buyer or expects a price premium
» Pre-registration VERs resulting from start of project implementation earlier than CDM registration
As an example of the voluntary market potential, there are currently 14 Gold Standard Verified Emission Reduction (VER) projects
in the pipeline, of which six are registered.
Table 4: Registered Gold Standard projects in Kenya
Gold Name Type Registration Province Annual Carbon
Standard date emission developer
ID reductions
(tCO 2 e)

462 Gachiki Community Small Hydro, Mini hydro 25 Oct 2010 Central 1,968 JP Morgan
Kenya

824 Shimba Hills Improved Eenergy 24 Jan 2011 Coast 41,944 co2balance
Cookstoves efficiency
(EE)
household

11
 825 Likoni Improved Cookstoves EE 24 Jan 2011 Coast 4,924 co2balance
household

827 Shimoni Improved Cookstoves EE 24 Jan 2011 Coast 4,922 co2balance

household

843 Kisumu Improved Cookstoves EE 24 Jan 2011 Nyanza 30,149 co2balance

household

886 Sustainable Deployment of the EE 4 Feb 2011 Western 2,073,328 Vestergaard

LifeStraw Family in rural household Frandsen
Kenya

Even though emission reduction or sequestration projects applying voluntary market carbon standards are sometimes seen as being
of secondary importance to the CDM, they are pioneering carbon transactions in sectors of relevance to Kenya, such as avoided
deforestation, and on a case-by-case basis are delivering real emission reductions and attracting carbon finance to Kenya. A good
example of the carbon potential is the privately-developed Rukinga REDD+ phase I project near Tsavo in Kenya that is jointly VCS
and CCBA-certified, has annual emission reductions of approximately 250,000 tCO2e and is the first project in the world to have
issued VCS Verified Carbon Unit (VCU) certificates. Both Nedbank and BNP Paribas have signed carbon offtake agreements with
the project.
As the chart below shows, the voluntary carbon market is playing a particularly important role in the domestic energy efficiency
(e.g. cookstoves and water filters) and forestry sectors in Kenya, which are sometimes related as they reduce the unsustainable
consumption of non-renewable biomass.
Figure 4: Projected annual average emission reductions (in tCO 2 e) from voluntary project pipeline in Kenya
by type and standard

2000
56,636 1,968

GS EE household

VCS REDD
1,866,391
VCS Afforestation

GS Other

2,762,886 GS Renewable energy

In addition to the above, there are pilot activities in Kenya to prepare agricultural and soil carbon projects. The first is called the
Kenya Agricultural Carbon Project that is being implemented by a Swedish NGO, Vi Agroforestry, with support from the World
Bank and participation in carbon credit off-take from the World Bank’s Bio-Carbon Fund. The second is being led by the World
Agroforestry Centre (ICRAF) in dryland areas of Kenya.
While the voluntary market focus to date is on the generation of carbon credits for buyers outside of Kenya, recently a number of
Kenyan companies have also begun measuring their carbon footprint and offsetting via CDM and voluntary market projects. For
example, Kenya Airways in mid-2011 launched a Carbon Offset Program for its passengers in cooperation with the International Air
Transport Association (IATA) and is planning to offset initially via pre-CDM voluntary emission reductions (VERs) from
geothermal projects in Kenya.

4.3. Carbon developers and buyers

12
 Analysis of the Carbon Market Landscape in Kenya

There are a good and increasing number of carbon credit developers and carbon buyers active in Kenya, both in the CDM and
voluntary markets. Most of these have entered the market in the last three years, although ClimateCare, Camco, ECM Centre and
the World Bank in particular are notable for their longer presence as carbon actors in Kenya. Private entities make up the
majority of both developers and buyers, although a small number of donor, NGO and sovereign developer and buyer institutions are
involved. A number of carbon developers have their headquarters in Nairobi and can be considered to be locally based. Four or five
of these are Kenyan-owned and operated.
Table 5: Select list of carbon developers and buyers active in Kenya
st
Name Type Relevant 1 year of carbon interest or Carbon
office(s) presence in Kenya standards

ClimateCare Developer, Buyer Nairobi, London 2007 CDM, GS

Camco Kenya Developer, Buyer Nairobi, London 2002 CDM

Viability Africa Developer Nairobi 2010 CDM, GS

Carbon Africa Developer Nairobi 2009 CDM, GS

ECM Centre Developer Nairobi 2005 CDM

co2balance Developer Nairobi, Mombasa, 2008 GS

London

Climate Pal / Carbon Developer Nairobi 2009 CDM

Manna

Cool NRG Developer Nairobi 2011 CDM

Low Carbon Development Developer Nairobi 2010 CDM

Atmosfair Developer Germany 2005 GS

myclimate Developer Switzerland 2002 GS

Hivos/SNV Developer Netherlands 2010 CDM, GS

Uganda Carbon Bureau Developer Kampala 2009 CDM, GS, Plan

Vivo

African Development Developer, Buyer Tunis n/a CDM

Bank (AfDB)

KfW Buyer Nairobi n/a CDM

The Paradigm Project Developer Nairobi 2010 GS

JP Morgan Buyer Nairobi, London 2009 CDM, GS

EnBW Project owner, Germany 2009 CDM

Developer, Buyer

Standard Bank Developer, Buyer London 2009 CDM

World Bank Developer, Buyer Washington 2005 CDM

Japan Carbon Finance Buyer Japan 2007 CDM

Wildlife Works Developer Nairobi n/a VCS, CCBA

Clean Air Action Developer USA 2007 VCS, CCBA

Corporation

BEA International Developer Nairobi 2005 CDM

13
Promethium Carbon Developer Johannesburg 2008 CDM

Kengen Project owner, Nairobi 2002 CDM

Developer

14
 Analysis of the Carbon Market Landscape in Kenya

5. Barriers to CDM project development

Since 2008, Kenya has witnessed upward momentum in the development of carbon projects and programmes, both under the CDM and
voluntary market standards. However, there are also a significant number of potential CDM projects that have either not
commenced as expected or were stalled or abandoned prior to successful registration.
For example, in 2007, before Kenya had its first registered CDM project, a GTZ regional report and the CDM pipeline database
st
identified at least 16 projects seeking CDM registration. Of these, as of 1 November 2011, three (all backed by the World Bank)
had achieved CDM registration, two are still under validation, eight had failed to proceed, two were rejected/terminated during
CDM validation and one opted for voluntary market certification. In 2011, a reforestation project became Kenya’s third project to
fail during the CDM validation phase.
Table 6: Current status of projects in Kenya that were considering the CDM as of 2007
Project name or description Location Annual Project Status as of November
CERs proponent 2011

1 30 MW wind farm Kinangop n/a Ecogen Project sold to new owners,

Windfarm Ltd under validation

2 Charcoal from sugar cane n/a n/a Cheng Yong Project failed
bagasse Company Ltd

3 Replacement of fuel oil with Meru 100,000 Michimukuru & Project failed, now
renewable biomass Kiegoy tea considering a wind farm
factories

4 Small-scale reforestation Country wide n/a TIST Registered under voluntary

market standards

5 Oil to biomass fuel switch in n/a n/a n/a Unknown

factories

6 Jatropha biofuel Migori and n/a n/a Project under development

Malindi but in Malindi not as a carbon
project

7 50 MW wind farm Ngong Hills n/a n/a Project still under

development

8 Jatropha biofuel Msambweni n/a n/a Project failed

9 Replacement of motorized n/a n/a Kick Start? CDM development stopped

water pumps with treadle
pumps

10 7.5 MW sugar cane bagasse Nyando n/a Chemilil Sugar Project still under
co-generation Company development, will likely not
meet 2012 CDM deadline

11 Solar PV project n/a n/a n/a Project implemented but not

as a carbon project. It is
possible that the credits were
bought by John Deer

12 Aberdares reforestation Aberdares Various Greenbelt One of 7 sub-projects has

projects 1-7 Movement been CDM registered

13 Olkaria III Geothermal Hell’s Gate n/a Kengen CDM registered

14 Olkaria II Geothermal Hell’s Gate n/a Kengen CDM registered

15 60 MW Sondu Miriu Hydro Nyanza 211,000 Kengen CDM validation negative

Power Project

16 Conversion of Kipevu Open Coast 45,000 PDD consultant CDM validation terminated

15
 Cycle Gas Turbine World Bank

The above reveals a historic no-start or failure rate of more than 50 , which indicates that barriers do still remain to successful
CDM registration and/or project development and implementation. An overview of the barriers is provided, although it should be
noted that some are universal to the CDM irrespective of the host country and are not specific to Kenya per se.

5.1. Barriers to successful CDM participation

Lack of awareness of the CDM requirements
While awareness raising activities and trainings with regards to the CDM have been a regular feature in Kenya for some years and
there is general awareness of carbon credits, there a lack of understanding of the CDM process and its requirements. This leads
certain project proponents to neglect the CDM potential or not consider carbon credits until it is too late and on the other hand
leads to raised or unrealistic expectations of carbon income on the part of some developers.

High CDM costs and lack of funds/appetite to pay for such and take on CDM risks
CDM investment costs and in some cases risks are relatively high and this is an evident barrier in Kenya. On the one hand, there
are those project developers who wish to apply for CDM registration but lack the resources to pay for the CDM cycle costs. Even
well-established institutions sometimes do not have the funds to undertake CDM development. For example, the Kenya Electricity
Generating Company (KenGen) as early as the year 2000 submitted CDM proposals to both the Japan Carbon Fund and the
Government of Belgium, but were told to cover the CDM documentation costs first. This was not an option for KenGen and hence
the projects did not pursue CDM registration. On the other hand, there are those who have the necessary capital but choose for
one reason or another (e.g. no risk appetite, other investment priorities) not to undertake CDM development.

Absence of appropriate methodologies and/or baseline data

In some sectors with good potential for emission reductions in Kenya (such as transport), there are no appropriate approved
methodologies that a project can apply to generate and monitor CERs and the process of developing a new methodology is long,
expensive and risky. Similarly, for certain methodologies and project developers, up-to-date, objective and transparent data and
information from reliable sources on baseline emissions (e.g. on traditional biomass use) is not readily available and this introduces
both costs of obtaining such data and risks that the project will be rejected or carbon credit volumes will be reduced during
validation or monitoring and verification due to a lack of supporting evidence.

Mistakes in carbon development

Three potential CDM projects in Kenya entered the validation stage (e.g. contracted and paid for an external auditor – which is
evidence of their commitment to reach CDM registration) and failed before achieving registration. Two of these were terminated
during validation likely due to the realization that they were not adequately able to reply to the auditor’s questions or that there
were faults in project design that could not be rectified. The third received a negative validation opinion.
In addition to the above projects that did not pass the validation phase, a number of CDM and voluntary market projects and
programmes that are being prepared or have entered validation have weaknesses with regards to additionality, conservativeness
and emission reduction calculations. This is often due to project developers underestimating the auditing requirements for CDM
projects. While validators and the CDM Executive Board may have been more lenient in the past in an effort to help facilitate more
CDM development in Kenya, it can be expected that quality control will become more stringent and those projects with poorly
prepared CDM documentation will face more risks of delays or rejection.

Underlying project is abandoned

In a number of cases (see for example Table 6), the CDM application process did not commence or was halted because the underlying
project that would generate the CERs did not make it past the conception, feasibility or development phase.

5.2. Barriers to underlying project development

While this short analysis is not able to describe in detail the barriers to the realization of the projects that could generate
carbon credits themselves, a summary of the main issues is provided.

Access to finance
While access to finance is improving as more and more investors (both indigenous and foreign) look to Africa as an investment
destination, it still remains one of the main barriers. Early risk stage capital for project development is hard to come by, as many
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 Analysis of the Carbon Market Landscape in Kenya

local entrepreneurs lack sufficient resources and foreign early stage investors may have unrealistic expectations of what can be
accomplished within a certain timeframe. In addition, early investment in other ventures in Kenya (such as real estate) can provide
higher and quicker returns with less risk than an investment in a wind farm, a solar LED light distribution project or a REDD
initiative. The potential and risks of small scale or distributed projects is also not well understood by many investors or banks,
and there is not much local expertise to assess projects developed on a non-recourse basis. Lastly, many projects require amounts
of capital that are too small to attract larger investors but too big to be eligible for microfinance or donor support.

Lack of project developer experience

Project developers themselves are also partially to blame for being unable to overcome barriers to project development due to a
lack of experience. This is again evident in the number of projects that could seek CDM registration that have delayed or failed
along the way. As a further example in the renewable energy sector in Kenya, more than 50 projects have been granted a
development license by the Ministry of Energy for a site under the Feed-in Tariff Policy, but not a single one of these reached
financial closure.

Political and institutional barriers

Political and institutional risks in Kenya negatively impact on the enabling environment and on the development and implementation
of potential CDM projects. The key concern relates to the uncertainty of the regulatory process in some sectors and the
likelihood that it can be affected by political regime changes. Other concerns include favoritism, cronyism, corruption, lack of
transparency in decision making, lack of adherence to guidelines and regulations, and the possibility of having project licenses
revoked. A case in point is that in which a new sugar mill has been permitted to start operations within close proximity of an
existing mill, in total disregard of existing laws. There are also ‘invisible’ risks such as those of poor governance and entrenched
interests, which can delay the approval and permitting requests of projects at various stages. Private sector and civil society
participation in CDM projects in Kenya is currently encouraged by the government but certain changes under consideration in
Kenya (e.g. taxation and revenue share on CER streams) may result in increased administrative burden and costs and lower returns
for CDM developers and buyers.

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6. Potential for carbon market growth
As described above, both the CDM and voluntary carbon markets in Kenya have since 2008 shown increasing activity in terms of
carbon project development, successful registration and transactions, carbon credit volumes, capital investment and
diversification of sectors and sizes of projects. In 2011 to date already 11 new CDM projects and programmes have entered the
pipeline as compared to only one project in 2006 and 2007, and 15 projects have submitted CDM Prior Consideration forms in the 10
months from the start of the year. Project developers are also increasingly using the CDM Programme of Activities framework as
a preferred approach especially in the distributed household energy efficiency and renewable energy sectors as evidenced by the
five Programmes that have started validation since December 2010. In the short-term, Kenya is positioned to become Africa’s second
largest participant in the CDM.
This recent growth is supported in part by new developments in the enabling environment, such as the adoption of the Kenyan
renewable energy Feed-in Tariff Policy in 2008, and later updated in 2010, which has helped promote investment in projects that in
almost all cases may also qualify under the CDM.
Table 7 below lists those project types with good potential for emission reductions and credit generation under the CDM and
voluntary markets.
Table 7: Sectors with carbon credit potential in Kenya
Sector Project/Activity

Energy supply and » Energy efficiency (supply side, demand side-domestic, industrial and outdoor)
consumption » Fuels switching
» Renewable energy (hydropower, solar, wind, biomass, geothermal, biogas)
Manufacturing » Fuels switching in industrial applications
» Industrial energy efficiency
» Structural change to less energy/emission intensive industries
» Charcoal production (methane emission reduction, renewable charcoal)
» Cement industry (waste energy recovery, cement blending)
» Methane avoidance and recovery in organic liquid and solid waste
» Renewable energy from industrial waste (saw dust, coffee wastes)
» Biofuel production
Agriculture and forestry » Afforestation and reforestation
» REDD+
» Biofuel production
» Animal manure management
Transport » Improved urban planning and traffic management
» Improved vehicle efficiency
» Modal shift in transport from road to rail
» Mass rapid transit such as improved public transport
Residential, commercial and » Renewable energy (solar, wind, hydropower)
government buildings » Fuel switching in households
» Energy efficient building design
» Energy efficiency and management (efficient lighting, boiler insulation)
» Waste management

Apart from the transport and waste management sectors, CDM or voluntary market projects and programmes are being developed
or planned in almost all the areas listed.

6.1. Post-2012
Unfortunately, the recent growth witnessed in the Kenya market and the potential for further project-based carbon market
developed is severely threatened by the EU Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009,
which substantially reduces the global compliance market for CERs from Kenya. According to the Directive, if no binding
international agreement is reached by the end of 2012, CERs from CDM projects in non-Least Developed Countries (LDCs) that are

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 Analysis of the Carbon Market Landscape in Kenya

not registered by 2012 will not be accepted into the EU ETS, by far the world’s biggest carbon market. Such CERs will only be
accepted if there is a separate bilateral agreement between the EU and the CDM host country in question.
The impact of this Directive is already apparent as there is a rush by project developers to achieve CDM registration in Kenya
before the end of 2012 and carbon buyers are less and less inclined to give upfront payments for CERs in Kenya from projects that
face registration risks.
Non-LDCs such as Kenya hosting post-2012 registered CDM projects have four options to ensure continued market access for such
CERs:

» Agreement of a bilateral treaty with the EU. As the modalities for such as treaty have not been defined, this is not likely to
be a solution earlier than 2013/14.

» Request for exemption of African non-LDCs from the Directive. Kenyan could lobby with other African non-LDCs for an
amended or exemption to the Directive, although this would be politically difficult as the EU may not be able to support
regional favoritism.

» Ensure the registration of Programme of Activities before 2012. If a broad enough range of Programme of Activities covering
different sectors and methodologies are registered before the end of 2012, post-2012 CDM sub-projects could in theory be
added to the Programme for a period of 28 years. This has been confirmed by the EC DG Climate in a 23 June 2011 letter to the
Project Developer Forum and number of CDM developers are already taking this approach, although the EU has reserved the
right to place other eligibility restrictions on Programmes of Activities in the future if it thinks it is warranted.

» Seek non-EU-ETS markets for Kenyan CERs. European and other sovereign buyers with targets under the Kyoto Protocol, as
well as the Australian emissions trading scheme (to be operational from 2015) offer possible alternatives, albeit with lower
levsl of demand.

» Switch to the voluntary carbon market. This is a viable option for post-2012 carbon projects. However, other than those
projects that deliver ‘branded’ (i.e. well-certified) VERs, the price attracted is likely to be low.
Another factor influencing the poor Kenyan carbon market outlook is the current uncertainty in carbon credit value, as the
economic events in Europe have pushed down the CER price to its lowest levels ever in Q4 2011. While according to most analysts
prices are expected to rise post-2012, the low price provides a negative signal to many potential CDM project owners and carbon
buyers. It also makes fixed-price Emission Reduction Purchase Agreements (ERPAs) harder to achieve, so that CER revenue streams
cannot be as easily used as an asset or collateral to leverage project finance.
All of the above point to a significant reduction in the potential of the CDM to deliver carbon finance and facilitate project
investment in Kenya. New market participant entry will similarly be curtailed and existing CDM project developers will focus on
ensuring delivering of existing CDM assets and diversifying into new areas.

6.2. New initiatives underway or proposed to attract carbon or climate finance

In contrast to the negative outlook for the CDM markets, a number of new developments are occurring in Kenya that provide some
examples of what the climate finance landscape might include (apart from registered CDM projects and programmes) post-2012.

Establishment of a carbon or climate exchange

March 2011 saw the establishment of the Africa Carbon Exchange (ACX) in Kenya, the second on the continent after the African
Carbon Credit Exchange in Lusaka, Zambia. The ACX, which is a private initiative with close ties to the government, has replaced
earlier informal discussions among a range of stakeholders regarding a Nairobi Carbon Exchange. The exchange aims to replicate
those in place elsewhere in the world and facilitate the transaction of greenhouse gas allowance trading with price
transparency. The plan is to have a registry and trading platform that seeks to match orders for buying and selling, not only for
projects in Kenya but for all African countries. At present the legal and technical infrastructure of the exchange are still being
developed and there are no active participants from either the buy or the sell side.

The potential of the idea of a climate exchange in Kenya is good. However, a number of critical questions remain, such as:

» How exactly will the exchange’s infrastructure work – will it be a real exchange or more of a clearing house like the CDM
Bazaar?

» Is there really enough supply of carbon credits and liquidity on the market to warrant an exchange?
» What will be the role of the government in participating in or regulating the exchange?
» How will the exchange deal with smaller carbon credit volumes and address the transaction costs for market participants?
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 » How will the exchange ensure quality control and transaction security?
» Will the exchange be exclusively focused on carbon credits (CERs and VERs) or will it also aim to play a role in attracting
future public climate finance?

» How will the exchange address the administrative requirements regarding the ownership and transfer of CERs under CDM
rules?
A well thought-out and properly developed exchange could help to increase buyer awareness of projects in Kenya and local
project participation in the carbon markets. It could also be a potential conduit for future public finance and possibly for the
monitoring, reporting and verification of emission reduction activities. However, the above questions remain to be answered and it
will likely be three to four years before a real exchange could become functional and attractive to participants.

Government-led sectoral efforts, policy PoAs and NAMAs

There are a number of efforts underway to increase government involvement in emission reduction activities in Kenya. Concrete
programmes include for example a draft regulation that will require all new buildings in Kenya to install solar water heaters and
a broad initiative from the Prime Minister’s Office for a kerosene-free Kenya. These and other activities could be developed under
a “policy” CDM Programme of Activities and hence apply for carbon credits (keeping in mind the 2012 registration deadline), or could
become part of future Nationally Appropriate Mitigation Actions (NAMAs) that the government is preparing with support from
consultants. Sectoral approaches may also facilitate the participation of certain emission reduction activities that have been
absent under the CDM in Kenya, such as in the transport sector.

Forest conservation funds

In July 2010, the Minister of Finance gazetted the Water Towers Conservation Fund, with an initial capitalization of KSh 50 million
(~ 500,000) and the primary aim of allocating funding to the preservation of the Mau Forest Complex and other threatened primary
forests in Kenya. While the initial monies for the fund come from public sources (government and donor), there is scope for any
revenues from carbon credit commercialization from avoided deforestation activities to be reinvested in the fund. There are now
further attempts in the exploratory phases to set up larger forest funds for Kenya that will likely include planned carbon and
climate finance from private and public monies.

Voluntary market projects

As described above, Kenya hosts the world’s first registered REDD+ project that has been issued VCUs under the Voluntary
Carbon Standard. The country also boasts the world’s first agricultural soil carbon project, which has inked an agreement with
the World Bank’s BioCarbon Fund. These examples show that even as the CDM is likely to lose its importance as a carbon finance
mechanism in Kenya, there may be alternative project-based approaches, although in the short-term these are still likely to be
developed on an ad hoc basis rather than under a broader national or global framework that would allow for more certainty in
attracting climate finance and in the monitoring of emission reductions.

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 Analysis of the Carbon Market Landscape in Kenya

7. Recommendations
In order to overcome the existing barriers to CDM project development, improve the carbon market outlook and ensure that the
private sector has continued incentive to participate in the evolution of greenhouse gas emission reduction activities in Kenya (such
as the shift from project to sectoral approaches and the increase in the importance of public climate finance, government
participation and monitoring and verification), the following recommendations are proposed:

Lobby with other non-LDC African countries While this might not be possible to achieve immediately and is subject to political
for an EU exemption to Directive 2009/29/EC sensitivities, it could be very useful for an African non-LDC bloc to start such
discussions with the EU, perhaps even at the Durban Conference of the Parties.
Establish seed capital funding for carbon There are a number of donor-funded initiatives to provide CDM development funding
and underlying project development (e.g. the African Carbon Asset Development Facility and the AfDB) and project
development capital (e.g. the Africa Enterprise Challenge Fund and the Energy and
Environment Partnership Africa) to which Kenyan projects can apply, but these
could be supplemented.
Increase DNA’s activities in CDM promotion The Kenyan DNA working with other relevant entities (e.g. Ministry of Forests for
activities, including emission baseline biomass, Ministry of Transport for transport) could conduct updated studies on
setting and CDM awareness creation baseline GHG emissions in different sectors, which could be relevant not only for
activities CDM and voluntary market projects but also for the development of nationally
appropriate mitigation actions. Also, the DNA should provide sectoral awareness
and promotional activities, and, with an increasing number of CDM projects
entering the pipeline, should install procedures (e.g. more frequent committee
meetings) to fast-track issuance of Letters of Approval
DNA designation of certain projects as With regards to small or micro-scale projects in the renewable energy and other
automatically additional sectors, the DNA could designate a list of technology types that are automatically
additional under the CDM. If this is not done soon it may have little impact on CDM
development, but again it could be a useful exercise linked to future NAMA
activities.
Provide financial incentives to project Such incentives could include tax breaks and concessions and more favourable
owners for investment in underlying import tariffs on for example technologies that reduce GHG emissions, something
projects that reduce or remove GHG that has been considered for a long time by the government but only partially
emissions implemented to date.
Enabling policy framework should promote The draft carbon emissions and trading policy and law should be formulated to
both public and private sector participation promote continued participation of both the public and private sectors. The private
sector has gained significant experience in developing and managing carbon assets
and can help to ensure continued access to carbon and climate finance and
monitoring and verification for such
Design “policy PoAs” based on the CDM that Quick win policy CDM PoAs could be developed by public and/or private actors
can be converted into NAMAs in the future based on existing CDM rules and methodologies and these could generate CERs and
be the precursor of NAMA activities that would attract more public climate finance
in the future. A policy PoA could be a good way for the public and private sectors
to cooperate and define their respective roles. However, time is running out for
such a PoA.
Provide financial or other support to local While a small number of local banks have experience in project finance and a larger
banks to lend to CDM and climate mitigation number in micro or trade finance, many are reluctant to lend to renewable energy,
projects energy efficiency and other potential CDM projects. Banks could be encouraged to
provide debt to such projects through, for example, credit support facilities.
Including climate/carbon finance and Relevant post-secondary subjects such as in finance, economics, engineering and
project development training in university project management could include carbon project development, monitoring and
curricula in Kenya climate finance

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