Download CLIMATE CHANGE MITIGATION AND TRADE

CLIMATE CHANGE MITIGATION AND TRADE COMPETITIVENESS
AN ASSESSMENT OF THE CLEAN DEVELOPMENT MECHANISM IN KENYA AND NIGERIA
By Jill Juma1 and Paul Ehidiamen2
PAPER PRESENTED AT TRAPCA’S RESEARCH FORUM ON THE 7th -8th
August, 2012,
ARUSHA, TANZANIA
1
Programme Officer, SEATINI, Kenya, Research Associate CIDR, Cameroon, LL.B(Hons) University of Nairobi, Msc.
International Trade Policy and Trade Law, Lund University
2
Economist, Federal Ministry of Trade and Investment, Nigeria, Bsc.(Hons) Economics Ambrose Alli University,
Msc Economics University of Abuja, Msc. International Trade Policy and Trade Law, Lund University
The paper is a research in progress and will be adjusted and improved from time to time; the views in this paper
are the authors and are in no way linked to any institution or organization where views and opinions from other
renowned scholars have been used, due recognition has been given.
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ABBREVIATIONS/ACRONYMS
CDM-
Clean Development Mechanism
CERs -
Certified Emission Credits
COP
-
Conference of Parties
CO2
-
Carbon Dioxide
DNA
-
Designated National Authority
EAC
-
East African Community
ECOWAS – Economic Community of West African States
GATT -
General Agreement on Tariffs and Trade
GATS -
General Agreement on Trade in Services
GHGs-
Green House Gases
REDD+-
Reducing Emissions from Deforestation and Forest Degradation Plus
TRIMS -
Trade Related Investment Measures
TRIPS -
Trade Related Aspects of Intellectual Property Rights
UNFCC-
United Nations Framework Convention on Climate Change
WTO -
World Trade Organization
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1.0 BACKGROUND
While on the one hand industrialized countries are progressively inclining towards reducing their
combined (GHG) emissions, developing countries on the other hand seem to be adopting policies
and regulations aimed at broadening opportunities that promote socio-economic growth and development. So that trade and environmental policy agendas seem to be running on separate
tracks.
The crux of the matter is that Countries in the South (Kenya and Nigeria included) seem to be
warming up to Climate Mitigation Policies while also balancing out their stakes in terms of trade
gains in the global trade arena. The CDM is one such avenue that is currently being pursued because it not only encourages sound environmental management but also industrialization through
technology transfer, a prerequisite for greater market access and trade through trade competitiveness. In view of the foregoing, the United Nations Framework Convention on Climate
Change(UNFCC) vide Article 12 of its Kyoto Protocol allows State Parties , as one of its flexibility mechanisms.
The CDM allows countries with emission reduction commitments (hereinafter referred to as an
Annex B Party), to implement an emission reduction project/projects in developing countries. By
so doing, such projects earn saleable Certified Emission Reduction Credits (CERs) each equivalent to one tonne of Carbon Dioxide (CO2) which are then counted towards meeting the emission
reduction targets envisaged in the Kyoto Protocol.
While on the face of it CDM may appear to be an answered prayer for most developing countries
in terms of achieving their socio-economic development visions such as Kenya’s Vision 2030,
there seems to be apparent gaps, obstacles and limitations when we align the same to international trade, and in particular, trade competitiveness. The reason is because the World Trade Organization(WTO) legal texts do not have clear cut guidelines between Sustainable Development
through Climate Change Mitigation and free and fair trade through the gradual reduction of trade
barriers. Adopting CDM fully in Kenya and Nigeria may have two pertinent implications
within the purview of trade competitiveness: First, as a way of recovering certain costs associated with fully implementing CDM, Kenya and Nigeria may opt to impose certain taxes on
goods or products penetrating into their market that do not comply with Climate Change Mitiga3
tion Procedures, a move that is not only highly likely to happen, but also capable of trade diversion and regional disintegration, given the fact that both countries are member states to the EAC
and ECOWAS respectively. Second is that the two countries do not have adequate structures and
policies to buttress themselves against imminent shocks arising from the sudden change leaving
them at a very precarious position.
It is against the foregoing background that this paper seeks to assess the effectiveness of CDM in
terms of enhancing or diminishing Kenya and Nigeria’s trade competitiveness globally. The
paper begins by giving a brief introduction on CDM, and then proceeds to give an account of
CDM in Nigeria and Kenya including the legal, policy and institutional barriers towards
implementing the same. This is followed by a brief synopsis after analyzing the legal systems in
both countries, as to whether with the status quo trade liberalization and competitiveness would
still suffice. The paper then proceeds to introduce the subject matter of trade competitiveness in
light of CDM, by bringing out possible considerations and their impact on trade in both
countries. A brief comparative analysis between Reducing Emissions from Deforestation and
Forest Degradation Plus (REDD+) and CDM to assess whether or not CDM is still a viable
option when both countries want to maintain their trade competitiveness globally. The paper
concludes by giving pragmatic policy recommendations and concludes it findings
2.0 OBJECTIVE, METHODOLOGY AND LIMITATIONS
The paper seeks to investigate whether or not the CDM, as a climate mitigation incentive,
affects Kenya and Nigeria’s trade competitiveness globally. The paper therefore assesses the
legal, policy and institutional credibility of CDM, vis a vis trade competitiveness in Kenya and
Nigeria using the WTO rules as the yardstick and by further assessing the interlinkages between
climate change and international trade. The choice of countries in this paper (Kenya and Nigeria)
is equally significant because they are amongst the few countries in Africa that are committed to
change mitigation and trade liberalization, not to mention the fact that both are developing and
commonwealth countries and tend to have a similar, legal, policy and institutional system.
However, the paper was limited by lack of adequate data on the macroeconomic impact of CDM
in Kenya and Nigeria owing to the fact that this was a new climate change venture both countries
were pursuing and there were very few experts in this area who could assist in a timely manner.
To that extent it is still not very concise on the impact of CDM in terms of macroeconomic
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growth in both countries
3.0 LITERATURE REVIEW
The competitiveness of a nation is determined by the productivity of that economy, while the
productivity of a nation is measured by the value and volume of goods and services efficiently
produced in that economy, which is determined by the available human and natural resources in
that Country. It follows therefore that the competitiveness of a nation is measured and
determined by her productivity and efficiency. However, the level of level of productivity of a
nation is a function of domestic and foreign investment, domestic innovation, technology inflow
and trade.
Martin et. Al. (2007) defined competitiveness as the set of institutions, policies and factors that
determine the level of productivity of a country.
According to Sala-I-Martin (2007) ― a more competitive economy is one that is likely to grow
faster over the medium to long run‖; This is based on both the dynamic and static nature of
competitiveness. First, competitiveness helps to drive productivity and higher income and
improve return on investment and as such furthering economic growth. Secondly, through
competitiveness a nation can identify it areas of strength and weakness and be able to build on
those areas of strength for economic growth and development.
Porter et. al. (2007) also defined competitiveness as ―a country’s share of world market for its
products‖. This definition expresses the interplay and strong link between competition and trade.
Rechsteiner et.al3. observes that the protection of the environment, particularly in the field of
climate change prevention, has evolved into one of the most important issues on the agenda of
many states. Environmental mechanisms have begun to influence international investment laws
in an unprecedented way. The author focuses on CDM and its possible conflicts with the WTO
Agreement on Trade Related Investment Measures (TRIMS).
3
Stefan Rechsteiner et.al TRIMS AND THE CLEAN DEVELOPMENT MECHANISM-POTENTIAL CONFLICTS, Cambridge University Press, 2010
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Gilbertson and Reyes4 reveal how carbon trading is a very recent invention by business and
political elites that undermines existing environmental legislation and diverts from planning a
rapid transition away from current fossil fuel expansion. The authors point to a plethora of ways
forward without carbon trading, for instance, shifting from subsidy to regulation based on local
knowledge and political organizing if climate change is to be addressed in a just manner.
Freestone and Streck5 examine all the legal and policy issues which are raised by emissions
trading and carbon finance. The authors not only look into the Kyoto flexibility mechanisms but
also the regional emission trading scheme in the European Union (EU) and emerging schemes in
the United States and Australia and New Zealand.
Metz6 observes that effective global response to climate change requires the development and
transfer of environmentally sound technologies between and within countries, both for adapting
to climate change as well as for mitigating the effects of greenhouse gas emissions.
Peters et.al7. Is of the view that the flow of pollution through international trade flows has the
ability to undermine environmental policies, particularly for global pollutants. He determines the
CO2 emissions embodied in international trade among 87 countries for the year 2001and finds
that globally there are over 5.3 Gt of CO2 embodied in trade and that Annex B countries are net
importers of CO2 emissions. Depending on country characteristics—such as size variables and
geographic location—there are considerable variations in the embodied emissions. He argues
that emissions embodied in trade may have a significant impact on participation in and effectiveness of global climate policies such as the Kyoto Protocol. We discuss several policy options to
reduce the impact of trade in global climate policy. If countries take binding commitments as a
4
Tamra Gilbertson and Gilbert Reyes, CARBON TRADING: HOW IT WORKS AND WHY IT FAILS, Dag Hammarskjold
Foundation,2009
5
David Freestone and Charlotte Streck, LEGAL ASPECTS OF CARBON TRADING, KYOTO, COPENHAGEN AND
BEYOND, Oxford University Press, 2009.
6
Bert Metz, METHODOLOGICAL AND TECHNOLOGICAL ISSUES IN TECHNOLOGY TRANSFER ,IPCC, 2000
7
Glen Peters and Edgar Hertwich, CO2 EMBODIED IN INTERNATIONAL TRADE WITH IMPLICATIONS FOR GLOBAL
CLIMATE POLICY, Industrial Ecology Programme, Norwegian University of Science and Technology (NTNU),2008 PP
1401-1407
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part of a coalition, instead of as individual countries, then the impacts of trade can be substantially reduced. Adjusting emission inventories for trade gives a more consistent description of a
country’s environmental pressures and circumvents many trade related issues. It also gives opportunities to exploit trade as a means of mitigating emissions. Not least, a better understanding
of the role that trade plays in a country’s economic and environmental development will help
design more effective and participatory climate policy post-Kyoto
O’Brien et. al8. considers synergisms between the impacts of two global processes, climate
change and economic globalization. Both processes entail long-term changes that will have differential impacts throughout the world. Despite widespread recognition that there will be ―winners‖ and ―losers‖ with both climate change and globalization, the two issues are rarely examined together. In her article, she introduces the concept of double exposure as a framework for
examining the simultaneous impacts of climate change and globalization. Double exposure refers
to the fact that certain regions, sectors, ecosystems and social groups will be confronted both by
the impacts of climate change, and by the consequences of globalization. By considering the
joint impacts of the two processes, new sets of winners and losers emerge.
Babiker9 also observes that the 1997 Kyoto Protocol on climate change obliges the
industrialized countries to initiate the international effort of abating anthropogenic greenhouse
gas (GHG) emissions. If such an initiative is to be taken, the associated competitive effects may
lead to significant relocation of developed countries' energy-intensive production. The article
examines this issue by adopting an oligopolistic structure combined with increasing returns to
scale production technologies to represent the strategic interaction among the firms producing
energy-intensive products. This representation is then embedded within a multi-regional
computable general equilibrium model, which in turn is used for quantifying these relocational
effects. The results suggest that significant relocation of energy-intensive industries away from
the OECD may occur, depending on the type of market structure, with leakage rates as high as
130%, in which case GHG control policies in the industrialized countries actually lead to higher
8
Karen L O’Brien and Robin M Leichenko DOUBLE EXPOSURE :ASSESSING THE IMPACTS OF CLIMATE CHANGE
WITHIN THE CONTEXT OF ECONOMIC GLOBALISATION ,Cicero University, 2000
9
Mustafa H. Babiker CLIMATE CHANGE POLICY,MARKET STRUCTURE AND CARBON LEAKAGE, 2004
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global emissions
Nielsen10 analyses the de lege lata(legality) of two types of unilateral trade measures along with
the multilateral trade initiatives that are currently being negotiated in the WTO. The legality of
both the unilateral and the multilateral trade initiatives need to be evaluated according to the
rules of both the UNFCCC and the WTO, because both systems are independent and equal in
public international law. Nevertheless, the UNFCCC is often overlooked in trade analyses, in
spite of the fact that certain types of unilateral trade measures raise legal issues vis-à-vis the
convention. Those types of unilateral trade measures can, moreover, potentially threaten the
multilateral trading system primarily because they will affect a broad range of products – if not
all. Conversely, the multilateral trade initiatives do not raise any legal issues vis-à-vis the
convention, which does not contain any rules pertaining to trade. She nevertheless suggests that
certain trade issues become a part of the new climate change agreement at COP15, to avoid the
unwanted consequences of unilateral trade measures. It should be noted that such prohibitions
against unilateral trade measures in a climate change agreement would not raise any legal issues
vis-à-vis the WTO rules.
4.0 OVERVIEW ON THE CDM
Article 12 of the Kyoto Protocol recognizes the development projects related with CDM.
Although the primary signatories to the Protocol are sovereign states, the CDM provision is quite
unique in the sense that it explicitly makes provision for the participation of private entities,
which are expected to manage both the rules and any other domestic laws that the development
of CDM projects ideally would involve11.
The history of the CDM can be traced right from the inception of the Kyoto Protocol whose
primary purpose was to ensure that the Conference of Parties (hereinafter referred to as the COP)
to the United Nations Framework Convention on Climate Change (UNFCC) make additional
commitments towards reduction of their respective GHG from what was initially agreed upon in
the (UNFCC).
10
Laura Nielsen TRADE AND CLIMATE CHANGE ,Manchester Journal of International Economic Law ,Volume 7,
Issue 1:2-17,2010
11
Baker & McKenzie Legal Issues Guidebook to the Clean Development Mechanism, UNEP, 2004
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So that countries that were essentially listed in Annex B12 to the Protocol were now expected to
collectively reduce their emissions by an average of 5.2 % based on their 1990 emission levels
by the conclusion of the first compliance period- from 2008-2012. Annex B countries were
therefore expected to adhere to a specific binding emission reduction target to be achieved during
this period.
Non –Annex B, although having flexible commitments, on the other hand were expected to
reduce their emissions but under the principle of common but differentiated responsibilities,
hence they were not required to undertake binding obligations to achieve set emission reduction
targets13.
So as to achieve the emission reduction targets, a comprehensive plan on the implementation of
CDM alongside other emission reduction projects was arrived at during the 7th Conference of
Parties(hereinafter referred to as COP 7) in Marrakech between October and November, 2001,
giving rise to what has popularly become the Marrakech Accords. The Accord establishes detail
operational guidelines for the CDM which are to be executed by the CDM Executive Board and
the Conference of Parties14.
The unique nature of CDM implementation lies in the fact the COP 7 authorized the Executive
Board to take early action by registering CDM projects, before the Kyoto Protocol entered into
force in February, 2005 after Russia deposited the last ratification instrument. This was so,
because as a legal requirement the Protocol can only become legally binding once 55 Annex B
parties, who account for 55% of the Annex I 1990 carbon dioxide emissions ,ratify the same.
There is process of implementing CDM projects which is supervised by the executive Board that
take decision based on the recommendations of the Designated National Authority (DNA). The
DNA gets inputs from the project purchaser, designated operational entity and CER Purchaser.
Figure 1 below is the structure of CDM implementation:
12
Ideally these are listed as Annex I to the UNFCC
13
Supra Note 1
14
Supra Note 1
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THE CDM EXECUTIVE BOARD
DESIGNATED NATIONAL AUTHORITY
(DNA)
PROJECT PURCHASER
CER
DESIGNATED
OPERATIONAL
ENTITY
PURCHASER
From the diagrammatic presentation above, the Board is the highest authority in implementation,
approval, accreditation, registration and allocation of CERs to every CDM project established in
a developing country. The Designated National Authority (DNA) comprises of the Ministries or
Agencies charged with environmental and climate change matters in developing countries. The
primary function of the DNA is to determine sustainable development criteria, confirm voluntary
participation of project participants, including issuance of letters of approval for CDM projects
nationally/domestically. Likewise the project purchaser which in most cases is a private entity or
company, develops project design documents, implements the CDM projects, monitors the
emission reductions, and delivers CERs to a CER purchaser. The Designated Operational Entity
(DoE), validates the project for registration and verifies and certifies emission reductions.
Finally, the CER purchaser provides equity finance to the project in addition to purchasing CERs
from the project15. Some benefits of CDM include; Provision of opportunities for sustainable
development, Employment Creation, Transfer of Technology, Improved air
quality and
additional Foreign Direct Investment. However, its disadvantages are that CDM time frame may
not be beneficial to developing countries, with CDM there’s a tendency of investing in larger
projects as opposed to smaller and rural based projects hence inequitable development and CDM
credits allow developed countries to continue to emit more greenhouse gases under the emission
15
Supra Note 1
10
trading regime.
5.0
THE CASE OF NIGERIA
Like Kenya, Nigeria is a signatory to the UNFCC and its Kyoto Protocol, automatically enabling
it to be a beneficiary to CDM projects as approved by the Executive Board. However, this is
insofar as its obligations in the international arena are concerned. The scenario is quite different
at the domestic level due to the legal system it ascribes to. The treaty making process in Nigeria
as entrenched in the 1999 National Constitution is dualistic in nature. Specifically section 12 of
the Constitution provides that16;
―No treaty between the federation and any other country shall have the force of law except to the
extent to which such a treaty has been enacted into law by the National Assembly‖.
Legally what the foregoing means is that no treaty, can be enforced domestically, unless the
Parliament domesticates the same. Based on this concept, it may well be argued that the
implementation and enforceability of the CDM provision as per the Kyoto Protocol will
definitely be an arduous task especially in instances where a dispute is most likely to arise
between the DNA and the Purchaser.
Domestically, Nigeria has not yet ratified the UNFCC; however there is in place the UNFCC
National Committee whose national focal point is the Ministry of Environment with
representatives from other Federal Ministries and Agencies relevant to Climate Change. The
primary purpose of the Committee is to advise the Federal Government on the formulation of
policies and issuance of guidelines for achieving the objectives of the UNFCC and its Kyoto
Protocol17.
6.0 Apparent Legal and Institutional Barriers to CDM Implementation in Nigeria
Beside the commonwealth dualist system of implementing and enforcing treaties, the legal
system in Nigeria still leaves a lot to be desired. This is so because even if Nigeria was to
domesticate the UNFCC and the Kyoto Protocol today, there lies a big legal gap in so far as
16
www.nigeria-law.org accessed on the 29/05/2012
17
Nigeria Clean Development Mechanism Phase II Report in www.unido.org accessed on 29/05/2012
11
harmonization of other domestic legislation that are interlinked to climate change are
concerned18.
First, Nigeria lacks an enabling legal framework that links government ministries and agencies
such as the Ministries of Environment, Industry, Science and Technology, Finance, the Energy
Commission of Nigeria, Energy Research Institutes, vis a vis handling of CDM projects and
emerging issues. The direct impact of this vacuum is overlap in legal and policy implementation
with an eventual possibility of duplicity of obligations- a potential barrier to having successful
implementation of CDM projects in Nigeria.
Second, is the issue of non- complementarity between the Federal and State administrative and
legal framework. Although
Section 20 of the Constitution of Nigeria
provides for
environmental safeguards as one of its core objectives, the reality on the ground is that for any
project linked to environmental safeguards(CDM included) to be successful approvals not only
come from the Federal but also from State authorities. So that the issue of one stop shop approval
may not arise, hence delay and unwarranted bureacracies. For instance, permit to purchase of
land for purposes of developing a CDM project vests in the specific state in which the project is
to be developed because the constitution vests land ownership in the State, however, the State
and its agents cannot unanimously make a decision to approve the development of a CDM
project without of the involvement of the Federal Government19.
Thirdly, is the absence of a specific legal and regulatory framework to govern the development
of CDM projects countrywide. This is deemed important because of predictability especially
with respect to foreign direct investment vide CDM projects for purposes of distilling out
benefits and costs, and also when it comes to the citizens, the framework is required for purposes
of addressing issues such as repatriation and compensation in case the projects involve land, and
also the whole idea of transfer of technology especially where the projects are targeting specific
industries20.
18
Supra Note 10
19
Supra Note 10
20
Supra Note 10
12
Fourth, is the issue of monopolization of the energy sector in Nigeria. Currently, many Nigerian
stakeholders believe that the National Electricity Power Authority as established by the National
Electric Power Authority (NEPA) Act, now Power Holding Company of Nigeria (PHCN) is a
barrier to the success of CDM energy projects as opposed to having an Independent Power
Producer who can supply the same more efficiently and equitably. It is on record that Nigeria
spends quite a fortune on the purchase of stand-by generators not only for purposes of essential
and efficient power supply where it is lacking but also during periods of power failures.
Although there is in the pipeline a bill that will specifically allow both Independent Power
Producers and Emergency Power Producers to generate power and sell.
Fifth, is the issue of transfer of technology as provided for in the National Office for Technology
Acquisition and Promotion (NOTAP) Act of 1979, which is not in consonance with Nigeria’s
national policy on environment. The policy provides for sustainable development through the use
of state - of -the art- equipment and environmentally sound technologies in all sectors of the
economy, to promote in-plant safety and healthy environment. Though NOTAP is meant to be
the regulatory authority, there are no explicit provisions in its enabling legislation for
environmentally sound technologies as reflected in Article 4 of the UNFCCC. NOTAP is
therefore not fine tuned towards technology transfer that addresses climate friendly facilities and
production processes. In addition to the foregoing, the NOTAP does not encompass a sound
Intellectual Property Rights (IPRs) regime hence weakening its ability to adequately facilitate the
transfer of clean technologies21.
In addition, studies have shown the current knowledge base with respect to CDM, provisions and
application of the UNFCCC, industrial processes, GHG emissions, technology transfer
arrangements and climate change issues is quite limited within the legal fraternity of Nigeria.
Hence there is an institutional barrier with respect to transfer of CDM technologies in the
country. Further to the foregoing, private lawyers, as a matter of government policy, are not
given government briefs to handle irrespective of the fact that some of them may have better
skills than government lawyers due to the level of exposure they may have22.
21
Supra Note 10
22
Supra Note 10
13
Another issue that most policy analysts tend to overlook is the whole dynamics involved with the
implementation of approved CDM projects (Carbon Financing). Substantial amounts are
required for the efficient operation of CDM and most of time investing in the said projects may
prove to be a huge financial risk because financial returns on the same may prove to be
unpredictable. In Nigeria specifically, market research has shown that the availability of venture
capital funds for industrial development is almost negligible, not to mention the fact that a good
number of Nigerian Commercial Banks do not have direct access to funds specifically for CDM
projects23.
7.0
THE CASE OF KENYA
Kenya, like Nigeria has developed a number of CDM related projects in sectors such as energy
supply, demand side management, fuel switching and forestry. The said projects operate on the
basis of equity and debt as a mechanism of raising capital for their operationalisation24. The
unique nature of Kenya's CDM projects lies in the fact that CDM projects in Kenya are more of
carbon investments, in the sense that every project developed generates carbon credits with
monetary value25. CDM guidelines in Kenya dates back as far as 2001, currently the same are
under review, but it is worth noting that Kenya has a special Designated Authority for CDM- The
National Environment Management Authority (NEMA) vide the Environmental Management
and Coordination Act (EMCA).
8.0
CDM INVESTMENTS IN KENYA
Kenya Electricity Generating Company (KENGEN)26 began CDM investments in 2000 through
a letter that was written to the UNFCC seeking support in obtaining benefits from CDM for some
of its projects. Progress was made in 2005 when the company submitted a CDM tender- The
Tana Redevelopment Project which was prequalified amongst other 14 short listed projects from
23
Supra Note 10
24
www.nema.go.ke accessed on 29/05/2012
25
Supra Note 17
26
www.kengen.co.ke accessed on 14/05/2012s
14
developing countries. However, this project was not successful due to the fact that the
Government of Belgium, wanted as a precondition, the cost of documentation to be catered for
fully by KENGEN, before the said project could be considered into its portfolio.
In 2006, the World Bank Carbon team promised to offer technical assistance on Carbon trading,
to that extent Project Idea Notes (PINs) for nine projects were developed, out of which six were
accepted by the World Bank. The said projects are;
1. Eburru Geothermal Project
2. Olkaria II Geothermal Expansion Project
3. Redevelopment of Tana Power Station Project
4. Optimization of Kiambere Power Project
5. Kipevu Combined Cycle Power Project
6. Sondu Miriu Power Project
The selected projects are expected to assist in the displacement of approximately 0.66 million
tonnes of CO2 equivalent annually. The World Bank pledged to purchase one Certified Emission
Reduction (CER) at USD 10.5 for Olkaria II geothermal expansion, USD 13.9 for Kiambere
Optimization, redevelopment of Tana Power Station and Eburru Geothermal, and USD 12.9 for
Kipevu Combined Cycle and Sondu Miriu. The projects are therefore expected to generate
annual cash flow revenue to KENGEN of approximately Ksh. 500 million per annum up to this
year (being 2012). Further, most of these projects are eligible to receive an additional USD 1 per
tonne of CO2 from the Carbon Fund as direct benefits to the communities in surrounding areas
where they are located27.
Beyond the expiry of the first commitment of the Kyoto Protocol (i.e. Beyond 2012), the World
Bank proposes to purchase the carbon reduction (hereinafter referred to as Verified Emission
Reductions [VERs]) at a slightly reduced price by approximately USD 228. This would benefit
KENGEN in that it lowers the use of thermal power generation plants and use them only as
stand-by-power generation, thereby displacing expensive heavy fuel, diesel and gas-fired
generation, thus reducing CO2 emissions to the atmosphere by generating energy without GHG
27
Supra Note 19
28
Supra Note 19
15
emissions, employing local labour in construction and plant management, helping Kenya
improve hydrocarbon trade balance through reduction of oil imports to be used for electricity
generation, assisting poor rural communities through the implementation of community
programmes funded by a designated portion of the carbon revenues and increases the number of
clean energy project in Kenya.
Mumias Sugar Company29
The Company has developed the "Baggasse Project" vide an agreement with the Japan Carbon
Finance Limited (JCF). According to the CER Purchase Agreement- 2019, JCF is to purchase
CERs. According to the Agreement, Mumias Sugar Company is expected to produce clean
electricity from Baggasse (cane residue).The company, through this project, estimates an annual
displacement of 100,0000 tons of carbon from the environment to be factored in the formula.
The company currently produces 13MW of electricity, which contributes 2MW to the national
grid and the rest is used domestically. Hence it is believed that the use of Baggasse which is set
to replace 47% thermal production in the boilers, the current production will increase to 35MW.
The project is set to earn the company revenue not only from the sale of power to the national
grid but also from Carbon Credits, meanwhile enabling it to give its contributions to the
conservation of the environment30.
9.0 CDM LEGISLATION AND POLICY IN KENYA
In evaluating on the pros and cons of CDM vis a vis trade competitiveness globally for Kenya, it
is important to provide an assessment of the enabling environment for the same through
legislation and policy.
In so far as CDM is concerned there are a number of legal instruments that can be used to
buttress Kenya’s implementation plan, not to mention enforcement, they include amongst others
the following;
29
www.mumias-sugar.com accessed on the 14/05/2012
30
Supra Note 22
16
1. The Energy Act of 2006
2. The Electricity Regulatory Commission
3. The Kenya Forest Policy
4. The Constitution of the Republic of Kenya
5. National Land Policy
6. National Climate Change Response Strategy
7. Kenya Cleaner Production Center
National Climate Change Response Strategy (NCCRS)31
This is an initiative spearheaded by the Ministry of Environment in 2010, as an adoptive strategy
towards Kenya's Vision 2030. The Strategy recognizes the importance of CDM and a green
economy hence its target to ensure Kenya is a green economy by 2020, at least ten years earlier
before the realization of Vision 2020. As part of mitigation measures, it adopts the following
strategies;
I) The Forestry Development Plan (FDP)
It aims at growing 7.6 billion trees during the next 20 years. The strategy towards achieving the
foregoing is by having an estimated 35,000 schools, 4,300 women groups, 16,350 youth groups
and six Regional Development Authorities consolidating their efforts in tree planting/growing.
Each school is expected to get a supply of 10,000 litre water tank to support harvesting of water
for the establishment and management of tree nurseries as well as watering of planted out
seedlings. Large scale land owners with at least 50 acres of land will be encouraged to construct
dams for water harvesting and storage in order to support establishment of irrigated private
forests.
ii) The Green Energy Development Programme
The programme seeks to take advantage of Kenya's abundant renewable energy resources.
According to the NCCRS, the North Eastern parts of Kenya are an ideal location for wind power
generation, while the arid and semi arid areas are conducive for solar energy capture utilization
since the areas experience long hours of sunshine throughout the year.
31
www.environment.go.ke accessed on 21/05/2012
17
In addition, Kenya has an ample potential to grow sugarcane, sweet sorghum, jatropha and other
non- food crops which can be suitable for Biofuel. It is therefore worth noting that maximizing
of the said potentials can contribute significantly towards the reduction of global GHGs as well
as reliance on imported fossil fuels.
The NCCRS further recognizes the Governments commitment to allocate budgetary resources, in
addition to seeking further support through bilateral and multilateral financial institutions. The
Government intends to offer credit and subsidy facilities to private investors to facilitate rapid
completion of green energy/ CDM projects. It is estimated that the said projects are estimated to
provide an additional 2790 MW by 2014.
In addition, the NCCRS outlines the energy efficient options that Kenya intends to pursue such
as;
a) Mandatory energy audits of large commercial and industrial consumers
b) Review of tax policies to encourage the importation of energy efficient motor vehicles
c) Subsidies and other tax incentives to promote and sustain wider adoption of energy efficient
electrical gadgets such as compact fluorescent light (CFL) bulbs and solar hot water heating
d) Constructing energy efficient buildings for example, buildings that uses as much sunlight as
possible while avoiding direct heating from the sun in order to minimise energy requirement for
cooling purposes.
iii) Transport
The proposals here include promotion of low-cost public transport modes such as Bus Rapid
Transit(BRT) and other means of mass transport ; proper urban and transport planning to
facilitate
efficient and low GHG modes of transportation
such as decongesting roads;
encouraging non- motorized modes of transport(NMT) by creating bikeways and pedestrian
walkways; creating transport demand management measures that encourage public transport and
18
NMT ; establishing a Light Rail Transit(LRT) along with BRT in major cities and towns to help
decongest traffic; and improving the country's railway network to facilitate low-cost and lowcarbon long distance transportation of cargo and passengers.
iv) Agriculture
In the agriculture sector, the proposed mitigation procedures include appropriate use of
biotechnologies which increase food production per unit area while simultaneously limiting
GHG emissions; proper management of agricultural waste such as the use of manure to produce
biogas; and promotion of agro forestry especially tree-based intercropping(TBI).
The Energy Act of 200632
The Energy Act recognises CDM through sections 98 and 103 respectively. Section 98
summarily provides for compliance with environmental, health and safety standards when
dealing with petroleum products. However, Section 103 is more specific because it empowers the
Minister for Energy to promote the development and use of renewable energy technologies,
including but not limited to biomass, biodiesel, bioethanol, charcoal, fuel wood, solar, wind, tidal
waves, hydropower, biogas and municipal waste.
It further defines the Ministers functions in relation to promoting the above as follows;
a) formulating a national strategy for coordinating research in renewable energy;
(b) providing an enabling framework for the efficient and sustainable production, distribution
and marketing of biomass, solar, wind, small hydro’s, municipal waste, geothermal and charcoal;
(c) Promoting the use of fast maturing trees for energy production including Biofuel and the
establishment of commercial woodlots including peri-urban plantations;
(d) promoting the use of municipal waste for energy production, and
(e) promoting the development of appropriate local capacity for the manufacture, installation,
32
www.kenyalaw.org accessed on 14/05/2012
19
maintenance and operation of basic, renewable technologies such as bio-digesters, solar systems
and hydro turbines;
(f) promoting international co-operation on programmes focusing on renewable energy sources;
(g)
harnessing opportunities offered under clean development mechanism and other
mechanisms including, but not limited to, carbon credit trading to promote the development and
exploitation of renewable energy sources;
(h) promoting the utilization of renewable energy sources for either power generation or
transportation;
(I) promoting co-generation of electric power by sugar millers and sale of such electric power
through the national grid directly to the consumers;
(j) promoting the production and use of gasohol and biodiesel.
The Kenya Forestry Policy33
Recognition of CDM is seen in paragraph 2.5 of the policy which acknowledges the role of tree
growing as a means of wealth and employment creation in Kenya. One of the avenues proposed
in the policy is the established of forest based industries which are expected to contribute to the
national economy. The policy provides that the said industries will be established through
appropriate investment incentives that encourage efficient use of raw materials, efficient
technologies and protection of the environment. The policy also permits the introduction of tax
incentives by the Government, as a means of encouraging efficient technology.
It further provides that the Government is to come up with legislation to regulate the forest sector
on a sustainable basis whilst also enabling trade in forest products.
Energy Regulatory Commission34
The Energy Act mandates the Commission to formulate enforce and regulate environmental
standards. The main regulatory instruments for Environment Health and Safety regulation used
by ERC in addition to the Energy Act No. 12 of 2006 are the Environmental Management and
Coordination Act No. 8 of 1999, and the Occupational Safety and Health Act No. 15 of 2007.
33
www.kenyaforestservice.org accessed on 14/05/2012
34
www.erc.go.ke accessed on 14/05/2012
20
The Constitution of Kenya35
Kenya promulgated a new Constitution in August 2010, which created a great paradigm shift in
terms of environmental management and preservation. Article 42 of the Constitution provides as
follows;
"Every person has the right to a clean and healthy environment, which includes the right—"
(a) to have the environment protected for the benefit of present and future generations through
legislative and other measures, particularly those contemplated in Article 69; and
(b) to have obligations relating to the environment fulfilled under Article 70.
The burden is therefore upon the State in cooperation with the county governments to ensure
amongst others the following;
(a)sustainable exploitation, utilization, management and conservation of the environment and
natural resources, and ensure the equitable sharing of the accruing benefits;
(b) Work to achieve and maintain a tree cover of at least ten per cent of the land area of Kenya;
(c) Protect and enhance intellectual property in, and indigenous knowledge of, biodiversity and
the genetic resources of the communities;
(d) Encourage public participation in the management, protection and conservation of the
environment;
(e) Protect genetic resources and biological diversity;
(f) Establish systems of environmental impact assessment, environmental audit and monitoring
of the environment;
(g) Eliminate processes and activities that are likely to endanger the environment; and
35
Supra Note 25
21
(h) Utilize the environment and natural resources for the benefit of the people of Kenya
On the other hand, citizens have a duty to cooperate with state organs and other persons to
protect and conserve the environment and ensure ecologically sustainable development and use
of natural resources.
The Constitution under Article 70 further allows for legal redress where citizens feel that their
right to a clean and healthy environment is being or is likely to be denied, violated, infringed or
threatened
National Land Policy of 200936
Though the said policy was not formulated under the framework of climate change management,
due recognition has been given to key concerns that are fundamental to climate change in Kenya.
Kenya National Cleaner Production Center37
The center was established in 2000 and is supported by UNEP/UNIDO/UNDP. It is involved in
the promotion of cleaner production programs which aim to:
1. Increase productivity by ensuring a more efficient use of raw materials , energy and
water
2. Promote better environmental performance through reduction at source of wastes and
emissions
3. Reduce the environmental impact of products throughout their life cycle by the design of
environmentally friendly but cost- effective products.
10.0
Apparent Legal and Policy Barriers to Implementation of CDM in Kenya
Article 72 of the Constitution of Kenya being the ground norm of the country, it may be argued
36
www.lands.go.ke
37
KENYA’S CLIMATE CHANGE AND TECHNOLOGY NEEDS AND NEEDS ASSESSMENT REPORT UNDER THE UNFCCC in
www.unfccc.int accessed on 29/05/2012
22
that the said provision is a major loophole towards ensuring effective CDM development and
management in Kenya. The Article empowers Parliament to enact legislation that will give effect
to all the environmental provisions in the Constitution. While this is positive sign of Kenya's
interest in adhering to its international commitments on environment and climate change, it may
be argued that the said provision is ambiguous and to a large extent quasi-committal.
The Article does not state clearly the prioritized legislation/s to ensure effective environmental
management. It would be more fortified if the drafters would have clearly outlined the priority
legislations that parliament should enact not to mention the time frame for the same. To that
extent, the immediate impression one gets is that in so far as Environmental Management and
Sustainable Development is concerned, there is no urgency for the time being by any State
Organ, due to that provision.
Regulations on Compensation and Resettlement
Ideally the development of CDM based projects would involve a substantial amount of land,
which would ultimately lead to relocation and resettlement of persons. The majority of these
persons depend largely on land for agriculture, livestock keeping, woodlots, seasonal labour and
remittance.
The previous Constitution under section 75 had explicit provisions on compensation and
compulsory acquisition of land. In the new Constitution, Article 67 provides for the
establishment of a National Land Commission charged with similar duties in the previous
Constitution.
Although this is a milestone achievement in the sense of ensuring neutral and equitable
management of land in Kenya, the National Land Commission is yet to be established to oversee
sensitive issues such as compensation and resettlement of persons.
This leaves land owners in precarious position because Kenya seems to be picking up quite fast
in its implementation of CDM in the East Africa Region. It is due to this that chances of land
owners rights being abused still remain high because there is no clear channel on how
resettlement is to take place, the duration between notification of relocation and resettlement, and
more importantly compensation mechanisms including the percentage of the same, especially for
23
those landowners who have invested heavily on land.
Absence of Transfer of Technology Regulations
Unlike
Nigeria
which
has
the
National
Office
for
Technology Acquisition
and
Promotion(NOTAP) Act of 1979, Kenya does not have an exclusive law governing transfer of
technology as reflected in Article 4 of the UNFCCC. Hence unlike NOTAP which is not fine
tuned to climate friendly transfer of technology, Kenya has legal back up at all on the same. This
weakens its ability to monitor, evaluate and further ensure an equitable spread of the same all
over.
Banking Act (Cap. 488, Laws of Kenya)38
Establishing CDM projects will involve substantial amounts of money in the form of loansCarbon financing, unfortunately, Kenya's Banking Act does not have any provisions on Carbon
Financing, which makes it quite difficult to effectively commence developing CDM projects.
One of the fears the financing sector has with regard to CDM, lies in the unpredictability and risk
involved in such a venture. For instance, in Kenya's geothermal industry, accurate assessments
of the resource potential including specific costs to the same are yet to be fully established, and
this can only be done once drilling has taken place.
11.0 CDM IN KENYA AND NIGERIA - A SYNOPSIS
The previous sections of this study provided an expose on the development of CDM in Kenya
and Nigeria - both Commonwealth Countries. It was observed that despite their respective
commitments in the international arena, there were still evident legal, policy and institutional
gaps on the domestic front. Legally, although Kenya is slowly tilting its system towards monism
in tandem with the new Constitutions provisions on international treaties, Nigeria is still
grappling with the medieval dual system which locks it out of rapid legal, policy and institutional
implementation not to mention reforms.
However this is still not a guarantee that Kenya will now have a smooth and free flowing CDM
38
www.kenyalaw.org accessed on 29/05/2012
24
implementation system, because of the exorbitant costs, high financial risks and investment
unpredictability associated with CDM, not to mention the fact that WTO law still harbors a
number of gaps when it comes to trade and climate change issues, which gaps either give way to
trade barriers or trade diversion.
On the international front, Kenya and Nigeria (both members of the WTO) have been active
participants in the ongoing Doha Negotiations on Trade and Environment. Currently the debate,
under the cluster of Environmental Goods and Services (EGS), has hit a snag because first, there
is no existing cluster on climate change within the domain of EGS; second, liberalization of EGS
products in the Harmonized System (HS) has marginal impact on climate change mitigation. The
talks on trade and environment are therefore efforts in futility.
Nevertheless, we cannot shun the fact that Kenya and Nigeria still have the European Union
(EU) as one of their major trading partners under the Economic Partnership Agreements (EPA'S).
The EU has in place a renewable energy policy, since it was one of the strongest proponents of
the Kyoto Protocol for reduction of GHGs, and assumed, for the first commitment period, 20082012, an emission reduction obligation of 8 % ( below the 1990 level). To that extent most of its
industrialization policies are geared towards achieving the said target. Kenya and Nigeria being
trade partners to the EU are automatically privy to this arrangement by virtue of their trade
transactions. There is an obvious disparity between the EU, Kenya and Nigeria in the
administration of CDM39;
First, the EU has a well established financing mechanism vide the European Investment Bank
(EIB) in the form of Carbon Funds. The financing mechanism of the EIB focuses primarily on
areas such as renewable energy and energy efficiency, carbon capture and storage, reduction of
greenhouses other than Carbon dioxide (CO2) in industries and utilities, and land use. Eligible
CDM projects can benefit from longer grace periods and maturities, including the possibility of
having up to 75% of the project cost financed by the Bank. In addition, the EIB has in place four
carbon funds in cooperation with other international finance institutions. Each fund is designed
to cover specific areas and/or carbon market players40.
39
Riva et.al, EUROPEAN RENEWABLE ENERGY POLICY AND OPPORTUNITIES PROVIDED BY CDM, 2005
40
Supra Note 32
25
Second, every CDM project established in the EU attracts Investment Subsidies which help
project developers overcome the barrier of high initial investments. The subsidies usually range
between 20 to 50% of eligible investment costs. The subsidies could also take the form of low
interest rate loans41.
Kenya and Nigeria are at the climax of EPA negotiations, and even though it is not clear when
the negotiations will be concluded, the guarantee is that the issue of trade and climate change
will definitely come up because the EU has GHG targets to attain based on the requirements in
the UNFCCC and its Kyoto Protocol. It would therefore be pretentious to delink CDM from
future trade relations with the EU. The CDM plane has already taken off and passengers therein
cannot request the pilot for an emergency landing, rather they have to adjust to the turbulence by
tightening their seatbelts and cruising along in the hope of a safe landing at the agreed
destination.
It is for this reason, that the next section of the paper attempts to assess the effectiveness of CDM
to Kenya and Nigeria in light of global trade competitiveness, and whether or not both countries
are able to juggle effectively CDM implementation on the one hand, and trade competitiveness
by virtue of ensuring that existing climate change commitments vide CDM are WTO compatible.
13.0 CDM AND GLOBAL TRADE COMPETITIVENESS
Trade is deemed to be a powerful engine of growth the world over. Studies have shown that a
country’s trade share is directly correlated to its economic growth whether in the positive or
negative. For instance, the East Asian adoption of export -led growth in the past three decades is
evidence that trade can actually be a catalyst for economic growth and poverty reduction.
Ironically, it is not a guarantee that the more you trade the more you enhance your economic
growth; there are many underlying issues that need to be taken into consideration for trade to
trigger steady and equitable economic growth. This is the point where many trade analysts speak
about trade competitiveness as a core component of trade governance. Porter et.al. (2006)
41
Supra Note 32
26
describes trade competitiveness as a country’s share of world market for its products42.
In respect to the above, why should Kenya and Nigeria gauge their trade competitiveness in light
of the CDM? First, competitiveness helps to drive productivity and higher income and improve
return on investment and as such furthering economic growth. Secondly, through
competitiveness Kenya and Nigeria can identify its areas of strength and weakness and be able to
build on those areas of strength for economic growth and development43.
Figure 2 below is a diagram showing the interlink ages in terms of laws/ regulations of trade and
climate change44.
Laws to control
Laws
to ensure
CLIMATE FRIENDLY LAWS
Climate change
ON TRADEfriendly
AND
Climate
investm
INVESTMENT
and Trade
Climate Change
Trade &
Investment
Economic
Activities
Impact
Cosby 2007
The competitiveness impact in figure 2 above is two folds; First strict laws and regulations to
ensure adherence to CDM by some Countries could place other competitor in Countries where
42
COMPETITIVENESS IN A GLOBALISED WORLD: THE MICROECONOMIC FOUNDATIONS OF THE COMPETITIVENESS
OF NATIONS, REGIONS AND FIRMS, Journal of International Business Studies , 2006
43
Supra Note 35
27
there are no or less strict laws and regulations. This could make them less competitive in the
international markets since it may reduce their economic activities. Secondly, Investment in
those sectors could move from Countries where there are strict regulations to those where it is
relatively less strict. This is referred to as leakage problem and reduces the competitiveness of
one Country to the advantage of another.
Nigeria and Kenya’s competitiveness in the international trading system has been relatively low
compared with the developed Countries. This is because they are both developing Countries who
are currently in the factor driven stage of the twelve pillars of the Global Competitiveness index
and using various means to woo investors and Foreign Direct Investments to their Countries.
To that extent there are a number of considerations which Kenya and Nigeria may have to put in
place as they embark on embracing CDM as part of their respective climate change policies,
which considerations may have an impact on the trade performance of both countries globally,
they are amongst others;
(i)
Border Carbon Adjustments (BCAs)45
The BCA is a measure that a government imposes when a commodity is imported from an
industry in a country that has not comparably offset the GHG emissions associated with the
production of that particularly commodity. BCA may be a flat tariff, a tax or a requirement for
the importer to purchase carbon credits that would compensate the country with stiffer climate
regulations for the loss of competitiveness that it has incurred because of its emission standards.
(ICTSD)
In light of the above, BCAs are intended to address the following three factors;
The first issue pertains to competitiveness, where some industries in developed countries believe
that BCAs are a protectionist mechanism vis a vis global competitiveness against industries in
countries that do not apply the same requirements.
Second is the carbon leakage argument- where emissions might move to countries that have less
stringent rules.
45
Thomas L. Brewer, THE WTO AND THE KYOTO PROTOCOL: INTERACTION ISSUES, GEORGETOWN UNIVERSITY,
2004
28
Third is linked to leveraging the participation of developing countries in binding mitigation
schemes to adopt comparable measures to offset emissions by their own industries.
Kenya and Nigeria cannot be exempt, as a matter of policy, from applying BCAs because it is a
natural phenomenon for countries to explore options of recovering possible losses when they opt
to take a certain policy direction, CDM, being one of them. It will therefore not be a surprise for
the governments of Kenya and Nigeria to come up with a cost adjustment policy in the form of
BCA.
In light of the foregoing, we then have to look at BCA in two angles vis a vis trade
competitiveness; whether application of the same will be a conduct in breach of Article XX (g)
and XIV (b) of the General Agreement on Tariffs and Trade (GATT) and General Agreement in
Trade in Services (GATS) respectively. Article XX (g) as read alongside the chapeau provides;
"Subject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between countries where the same
conditions prevail ,or a disguised restriction on international trade ,nothing in this Agreement
shall be construed to prevent the adoption or enforcement by any contracting party measures:’’
(g) Relating to the conservation of exhaustible natural resources if such measures are made
effective in conjunction with restrictions on domestic production or consumption"
From the foregoing provision, there lies a very thin line between environmental protection and
arbitral trade protection measures. Nothing in the BCA policy indicates that it is meant to
conserve natural resources or better still protect human health, as a matter of fact the application
of BCA is seen to be cost compensatory measure by countries that are fully adhering to their
GHG emission reduction commitments, which eventually takes the form of a trade barrier in
contravention to the objectives of the WTO.
Further to the above, future application of BCA by Kenya and Nigeria is highly likely to thwart
or undermine regional integration as outlined in Article XXIV of the GATT. Kenya and Nigeria
are members of the EAC and ECOWAS respectively; ideally imposing BCAs to fellow member
states will automatically weaken the long standing trade ties or divert trade to regions outside
EAC and ECOWAS, because goods that have BCA will have a higher domestic price in terms of
imports. Consumers will therefore prefer to import from without the region cheaper products,
hence resulting to major trade losses.
29
Other additional complications associated with the chapeau of Article XX are the clear meaning
of 'like products'. Naturally, tax measures will be imposed by countries having CDM projects
against those that do not have CDM projects, already there is a clear disparity. Second to that, is
the mechanism of taxation; whether it is a cumulative tax and whether the input on the
commodity being taxed is present in the final product?
(ii)
CDM and Subsidies46
The rules and regulations on subsidies are contained in the Subsidies and Countervailing
Measures (SCM) Agreement and the Agreement on Agriculture (AoA). The issue of Kenya’s and
Nigeria trade competitiveness vis a vis subsidies can arise in instances where, under the CDM
arrangement, policies are introduced to fund new technologies that adhere to CDM within the
respective industries, or where the respective governments decide to introduce agricultural
incentives in terms of providing sinks in soil or reducing carbon emissions, as long as it can be
proven that the said incentives had more than minimal effects on production contrary to the
Green Box regulations, the said incentive is not only challengeable , but its most likely to divert
trade in these two countries.
Also, in relation to export subsidies, if the European Union subsidizes entities in Kenya so as
to promote exports from Kenya( a phenomenon that is highly likely to happen amongst countries
who have decided to fully implement CDM), then such a subsidy would the SCM Agreement.
Another policy issue that arises with respect to the SCM Agreement is whether or not free
transfer of units by Designated National Authorities (DNA) to private companies would be
considered as a subsidy. Although many analysts would argue that a subsidy can only suffice if it
is a financial contribution by a government, within the meaning of the SCM Agreement, WTO
case law, especially the Lumber47 decision provides a dissenting view to the same. In this
dispute, the Panel ruled that a financial contribution is not limited to a money transferring action,
46
Steve Charnovitz TRADE AND CLIMATE: POTENTIAL CONFLICT AND SYNERGIES, Pew Center on Global Climate
Change,,2003
47
Canada –v- United States of America in www.wto.org accessed on 29/05/2012
30
but also encompasses an in- kind transfer of resources that can be values, such as the right to
harvest public trees.
(iii)
CDM Products and the Technical Barriers to Trade (TBT) Agreement48
Article 2 1(a) (i) of the Kyoto Protocol provides for domestic energy efficiency policies and
measures that will reduce greenhouse gas emissions for enhancement of energy efficiency in
relevant sectors of the economy. The question is whether the concept of labeling and certification
of energy efficiency as a climate change measure, goes against the TBT Agreement. The test here
is whether or not an environmental regulatory measure is the least trade restrictive vis a vis
fulfilling a legitimate objective, and the said measure should be in conformity with an
international standard. Incidentally, the TBT Agreement has provisions of environmental
protection as part of its objectives.
The likely area of dispute here is eco -labeling, primarily where it becomes a mandatory
requirement that the production process in a commodity be included in the label of that
commodity for it to gain entry, for instance having a mandatory requirement that all products
must specify the level of GHG emissions before gaining entry may go against the TBT
Agreement, and the objectives of the GATT regarding market access.
The foregoing issue arose when the Government of Netherlands submitted a proposal before the
WTO concerning a label identifying whether timber was harvested under sustainable forest
management. When this measure was notified to the WTO, several countries raised objections on
grounds that it violated trade rules; in addition, the said measure was challenged by the European
Union, hence forcing the Netherlands to withdraw the proposal.
(iv)
Emissions Trading49
Emission trading (Article 17 of the Kyoto Protocol) is an aspect of CDM which ideally involves
the provision of economic incentives by Designated National Authorities (DNA) which
incentives are aimed at achieving reductions in the emission of GHGs.
48
Supra Note 39
49
Supra Note 39
31
Usually a cap is set by the DNA on the amount or percentage of GHG to be emitted. The cap is
then allocated to firms in the form of emission permits which represent the right to emit or
discharge a specific volume of the specified pollutant. Usually under this arrangement, firms or
industries are required to hold a number of permits which have to be equivalent to their
emissions. The total number of permits should not exceed the cap. So in instances where
industries need to increase their volume of emissions, they must purchase the same from
industries that require fewer permits- hence the term emissions trading .In essence therefore the
purchasing industry is paying a charge for polluting, while the selling industry is being rewarded
for having reduced emissions, hence having a cost effective GHG reduction strategy.
As a general rule, domestic emission trading does not contravene any WTO provisions. It will
therefore not be a legal issue if Kenya and Nigeria introduce domestic emission trading policies
respectively. However, concerns are likely to be raised if the their respective domestic emission
trading policies make it difficult for another country to do business with the domestic
industries in the respective countries, because this would amount to arbitrary trade restriction as
it breaches Article III of the GATT, which provides for the National Treatment(NT) principle.
For example, if Kenya or Nigeria has a GHG trading system that does not recognize emission
units originating in countries outside the Kyoto Protocol, what happens is that the said
requirement makes it difficult to import energy from non- Parties because the fuel producers
might not have emission units to accompany sales. The breach of Article III of the GATT arises
because it destabilizes competition between imported and domestic products giving less
favourable treatment to the foreign product.
(v)
CDM and Trade Related Investment Measures (TRIMS)50
The complexity of CDM projects and the TRIMS lies in the fact that investment rules in the
WTO generally cover goods, therefore leaving a huge legal gap in the area of services. For
instance where there is a CDM project in the transport services sector involving transport
projects aimed at reducing GHG emissions such as the construction of Bus Rapid Transit
Systems (BRTS), it might not be prudent to start such a venture when there is no clear backing in
the WTO investment regime.
50
Supra Note 38
32
13.0 IS CDM STILL THE BEST POLICY OPTION FOR KENYA AND NIGERIA?
Reducing Emissions from Deforestation and Forest Degradation Plus (REDD+) 51
REDD is a mechanism that is still undergoing negotiations at the UNFCCC. The primary
objective of REDD is to support activities that enable reductions in CO2 emissions that are
caused by deforestation and forest degradation. REDD-plus which is a version of REDD aimed
at developing countries, aims to strengthen and expand the role of forests as carbon pools/sinks,
through forest conservation, sustainable management of forests and enhancement of forest
carbon stocks.
CDM and REDD+ are similar in the sense that both include forest projects as part of emission
reduction incentives, however, the difference is that after the adoption of the Kyoto Protocol in
1997, only forests in developing countries were included in CDM. Also according to the 2001
Marrakesh Accord, only afforestation and reforestation projects fall under the CDM52.
On the other hand, REDD+ focuses on possibilities to reduce emissions from deforestation and
forest degradation as well as the capacity of forests to conserve carbon. Also, unlike the CDM,
REDD+ caters for the indigenous communities as it has an access and benefit sharing plan - a
very important aspect of international trade especially in the area of biodiversity which is part of
REDD+ focal objective53.
Again, unlike the CDM, REDD+ has clear safeguard measures which include the Climate and
Biodiversity Project Design Standards (CCB) - an initiative by the Civil Society used to evaluate
land-based carbon mitigation projects in the early stages of development. In addition, REDD+
projects have compensatory mechanisms for individuals, forest communities and organizations to
reduce activities that contribute to deforestation or forest degradation and to expand activities
that contribute to conservation, the sustainable management and the enhancement of foreign
51
www.iucn.org accessed on 25/05/2012
52
Supra Note 44
53
Supra Note 44
33
carbon stocks54.
Despite the above positive outcomes of REDD+, initiating the same would not improve Kenya
and Nigeria’s trade competitiveness, first because pursuing a REDD+ option would have a
significant impact on the composition of South- South trade between REDD+ payment receivers
and third party countries. On the demand side, the possibility of REDD+ recipients using their
payments to re-import that moved to new, non -REDD countries is high. To that extent, real
benefits of REDD+ payments would not be realized by countries with reduced carbon emissions,
but by new deforesting countries that are more likely to respond to higher world prices and new
demand from former exporters55.
The second impact is linked to the degree to which it changes the source of countries
deforestation. A REDD+ programme in Kenya or Nigeria could lead other countries to pick up
the deforestation instead, where it did not exist initially; as a result, the relocation of the
deforesting industry could leak carbon and change the composition of trade among developing
countries56.
Thirdly, should Kenya and Nigeria consider REDD+ as an alternative, then the potential of the
same to appreciate both countries' forested currency thereby negatively affecting export
promotion is high. REDD+ will dissuade these countries from deforesting or degrading, in
exchange of high payments for afforestation or reforestation, hence raising the opportunity costs
for deforesting products. So that Kenya and Nigeria will focus more on planting trees under this
initiative and desist from export promotion through forest products such as coconuts or palm oil.
Fourth, in addition to limitation of deforestation, REDD+ will increase the inflows of capital
from foreign countries, hence putting appreciative pressure on Kenya and Nigeria’s currency. If
REDD+ is to succeed in these countries in terms of converting all the forests to protected land,
54
Supra Note 44
55
www.ictsd.org accessed on 25/05/2012
56
www.ictsd.org accessed on 25/05/2012
34
foreign income will replace the income that could have been gained by selling deforesting
products in Kenya and Nigerias domestic markets respectively. In order for the REDD+ payment
to be useful, Kenya and Nigeria will have to exchange the foreign currency for their respective
domestic currencies, hence appreciation of domestic currency, making it difficult for these
countries to pursue an export oriented model of trade.
In conclusion, pursuing a REDD+ option in place of the CDM would be an imprudent venture,
primarily because trade in Kenya and Nigeria is the driving force behind economic development.
REDD+ is not geared towards economic development, at least not at the moment, rather its main
objective is environmental and biodiversity conservation which developing countries get paid for
practicing the same. An old adage says that you cannot keep giving out fish, at some point you
have to teach the people how to fish, for Africa and particularly Kenya and Nigeria, REDD+ is
definitely not
a policy consideration because
of its
overreliance on donor funding for
economic development. It must be appreciated that with time, aid for trade is gradually going to
be a thing of the past , as countries are slowly inclining towards trade for aid, which has arisen
out of the recognition that having sound trade policies that are export driven, would cater for
all national economic and developmental needs eventually abolishing the reliance of aid for a
country to trade effectively. To that extent, the REDD+ is more likely to create an import driven
economy due to a narrow export gap and reliance on payment incentives to boost afforestation.
In view of the above, that the CDM will still be the best avenue to pursue, however, the same
can only be successful if certain policy guidelines and recommendations outlined in the next
section of the study, will be put in place.
14.0
POLICY RECOMMENDATIONS
Initially, the paper gave an account of the apparent legal and policy barriers in Kenya and
Nigeria that would hinder not only the effective implementation of CDM projects but also trade
competitiveness since some of the mechanisms to be used in developing the same still do not
adhere to the WTO generally.
To the extent of the above, this section seeks to give policy recommendations that Kenya,
35
Nigeria and the WTO may consider to make the implementation of CDM more effective and
further boost Kenya and Nigeria’s trade competitiveness globally. They are amongst others;
GHG TAXES
Currently Kenya and Nigeria’s taxation laws still do not recognize or do not have any provisions
relating to taxation of GHG emissions on a product by product basis. It would be prudent to
amend the existing taxation laws to incorporate GHG emissions. They may want to pursue
taxation specifically on fuel or petroleum products. To avoid disputes at the WTO level, the taxes
can be imposed identically on products produced from domestic as well as imported sources, so
as to be in conformity with Article III of GATT - National Treatment57.
The taxation laws can also be amended to incorporate tax on motor vehicles based on the fuel
economy of each model type for as long as the same tax is imposed on imported vehicles in
accordance with the National Treatment principle.
MINIMUM STANDARDS AT NATIONAL, REGIONAL AND INTERNATIONAL LEVELS
The domestic standardization laws of Kenya and Nigeria still do not have provisions to develop
standards for GHG measurement and verification; the same is the case regionally in the EAC and
ECOWAS treaties respectively. The proposal here would be to have a minimum threshold set by
the International Standardization Organization (ISO). Although there is in place a taskforce set
up by the ISO to develop standards for GHG measurement and verification, there is still a legal
gap, hence creating a harmonization barrier.
Harmonization of standards would facilitate trade regionally and internationally. Furthermore, it
would induce technological breakthroughs from larger potential markets (technology transfer)58.
LIBERALISATION OF ENVIRONMENTAL AND ENERGY GOODS AND SERVICES
(EEGS)
Although there has been a stalemate at the Doha trade talks regarding liberalization of EGS,
Kenya and Nigeria may pursue it regionally vide the respective regional blocs. The primary
57
Supra Note 39
58
Supra Note 39
36
reason behind the stalemate multilaterally, is because the WTO has not clearly classified
environmental technology and services related to climate change and CDM.
Pursuing the negotiations regionally would be beneficial because fewer stakeholders with
common interest would be involved therefore it will be easier to get into a profitable
compromise. Secondly, with the ongoing, bilateral North – South
trade arrangement, in
particular the EPAS, having hegemony regionally would give clear policy directions especially
on the issue of liberalization, foreign direct investment and trade diversification.
Thirdly, negotiating for EEGS would diversify Kenya and Nigeria’s trade base from the
traditional export in agriculture and horticultural products, hence greater gains from trade.
SETTING UP OF APPROPRIATE POLICIES INSTITUTIONS VIS A VIS TECHNOLOGY
TRANSFER
The absence of a policy, legal and institutional framework on transfer of technology leaves
Kenya and Nigeria at a precarious position especially when it comes to benchmarking,
monitoring and evaluation of CDM projects59.
There is need for an institution to assist in making appropriate technology selections vis a vis
CDM based on local conditions. The institution would carry out the following:-
1. CDM technology testing, demonstration and certification
2. Have and manage a CDM technology international data base.
3. Offering advisory services including management ,information on financial and market services
4. Give technical and financial support
REDUCTION OF FINANCE AND INVESTMENT BARRIERS
In the previous section, it was observed that financing of CDM technology in Kenya and Nigeria
is still a risky venture not to mention the fact that the respective banking laws still do not have
explicit provisions to address the same. The case is quite different at the continental level,
59
Supra Note 30
37
because the African Development Bank (AfDB) has specific funds, though not as elaborate as
the EIB, for carbon financing.
To that extent Kenya and Nigeria have to catch up with the continental pace by60:
1. Providing venture capital to promote CDM projects
2. Developing and engaging in capacity building programs to develop CDM investment
planning and management capabilities of the finance sector
3. Having policies in place that will enable financial institutions to get incentives for funds
channeled to CDM projects
4. Have in place fiscal policies to promote lower interest rates for medium to long term
loans obtained for CDM projects.
TECHNOLOGY TRANSFER AND THE TRIPS AGREEMENT
Since Climate Change is an issue of international concern that has a trickledown effect on the
implementation of domestic laws, it would be advisable to review the TRIPS Agreement so as to
enable the effectiveness of implementation , monitoring and evaluation.
The TRIPS Agreement recognizes transfer of technology in its Article 66.2 which provides
that member countries shall provide incentives to enterprises and institutions in their territories
for the purposes of promoting and encouraging technology transfer to least developed country
Members.
CDM is an important platform for transfer of technology, because it is a well know principle that
countries with efficient technology are the most competitive in global trade due to high quality
products that meet international standards. It is therefore not a surprise that many developing
countries will want to lobby for mandatory provisions in CDM Agreements that would ensure
technology transfer which primarily would take the form of Build Operate and Transfer (BOTs)
mechanisms.
For the above to happen, the scope of patentability in Article 27.1 of the TRIPS Agreement
should be limited by providing set criteria within a definition of patentability that has yet to be
added the TRIPS Agreement. This would reduce the extent of products and processes that would
60
Supra Note 10
38
be subject to patent claims.
INCREASED AID FOR TRADE (AfT) TO GHG EMISSION REDUCTION
The WTO should consider delivering the necessary technical support, infrastructure and capacity
building to Kenya and Nigeria to ensure that their trade still remains competitive globally
through the provision of infrastructure and financial aid to implement CDM driven projects and
industries in the respective countries.
Currently, the Global Environmental Fund (GEF) - CDM projects financier, cannot be adequate
enough due to the fact that it caters for many countries with needs at differing levels. Since
climate change issues have over the time been the focal point for trade debates, the WTO has the
responsibility of ensuring that there is a clear balance without derogating the need for sustainable
development and the need for globalization through gradual and progressive removal of trade
barriers- trade liberalization. AfT would therefore be an efficient tool towards achieving the said
goal.
16.0 CONCLUSION
The research began by giving a brief account of CDM and
its implementation structure,
thereafter it proceeded to give a background of CDM both in Kenya and Nigeria including an
expose’ on the legal, institutional and policy barriers to its smooth implementation. As its
primary objective, the paper began by introducing the subject matter on trade competitiveness
and went further to bring out the possible considerations vis a vis international trade should
Kenya and Nigeria fully adopt to CDM policies ,in addition to other climate mitigating options
primarily REDD+ which the paper concluded was not feasible for Kenya and Nigeria to vouch
for trade competitiveness globally as the same was more of a paid environmental and
biodiversity programme with the eventual outcome of driving Kenya and Nigeria into an importoriented economy.
To the extent of the foregoing, the paper recommended that CDM implementation was still the
best option for these two countries, for as long as certain policy, institutional and legal structures
were put in place.
From the entire assessment, the paper draws the conclusion that CDM in Kenya and Nigeria still
remains a façade as opposed to a reality simply because the legal and institutional capacities in
39
both countries still require major adjustments; second the Kyoto Protocol is not very clear as to
whether this is the entire route Parties should follow in a bid to achieve sustainable development;
thirdly, the WTO, even though it appreciates, the link between trade and climate change does not
have adequate provisions in its various legal texts to formally provide that linkage; thirdly CDM
has a high potential of raising more trade barriers and disintegrating regional blocs because it can
only be implemented on countries that are members to the UNFCCC, if you look at this from the
regional integration angle, it simply means ECOWAS and EAC member states who are not
signatories to the same(and indeed very few of them have acceded to the UNFCCC), may be
required to meet certain requirements for their products to enter into Nigeria and Kenya’s
markets, for instance Border Tax Adjustments or Eco- labeling, which not only goes against the
WTO principle of non- discrimination but also progressive and deeper regional integration.
The TRIPS Agreement on the other hand still presents an opportunity for patentability while also
creating a barrier on transfer of technology by failing to incorporate flexibilities on transfer of
technology, just as it has done with access to essential medicines, so as to facilitate trade and
industrialization.
It is with the foregoing in mind that the paper concludes that CDM vis a vis trade
competitiveness in Kenya and Nigeria still remains a façade as opposed to a reality we have been
made to believe in.
40
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