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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. 1 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 2 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 4 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 5 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 6 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 7 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 8 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 9 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 REFERENCES 1. Aldy, Joseph E., Peter R. Orszag& Joseph Stiglitz(2001), Climate Change: An Agenda for Global Collective Action, Paper presented at the Conference on ― The Timing of Climate Change Policies,‖ Pew Center on Global Climate Change, October 2001. 2. 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