Legal landscape of voluntary carbon markets – Focus on Africa

The global effort against climate change requires innovative mechanisms to reduce greenhouse gas (GHG) emissions. Among these mechanisms, voluntary carbon markets have emerged as a tool to direct investments towards low-carbon projects. Stakeholders (such as large corporations) operating on carbon voluntary markets purchase carbon credits as a way to compensate for their climate impacts. A “carbon credit” represents the equivalent of one metric ton of CO₂ either avoided or removed from the atmosphere. Examples of projects generating carbon credits include afforestation, wetland restoration, and clean cooking initiatives that replace traditional wood and charcoal stoves with solar or electric alternatives.

The sale and purchase of carbon credits on voluntary markets currently relies on independent bodies (such as VERRA) that establish the standards that projects must meet to be recognized as effective GHG emission reduction or removal methods. A primary concern, and the subject of much controversy, is the quality and integrity of carbon credits issued by such independent certification bodies.

Article 6.4 of the Paris Agreement^[1] establishes a centralized crediting mechanism^[2] overseen by a Supervisory Body. Once the mechanism is fully operational, states, companies, and individuals will be able to purchase Article 6.4 carbon credits (called “A6.4ERs”). Despite some uncertainty about the Paris Agreement’s impact on voluntary carbon markets and the potential shift to a global market, Article 6.4 is expected to set a benchmark for carbon credit standards, enhancing credibility and stability, and increasing demand for carbon credits: enhanced transparency and strengthened verification and monitoring methodologies are essential to building trust among stakeholders and ensuring the credibility and effectiveness of carbon markets.

Carbon markets, though still emerging, could offer significant opportunities for many African States to host climate change mitigation projects, given the potential for low carbon infrastructure development and the development of natural carbon sinks. This article presents an overview of the legal frameworks, challenges, and the future outlook for voluntary carbon markets in Africa.

African Carbon Markets: Potential and Goals

Africa currently generates only a small fraction of its maximum annual potential of carbon credits and represents only about 16% of the global carbon market^[3]. The African Carbon Markets Initiative (ACMI), launched at COP27, aims to address this gap by producing 300 million carbon credits annually by 2030 and 1.5 billion credits by 2050^[4]. The initiative also seeks to unlock significant revenue, support millions of jobs, and ensure equitable distribution of carbon credit revenue to local communities.

National Legal Frameworks -Tackling Key Issues

On a national level, governments are increasingly recognizing the need to establish robust legal frameworks to regulate carbon markets and attract investment in carbon offset projects. These frameworks are designed to:

• Establish a framework for the implementation of the Paris Agreement, including article 6.4 ;
• Ensure that projects align with national GHG reductions targets ;
• Guarantee that the state benefits from the projects developed within its territory ;
• Attract investments.

As an example, in 2023 the Kenyan government amended the Climate Change Act, 2016 to provide for express regulations of carbon markets in Kenya and the Climate Change (Carbon Markets) Regulations, 2024 were adopted in May 2024. Togo adopted the decree no. 2023-034/PR on carbon mechanisms in March 2023 and the order no. 040/MERF of 30/05/24 defining the procedure for approving projects and programmes eligible for carbon mechanisms was published in September 2024.

The institutional framework typically involves a national authority responsible for verifying project eligibility, approving and registering projects, and monitoring their implementation.

Regarding the regime applicable to carbon credits, we have observed that the recurring issues, which are crucial to both states and project developers, are those typically raised in relation to natural resources projects financed by the private sector. These issues are notably the following:

• Ownership of carbon credits – States have generally adopted one of these two approaches:

1. State ownership: Carbon credits generated by a project in a country belong to the state (or any other public authority designated by the relevant legislation), which then grants ownership of a certain proportion of such credits to the project developer ;
2. Project developer ownership: Carbon credits generated by a project belong to the project developer, who may have the obligation to transfer a certain proportion of such credits (or of their corresponding value) to the state, a designated public authority and/or local communities.

Regardless of the approach, the corresponding legislation should be clear and specific.

• Sharing agreements – Legislation may also provide that benefits from carbon credits be allocated through a sharing agreement. The sharing agreement determines how the benefits of the projects are shared between stakeholders, which can include: the state, local communities, and certain national authorities. The state can negotiate conditions depending on how attractive a project is to investors.
• Taxation and fees : Another way for the state to obtain benefits from carbon markets is through taxation and/or fees. States may subject the sale and/or more generally any form of transfer of carbon credits to a specific tax and/or to certain fees to be paid to the relevant authority. Many countries have not yet adopted the subsidiary legislation to set the basis for the tax or determine the amount of the fee. This is a key point for investors and project developers, as these amounts will impact their revenue, and investors seek stability regardless of the fees and taxes that will apply over time.

Although they are more and more regulated, carbon markets in African jurisdictions still face certain challenges. Incomplete legal frameworks can create uncertainty for investors and project developers. In many countries, new legislations are not yet tested by the market, and the changing regulatory environment can make it difficult for stakeholders to navigate. Conflicting regulations, such as those related to environmental and social impacts, land and property rights, and public procurement, can also hinder the implementation of projects.

By addressing these challenges and building robust legal and regulatory frameworks, African States will be in a better position to harness the full potential of carbon markets as a tool to contribute to mitigating climate change.

In recent years, we have been advising a growing number of developers in relation to the development of natural carbon sink projects on the continent. We assist them in securing the legal structure of their projects within this evolving regulatory context.

[1] The Paris Agreement was adopted on 12 December 2015 at the twenty-first session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 21) and entered into force on 4 November 2016.

[2] Article 6.4 of the Paris Agreement provides that: “A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to this Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to this Agreement, and shall aim:

(a) To promote the mitigation of greenhouse gas emissions while fostering sustainable development;

(b) To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;

(c) To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and

(d) To deliver an overall mitigation in global emissions.

[3] Africa Carbon Markets: Status and Outlook Report 2024.

[4] ACMI 2022 Roadmap Report.