ARTICLE
5 July 2023

Regulatory Update: Nigeria's Carbon Market Approach

PL
Pavestones Legal

Contributor

Pavestones is a modern, full service, female led law practice with a particular focus on technology and innovation. The practice was borne out of a desire to meet the legal requirements of businesses by adopting a modern, cost effective and less archaic approach. Our key practice areas are Corporate and Commercial, Technology and Innovation, Data Protection and Compliance Services, Energy and Natural Resources and Banking and Finance.
In a previous publication, we discussed the Africa Carbon Market Initiative (ACMI) which is geared towards initiating and scaling a carbon credit market across the continent.
Nigeria Environment

Introduction

In a previous publication, we discussed the Africa Carbon Market Initiative (ACMI) which is geared towards initiating and scaling a carbon credit market across the continent. In furtherance of Nigeria's commitment to the ACMI, the Federal Government passed the Climate Change Act of 2021 (the "Act") into law and established the National Council on Climate Change (NCCC).

On June 24, 2023, the NCCC published a notice titled "Regulatory Guidance on Nigeria's Carbon Market Approach" ("Publication"), wherein it emphasised its commitment to the global efforts to reduce emissions that contribute to climate change and made a proposal for appropriate governance framework and processes for the proper implementation of cooperation mechanisms under the Paris Agreement.

In this article, we highlight. the existing framework and structure of the voluntary carbon market and the proposed methods of achieving its commitment to the ACMI and the Paris Agreement as indicated in the Publication.

Provisions of the Paris Agreement on the Voluntary Carbon Market.

The Paris Agreement is an international treaty on climate change, adopted by 196 countries including Nigeria.

Article 6.2 of the Paris Agreement makes provisions for voluntary cooperation between and among contracting states/countries by enabling trade in mitigation outcomes to achieve emission reduction targets. The trade in mitigation outcomes allows for two contracting states to enter into an agreement whereby one party reduces carbon emission (in line with its Nationally Determined Contributions (NDC) to the reduction of carbon emissions) and transfers the credit gained from the reduction to the other party who then counts it towards its own NDC targets. This is usually followed by financial compensation paid by the receiving party. This is generally referred to as internationally transferred mitigation outcomes (ITMO) and can be executed by state actors or a private sector actor (to assist the country in meeting and/or exceeding its own NDC). This arrangement will be considered as an investment by the receiving party in the selling party to assist in various carbon projects. Consequently, the consideration received by the selling party must be channeled towards low-carbon projects in its state.

It is important to note that the ITMO sold will not be counted towards the selling party's NDC, and the parties are required to make the necessary adjustments in their respective accounts towards the fulfilment of their individual NDC ("Corresponding Adjustments").

  • Corresponding Adjustments

Article 6.2 of the Paris Agreement requires that contracting states shall apply robust accounting to ensure the avoidance of double counting. Corresponding Adjustments require that where countries enter into an arrangement for ITMO, the emission sold is not counted as mitigation by both countries.

Essentially, where a country purchases credits gained from emission reductions from another country, it is considered that such buying country has funded a mitigation project in the selling country, and as such, the emission reduction bought will be counted to its credit as having fulfilled part of its own NDC under the Paris Agreement. the selling country, and as such, the emission reduction bought will be counted to its credit as having fulfilled part of its own NDC under the Paris Agreement. The selling country, however, will have the emissions sold deducted from its 'account', and it will not be counted to its credit as having fulfilled its own NDC.

States are advised to develop proper accounting mechanisms to ensure that emission reductions are not counted twice. It is important to note that only Authorised Emissions Reductions (AERs), which are emissions sold by state actors, are subject to corresponding adjustments and the requirement to establish a double-entry book-keeping mechanism to ensure that the emissions are not claimed twice. Where the emissions, however, are sold by non-state/private sector actors (Mitigation Contribution Emissions Reductions- MCERs), they will not be subject to corresponding adjustments, as they are not subject to the accounting framework of the Paris Agreement. Where the MCER is however used by these non-state actors to comply with any national laws/regulations on carbon emission reduction, it will then be subject to the Paris Agreement's accounting framework.

Nigeria's Proposal for Attaining its Climate Targets.

The NCCC in its publication recognizes that the voluntary cooperation between contracting states and the requirement for corresponding adjustments represents the best option for Nigeria to meet its domestic and international climate obligations. It also recognizes that ITMOs alone will not be sufficient to achieve its climate targets. It emphasizes the need for the inclusion of and partnership with private sector actors towards achieving its climate targets.

To this end, the Federal Government has declared that further participation in the carbon market will be based on government policies and development priorities which shall be developed over time. At present, the Act contains no provisions or directions for participation in the voluntary carbon market, leaving room for self-regulation and standards developed by independent organisations for carbon credit projects.

The NCCC recognizes the importance of private sector participation in the Nigerian carbon credit market. In order to establish and develop a regulatory framework, the NCCC announced the introduction of a "No-Objection" by the NCCC which will be required to approve the issuance and transfer of certified credits generated across all sectors. We expect that this will be applicable to AERs and MCERs and will ensure that any ITMOs sold will count towards meeting Nigeria's climate target. In addition, the introduction of a governance framework for participants in the voluntary carbon market will-

  1. create clear structures within which projects will be considered eligible to generate carbon credits;
  2. aid proper accounting and corresponding adjustments, as the government will have the ability to track, quantify and register carbon transactions;
  3. protect participants from fraud, excessive speculations, money laundering, etc.

Conclusion

The voluntary carbon market is largely unregulated, and participants are left to develop standards and guidelines that will govern their participation. As the market grows, there has been an increased call for governance and Nigeria is not left out in this call. We expect that within the shortest time possible, the NCCC will issue regulations regarding the process of obtaining the No-Objection, and other rules that will govern participation in the carbon market. It is expected that these regulations will not inhibit the flexibility of the market to ensure that its ultimate purpose is fulfilled as stakeholder engagement is encouraged by the NCCC in the Publication.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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