Efforts to develop a global carbon market are often discussed in terms of climate science, project methodologies, and carbon pricing. However, the creation of a functioning international market is, to a significant extent, a legal undertaking. Kenya’s recently released carbon-market rulebook illustrates why regulatory development is necessary—and how changes in the rules can materially affect developers, financiers and carbon-credit purchasers.
Carbon Credits Are Legal Constructs
A carbon credit is not a tangible physical commodity like other energy commodities. It is an intangible instrument created through a combination of project documentation, measurement and verification standards, registry procedures, contractual arrangements, and government regulation.
Scientific and technical standards determine whether an emissions reduction or removal has occurred. Law determines who owns that reduction, whether it may be converted into a tradable credit, what approvals are required, whether it may be transferred internationally, and what claims a purchaser may make when using it.
A global market therefore depends on reasonably clear and compatible rules addressing, among other matters:
- Ownership of emissions reductions and carbon credits
- Rights to develop projects on public, private, or community land
- Government approval and registration requirements
- Environmental and social safeguards
- Community consultation and benefit sharing
- The taxation and regulatory treatment of project revenues
- International transfers and corresponding adjustments
- The representations companies may make when retiring credits
These issues become particularly important under Article 6 of the Paris Agreement. Article 6 permits countries to transfer mitigation outcomes internationally, but requires authorization, tracking, reporting, and accounting systems intended to prevent the same emissions reduction from being counted by more than one country. The international framework must ultimately be implemented through national legislation and administrative procedures.
Regulatory Uncertainty Creates Transaction Risk
Where national laws are incomplete, inconsistent, or subject to change, the resulting uncertainty affects every participant in a carbon project transaction.
For project developers, regulatory change can affect project eligibility, approval timelines, credit volumes, benefit-sharing obligations, and the ability to sell credits internationally. Developers commonly incur significant costs before the first credit is issued. A new approval requirement or export restriction introduced after those expenditures have been made can materially alter project economics or strand invested capital.
For financiers, regulatory uncertainty becomes credit and valuation risk. Financing decisions are often based on projected credit issuances and anticipated sales revenue. If government authorization is delayed, international transfers are restricted, or additional fees and benefit-sharing obligations are imposed, the project may not produce sufficient cash flow to service its debt. The value of carbon credits as collateral is similarly reduced if their ownership or transferability is uncertain.
For corporate offtakers, the risks include non-delivery, replacement costs and an inability to make the intended climate claim. A purchaser may receive fewer credits than expected or receive credits that lack an anticipated host-country authorization or corresponding adjustment. Although such credits may continue to exist in a voluntary registry, they may not possess the attributes required for the purchaser’s intended compliance obligation or climate claim.
Inconsistency between jurisdictions compounds these problems. A credit may comply with the law of the host country but fail to satisfy the purchaser’s domestic regulations, a compliance program, or an applicable claims standard.
Kenya’s Evolving Framework
Kenya’s recent carbon credit guidebook illustrates both the benefits and the risks of regulatory development.
The country’s Climate Change (Carbon Markets) Regulations, 2024 established a national framework for carbon projects. Among other things, the regulations address project approval, registration, environmental, and social requirements, government oversight, community-development arrangements, and benefit sharing. They also establish procedures relevant to Kenya’s participation in Article 6 transactions.
In July 2026, however, Kenya released the Kenya Guide for Strategic Engagement in Carbon Markets 2026. The guide is intended to operationalize Kenya’s Article 6 strategy and make governmental decision-making more transparent and predictable.
It establishes a three-stage process—No-Objection, Approval, and Authorization—for projects seeking to participate in international carbon transactions. Importantly, it also creates a national carbon budget of approximately 10 million tonnes of carbon dioxide equivalent for international transfers through 2030, with indicative annual allocations of approximately 1.67 million tonnes.
The initial framework focuses on mitigation activities in the energy, transport, industrial-process, and waste sectors. Forestry and other land-use activities are not currently included in the priority list while Kenya develops stronger baselines and systems for addressing accounting and reversal risks. Inclusion in a priority category does not itself guarantee authorization.
These restrictions serve legitimate national objectives. In particular, the carbon budget is intended to prevent Kenya from transferring emissions reductions that it may ultimately need to satisfy its own nationally determined contribution under the Paris Agreement.
Nevertheless, the guide also illustrates regulatory-change risk. A developer may have structured and financed a project on the assumption that all qualifying credits could be sold internationally or obtain Article 6 authorization. Under the new framework, authorization depends on project type, national priorities, and the remaining capacity within Kenya’s carbon budget. A credit may therefore be validly issued under a voluntary standard but lack the government authorization or corresponding adjustment anticipated by the purchaser.
Implications for Carbon Transactions
Kenya’s experience underscores the need to treat host-country regulation as a core component of carbon-project diligence and transaction structuring.
Carbon purchase and financing agreements should clearly distinguish between credit issuance, host-country approval and authorization for international transfer. They should also allocate the risk that authorization is delayed, denied, or unavailable because a national or sectoral carbon budget has been exhausted.
Depending on the transaction, relevant protections may include the following:
- Making specified governmental approvals conditions precedent
- Establishing long-stop dates for authorization
- Defining whether delivery requires a corresponding adjustment
- Providing substitute-credit or replacement rights
- Allocating new taxes, fees, and benefit-sharing costs
- Including stabilization/change-in-law and regulatory-cooperation provisions
- Adjusting prices if credits do not receive the expected authorization
- Providing termination rights where regulatory changes frustrate the intended use of the credits
Kenya’s rulebook may ultimately increase investor confidence by creating a more structured and predictable approval process. At the same time, it demonstrates a broader point: regulatory clarity does not necessarily eliminate carbon-market risk—it frequently reallocates that risk among governments, developers, financiers, and buyers. Local regulatory incentives and investor protections can also be important drivers in attracting capital to fund and develop carbon credit projects.
The success of a global carbon market will therefore depend not only on producing credible emissions reductions, but also on developing legal systems and contractual structures that make the resulting rights sufficiently durable, transferable, and predictable.