The purpose of this initiative is to launch a Clean Development Mechanism (CDM) in Nairobi in partnership with CDM and Carbon market participants to facilitate CDM transactions and bridge both information and knowledge gaps required for high quality CDM investments, carbon financing, insurance/reinsurance, environmental management and sustainable development in Africa in general and Kenya in particular. CDM projects and carbon investments and carbon financing are continuously scarce specifically in Kenya and Africa in general despite the fact that there are potential opportunities for investments in the CDM carbon market.

The Africa CDM carbon market framework will actively engage participants in an electronic and physically open market platform to exchange ideas, information and transactions on potential CDM carbon deals and opportunities. Market engagement of participants will stimulate interests to improve level of participation, contribution and generation of CDM projects required to meet the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 1997 and 2005 Kyoto Protocol standards. The participation is on voluntary basis and BEA International will enhance coordination, maintain data base and registry of CDM transactions for the participants and develop climate change insurance premiums on the basis of carbon neutral products and services.

Rationale for Operation of the CDM Carbon Market Framework

The CDM carbon market framework is a financial-based solution to environmental problems and sustainable development. The carbon market framework is deeply rooted in the Chicago Board of Trade that administered the first carbon allowance in 1993 with actual compliance in 1995.In order to promote sustainable development within the CDM carbon market framework, it is necessary to set some market parameters. Building up on the lessons from the Chicago Climate Change and Emissions Trading, an overall cap was established on reducing (SO2) by power electric companies that find it expensive to reduce sulphur emissions be able to buy allowances from companies that extraordinarily reduce sulphur at low costs (Chicago Climate Exchange 2008). In addition, the Canada Private Equity Association (CPEA) alliance of Ecosecurity team enables the CDM carbon market framework attract a variety of buyers including public and private sector entities in Europe, North America and Japan (Canada Private Equity Association 2008).

The buyers are obtaining carbon credits or offsets from new energy projects that are most suitable CDM projects including solar energy, biogas, wind energy, hydro, bio-diesel, and energy efficiency and energy saving projects. Other potential projects include capturing methane from landfills, reducing pollution from agricultural activities within good land use practices, reducing deforestation through enhanced carbon sequestration including tree planting, forest management and regeneration of degraded areas or increased biodiversity management and conservation. The application of CDM carbon market framework for reducing emissions of greenhouse gases has potential to promote intellectual, political and economic understandings on how a widespread entrepreneurship mechanism can promote solutions to environmental problems, financial viability and sustainable development.

Within the CDM carbon market framework, buyers can choose from a variety of carbon credit types or offsets. These include Certified Emissions Reductions (CERs), Emission Reduction Units (ERUs), Verified Emission Reductions (VERs), technologies, greenhouse gas methodologies, geographical diversity (areas), risk profiles, insurance premiums, and sustainability co-benefits (Canada Private Equity Association 2008). The insurgence of the CDM carbon market framework both on the volumes of carbon credits exchanged or traded and the continuous increase in the number of participants is a good indicator for the establishment of the market in the developing countries. The developing countries are considering the CDM carbon market framework that promotes both inward investments and sustainable development projects (Canada Private Equity Association 2008). This consideration puts to test how many CDM projects can a developing country such as South Africa or the rest of Africa generate and how these projects will benefit the country and poor communities at large.

In general, the CDM carbon market framework will adopt the Chicago Climate Exchange framework. The framework is extrapolated on three parts that are integrated to provide stakeholders or participants with real-time data required to support trading in the market, assist market participants in managing carbon baseline portfolios and sustain a carbon market framework barometer required for compliance purposes. Each one of these structures or parts will enhance quality, effective performance, efficiency, sustainability and reputation of the market. The structural overview of the market is as follows:
The CDM carbon registry

This is the electronic data base that serves the market participants and stakeholders with information on potential CDM projects, tradable carbon credits or offsets, supporting financial instruments either public or private, sale contracts, CDM transactions, membership duration, members in compliance or non-compliance with CDM carbon market framework rules and regulations stipulated in the context of the UNFCCC and the Kyoto Protocol, membership status
The CDM carbon market platform

This is an electronic accessible market place by the participants. It offers an opportunity for the CDM trades to take place among the account holders. Also, the space enables completion of the private transactions through bilateral arrangements to be efficient and effective.
The CDM carbon clearing and deal settlement

The CDM carbon clearing and deal settlement provides space for daily completion of transactions obtained from both registry and market place. The information is accurately processed from the carbon trading and associated activities. The link of the clearing and settlement to registry system is to facilitate and enhance effective and prompt delivery of carbon financial instruments to CDM carbon account holders.

Insurance Premiums

Effects of climate change pose challenges to investments, industries, manufacturing, infrastructure, agriculture, transport, energy among key sectors for economic development. In part of mitigating investments risks against climate change, insurance and reinsurance of investments is essential to financial and economic sustainability. The CDM carbon market will develop products and services inform of premiums that can be offset through the carbon credits and benefit corporations.

Operation process of the CDM Carbon Market Framework

The three operational processes of the CDM carbon framework will be accomplished as shown in the framework below. The carbon market framework is a subsidiary of the Africa Carbon Market (ACM), designed on contractual market arrangements that offers standardized and clears carbon credits and voluntary or options contracts on reduction of greenhouse gases, pollution control, trade in clean technologies, clean industrial production, clean energy, renewable energy, energy efficiency, energy conservation, carbon sequestration, good land use and agricultural practices, restoration of ecosystem, forest management, reforestation, afforestation, waste management, methane capture and related environmental products.

The ACM undertakes delivery of carbon credits from African countries for trade within and outside Africa. The making and delivery of the carbon credit contracts by ACM will be done by registered members of the ACM. ACM will initiate and make sale contracts or sell orders on behalf of the sellers of the carbon credits. The sellers will be cleared for the sale of the credits. ACM will enhance outreach to potential buyers of the carbon credits locally and overseas. The buyers will issue purchasing or buying orders of the carbon credits to ACM. ACM will verify, validate the orders and clear the buying orders for delivery of the carbon credits. ACM will match the buying orders to the selling orders and establish trading privileges amongst the ACM account holders and other special market participants.

ACM will ensure trading eligibility, transparency, accountability, responsibility and ensuring that the registry of accounts is accurate and updated accordingly prior to making and delivery of the contracts. Once the carbon credit contract is delivered to the buyer, ACM will ensure that payments are made as stipulated in the contract and the seller of the carbon credits receives proceeds according to the time schedule. ACM will make 5-10% retainer of the proceeds from the seller and buyer to offset costs of the transactions and enhance efficiency and effectiveness in the performance of the carbon market framework.

Potential traders both sellers and buyers of carbon credits from CDM projects in Africa are encouraged to apply for special trading privileges or establish an account with ACM. The ACM Business Development and Marketing team will reach out to potential CDM market participants and explore opportunities for participation.

Capitalization for the ACM approach is ranging from individual contributions, Foundation grants, donations, investments and or shareholding. Initial down payment is required for set-up operations, demonstration, marketing, outreach and buy-out risks and high cost operations necessary towards sustainability. The exit strategy of the pilot is after five years and the business operations will kick in at full cost recovery. The business plan is currently under development and will provide some ideas on cash generations, cash flows and operational expenses.