Establishing a Voluntary Carbon Market in Egypt: Legal Framework and Strategic Implications

Overview

Egypt has recently launched its first regulated Voluntary Carbon Market (“VCM”) through a statement made by the Minister of Planning and Economic Development (the “MOPED”). This significant milestone marks a key step in Egypt’s efforts towards environmental and economic sustainability. Notably, this development follows the issuance of prime ministerial decree no. 4664 of 2022 (the “Decree”) on 13 August 2024, which amends the Executive Regulations of the Capital Markets Law, consequently establishing a voluntary market for trading carbon emission reduction certificates (“CERC”) in the Egyptian Stock Exchange (the “EGX”).

The launch of the first VCM in Egypt aligns with the recommendations outlined in the “Sharm El-Sheikh Guide for Fair Finance”, which was introduced during COP27, as well as Egypt’s Vision 2030 and the National Climate Change Strategy 2050. To support this initiative, Egypt is implementing the Joint Capital Market Program (J-CAP) in collaboration with the World Bank, aiming to support the development of the local financial market into a regional hub for VCM. 

Additionally, the MOPED is enhancing its partnership with the World Bank’s Transformative Carbon Assets Fund (TCAF) to reduce carbon emissions through the “Nouwfi” program. Furthermore, the MOPED is cooperating with the European Union via the Technical Assistance and Information Exchange (TAIEX) mechanism to obtain technical support for the carbon border adjustment mechanism. Importantly, trading carbon credits is estimated to reduce the global cost of implementing nationally determined climate contributions by USD 250 billion by 2030.

Legal Framework

Egypt has demonstrated a strong commitment to establishing a regulated VCM through recent actions by the Financial Regulatory Authority (the “FRA”) and the EGX. The following regulations constitute the current legal framework around the VCM:

1. The Decree:

The Decree mandates the creation of a VCM platform within the EGX, designed for trading CERC. CERC are considered tradable financial assets representing reductions in greenhouse gases (“GHG”). They are issued to entities that implement projects aimed at reducing GHG emissions, subject to approval by the concerned authorities. Each CERC will correspond to the reduction of 1 (one) metric ton of carbon dioxide. 

2. FRA's Regulator Framework: 

• Supervision and Control Committee: The FRA issued Decree No. 57 of 2023, establishing a dedicated Supervision and Control Committee for Carbon Credits. This committee is responsible for overseeing the issuance, trading, and management of carbon credits within the Egyptian market and includes members from the FRA, the Ministry of Environment, the EGX, and experts in VCM.
• Registration Criteria for Verification and Validation bodies: Decree No. 163 of 2023 outlines the criteria for registering verification and validation bodies. Registration requirements for Egyptian entities include obtaining ISO/IEC 17029 - ISO-14065:2020 or any updates thereof, as well as the ISO 14064:3 accreditation certificate for documenting verification and certification work for carbon emission reduction projects (“CERP”). Additionally, they must complete other competence tests for their management teams.
• Foreign entities must be recognised by the United Nations Framework Convention on Climate Change (UNFCCC) or the Paris Agreement and be accredited in international carbon registries. They must also provide supporting documents regarding experience. These entities play a vital role in ensuring the quality and credibility of CERP, ensuring that they meet international standards and generate genuine carbon credits.
• Accrediting Local Voluntary Carbon Registries: FRA Decree No. 30 of 2024 establishes the standards required for the accreditation of local voluntary carbon records with the FRA for the purpose of registering CERP and issuing CERC tradable in the VCM on the EGX. International voluntary carbon records recognised by the International Carbon Reduction and Offset Alliance (ICROA) are considered accredited by the FRA without the need to meet the conditions stipulated in this decision.
• Listing and Delisting Rules: To register a CERP, FRA Decree No. 31 of 2024 provides that applicants shall submit an application to the FRA to register the project on the database of CERP. The FRA shall issue evidence of the project’s registration in its database after completing a certain set of documents. Once registered, they can apply to list the certificates on the EGX. The application must include details such as the details of the carbon registry, project identification, and certificate quantities. The exchange will publish the listing request, and the FRA committee will decide within 5 (five) business days. Trading of these certificates will abide by the EGX rules and procedures.

3. EGX’s Trading Rules:

• Listing and Trading Rules: The EGX has introduced rules for listing and trading CERC and their Forward Contracts. CERC are tradable financial instruments representing units of reduced GHG, where each unit equals 1 (one) ton of carbon dioxide equivalent emissions. These credits are issued in favor of the project developer upon the completion of verification and validation work conducted according to the internationally recognised carbon emission reduction standards and methodologies, audited by verification bodies, whether local or international, as listed in FRA’s registry. These CERC are referred to as credits in these rules, and Forward Contracts for CERC are ownership contracts for CERC to be issued in the future, under which the project owner or financier to deliver the credits to the other party in the contract at a specified time, as agreed between the 2 (two) parties. Ownership of these contracts is traded in the market.
• Clearing and Settlement Rules: The EGX has released rules on its website governing the settlement of CERC and their associated Forward Contracts. It defines a Settlement System specifically designed to handle trading transactions related to these carbon credits. The rules also outline the obligations of Clearing Company members, which are entities licensed by the FRA to manage credit and cash settlements for CERC and their Forward Contracts.
• Carbon Offset Platform: The EGX established a platform for companies to offset their residual emissions through the purchase of high-quality carbon credits. This platform facilitates market access and encourages companies to take responsibility for their carbon footprint.

4. Additional Measures:

• Accounting Interpretation: Prime Minister’s Decree No. 2 of 2024 adds an accounting interpretation on CERC, providing guidance to companies on incorporating these certificates into their financial statements, enhancing transparency and promoting standardised reporting practices.
• These recent regulatory developments demonstrate Egypt’s proactive approach in establishing a well-functioning VCM. We are closely monitoring updates in this sector and will be provide regular updates.