Egypt’s Financial Regulatory Authority (the “FRA”) has introduced new carbon trading regulations, marking a significant step towards environmental sustainability. These regulations establish a framework for carbon certificates trading, aiming to reduce greenhouse gas emissions and promote carbon reduction projects. The move aligns Egypt with global efforts to combat climate change and creates new opportunities in the country’s financial markets.
The new regulations outline the creation of a Voluntary Carbon Market (the “VCM”) and the issuance of Carbon Emission Reduction Certificates (the “CERCs”). This system allows businesses to trade carbon credits, incentivizing the reduction of carbon dioxide emissions. The FRA, working within the Capital Market Law, has set guidelines for brokerage firms to participate in this emerging market. As a result, companies and investors now have a structured approach to engage in carbon trading, contributing to Egypt’s environmental goals while potentially benefiting from new economic opportunities.
A) Overview of Egypt's New Carbon Trading Market:
Egypt has taken a significant step towards environmental sustainability by launching its first regulated VCM. This initiative, which began with the Prime Ministerial Decree No. 4664 of 2022, has set the stage for a carbon trading platform within the Egyptian Stock Exchange (the “EGX”). The FRA has introduced groundbreaking regulations to create a robust framework for the accreditation, issuance, listing, delisting, and trading of CRECs.
B) What is a Voluntary Carbon Market (VCM)?
A Voluntary Carbon Market (VCM) is an economic system where entities can trade greenhouse gas emission allowances voluntarily. Unlike compliance carbon markets, which are regulated and require participants to meet specific emission reduction targets, VCMs offer a platform for companies, cities, or regions to offset their carbon footprint by purchasing credits. These credits represent emissions reductions achieved by others, according to the United Nations (UN) Environment Program. In this regard, the voluntary carbon registries acknowledged by the International Carbon Reduction and Offset Alliance (the “ICROA”) are considered to be fully compliant with all the conditions of the FRA without the need to follow the conditions mentioned under the FRA Decree No. 30 of 2024.
C) Alignment with Egypt's Vision of 2030 and the National Climate Change Strategy of 2050:
The establishment of the VCM aligns with Egypt’s Vision 2030 and the National Climate Change Strategy 2050. This initiative aims to strike a balance between economic growth and environmental stewardship, underscoring the nation’s commitment to mitigating climate change impacts while driving sustainable development.
Egypt’s leadership in this domain also contributes to the broader goals of Africa’s Agenda 2063, which promotes climate-resilient and environmentally sustainable economies across the continent. The carbon market is expected to enhance the green economy’s contribution to Gross Domestic Product (GDP), boost green investments, and help achieve targeted ratios in various aspects of the green economy.
D) Legal Framework and Regulatory Bodies:
The legal framework for Egypt’s new carbon market has been established through a series of decrees and regulations. These decrees have laid the groundwork for a robust system that aims at reducing greenhouse gas emissions and promote environmental sustainability.
This decree marked the beginning of Egypt’s journey towards a regulated carbon market. It set the stage for a CM platform within the EGX. This decree has amended some provisions of the Executive Regulations of the Capital Market Law. In this regard, this decree mandates the creation of a VCM platform within the EGX, designed for trading CERCs. Further, it also requires all government entities, public business sector, private sector, and project developers to notify both the FRA and the Ministry of Environment about projects for which CERCs will be issued.
2. Role of the Financial Regulatory Authority (FRA):
The FRA has played a crucial role in developing the regulatory framework for the VCM. In this respect, the FRA has issued several decrees to establish and regulate the VCM as follows:
- FRA Decree No. 57 of 2023 which establishes a Supervision and Control Committee for carbon credits, which plays a crucial role in shaping the framework for carbon emission reduction in Egypt.
- FRA Decree No. 163 of 2023 which lists the Entities that can verify and attest the Carbon Emission Reduction Projects in Egypt.
- FRA Decree No. 30 of 2024 which sets high standards for governance, data security, and transparency in accrediting voluntary carbon registries. This decree ensures that each Carbon Emission Reduction Project and each CERC is uniquely identifiable and is fully traceable.
- FRA Decree No. 31 of 2024 which outlines the rules for listing, delisting, and trading the CERCs on the EGX.
- FRA Decree No. 1732 of 2024 which outlines the conditions for brokerage firms to trade CERCs, including capital requirements, technological infrastructure, record keeping, staff training, and regulatory compliance.
E) Carbon Emission Reduction Certificates (CERCs):
- What are CERCs?
Carbon Emission Reduction Certificates (CERCs) are tradable financial assets that represent reductions in greenhouse gasses (GHG). These certificates are issued to entities that implement projects aimed at reducing GHG emissions, subject to approval by the concerned authorities. Each CERC corresponds to the reduction of one metric ton of carbon dioxide. The purpose of CERCs is to provide a tangible and tradable representation of carbon reduction efforts, enabling companies to offset their emissions and contribute to environmental sustainability.
Carbon credit trading has the potential to lower the cost of executing national targeted contributions by more than half, reaching 250 billion USD by 2030 globally. This market mechanism represents a positive step towards involving the private sector in climate action and encouraging Egyptian companies to invest in their carbon emissions’ mitigation projects.
2. Issuance and Registration Process for CERCs:
To obtain a CERC, projects must go through a rigorous verification and validation process. The FRA has established a framework for this process through several decrees. FRA Decree No. 31 of 2024 outlines the procedure for registering the Carbon Emission Reduction Projects (CERPs). In this respect, applicants must submit an application to the FRA to register their project on the CERP database. Once the required documents are completed, the FRA issues evidence of the project’s registration.
The issuance of CERCs involves several stages and it is anticipated that it would typically takes between one and a half to two years. The process includes verification and validation work conducted according to internationally recognized carbon emission reduction standards and methodologies. These are audited by verification bodies, both local and international, as listed in the FRA’s registry.
3. Trading Mechanism for CERCs on the Egyptian Stock Exchange (EGX):
The Egyptian Stock Exchange (EGX) has introduced the rules for listing and trading CERCs. In regards to CERCs, they are traded as financial instruments on the EGX, representing units of reduced GHG emissions. The EGX has 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.
The trading of CERCs on the EGX has several benefits for the Egyptian market. It expands the scope of the market and attracts more investors. Additionally, it increases companies’ ability to assess their risks, provides a clear framework for evaluating companies and stocks, and serves as an important tool for financing emission reduction projects.
F) Impact on Carbon Footprint Reduction for Exported Goods to the European Union – Coping with the EU CBAM:
The new VCM supports Egypt’s broader efforts to reduce the carbon footprint of exported goods. This is particularly important in light of international initiatives like the European Union’s Carbon Border Adjustment Mechanism (the “CBAM”).
The CBAM, set to be phased in over the coming years, will tax imports of carbon-intensive goods into the European Union (the “EU”). For Egypt, which exports large volumes of emission-intensive products such as steel, aluminum, and fertilizers to the EU, this presents both a challenge and an opportunity. While it could potentially disrupt Egypt’s export-driven industries, it could also incentivize companies to decarbonize their processes, making them CBAM-compliant and making them able to maintain their export volumes to the EU.
G) FRA’s Requirements for Brokerage Firms to Trade CERCs:
To facilitate the operation of the VCM, the FRA has outlined specific requirements for brokerage firms to trade CERCs. In this regard, FRA Decree No. 1732 of 2024 sets stringent conditions for such firms. Key requirements include:
- A minimum issued and paid-up capital of EGP 15 million.
- Provision of technological infrastructure.
- Appointment of a trained officer for trading in CERCs.
- Implementation of data protection measures.
- Offering electronic systems for trading CERCs.
- Maintaining accurate records of transactions involving CERCs.
These requirements would ensure that the brokerage firms within this field are well-equipped to handle the complexities of CERCs trading. Accordingly, this regulatory framework aims to create a robust and transparent trading environment for carbon certificates.
