Factors influencing the financial sustainability of carbon projects in Kenya: the moderating role of institutional capacity

Abstract

Climate finance has increasingly become a critical tool for supporting low-carbon transitions and climate-resilient development, with carbon finance playing a central role through the generation and trade of carbon credits. However, despite the growing adoption of carbon projects in Kenya, their financial sustainability remains a significant challenge due to economic constraints, socio-environmental dynamics, technical limitations, and institutional gaps. The goal of this study was to examine the factors influencing the financial sustainability of carbon projects in Kenya. Specifically, the study sought to determine how economic, socio-environmental, and technical factors affect financial sustainability, and how institutional capacity moderates the relationship between these factors and the financial sustainability of carbon projects in Kenya. The study was grounded in the resource-based view theory, the stakeholder theory, and institutional theory, which collectively explain how internal resources and capabilities, stakeholder relationships, and institutional structures influence the long-term sustainability of carbon projects. A descriptive cross-sectional research design was employed, and primary data was collected using structured questionnaires administered to project managers, financial officers, and monitoring and evaluation officers from Gold Standard-certified carbon projects in Kenya. Data was analyzed using descriptive statistics, Pearson correlation, and multiple linear regression analysis to determine relationships among variables and test hypotheses. The correlation analysis revealed that all independent variables were positively and significantly associated with financial sustainability. Economic factors showed the strongest relationship, followed by socio-environmental factors, while technical factors exhibited a moderate but significant relationship. These findings indicate that strong financial structures, community engagement, and technical capacity are all associated with improved financial sustainability of carbon projects. The regression results further indicated that the independent variables significantly influence financial sustainability. In the non-moderated model, economic factors had the strongest and statistically significant positive effect, followed by socio-environmental factors, while technical factors was not statistically significant. The moderated regression results indicated that institutional capacity does not have a statistically significant moderating effect on the relationship between the independent variables and financial sustainability, as all interaction terms were insignificant. The study concludes that the financial sustainability of carbon projects in Kenya is primarily driven by economic factors, supported by socio-environmental dynamics, while technical factors play a complementary role. Additionally, institutional capacity does not moderate this relationship. The study recommends that project developers strengthen financial management and funding diversification, enhance community engagement, and improve institutional frameworks to support sustainable carbon project development.”

Keywords: Carbon Finance, Financial Sustainability, Institutional Capacity, Socio- Environmental Factors, Technical Factors, Kenya.