Issues to consider for Kenya on the road to launch of carbon tax

The global climate crisis is having a big impact on both people and the planet. FILE PHOTO | SHUTTERSTOCK

The global climate crisis is having a big impact on both people and the planet.

Heatwaves, droughts, floods and other extreme weather events are increasingly affecting life as we know it and reducing greenhouse gas emissions is now more than ever, a worldwide imperative.

The National Treasury has issued Kenya’s Draft National Green Fiscal Incentives Policy Framework for public comment.

The draft policy is a resounding acknowledgement by the government of the need for Kenya to go all-out green. It highlights the different fiscal policy measures that can be used in the country’s pursuit of low-carbon climate-resilient development, to deal with the challenge of global warming.

Among the draft’s suite of proposed measures, one that has elicited great attention is the proposal for the government to explore the viability and design of a carbon tax.

Read: Explore all the options before costly carbon tax 

The aim of such an initiative is to lower GHG emissions and provide a revenue stream that can be used to meet broader government objectives.

Specifically, the draft policy proposes a carbon tax to facilitate the switch to clean energy and foster the polluter pays principle.

It also calls for an evaluation of the modalities to include afforestation or reforestation projects in the national carbon tax scheme.

While taxes have been imposed since time immemorial, carbon taxes are of more recent origin. As of April 2022, the World Bank reports that there are only 37 carbon tax initiatives in different countries around the world, though the number is likely to increase as more countries seek direct carbon pricing as a response to the challenge of climate change.

A carbon tax can be levied across major economic sectors, including but not limited to, industrial production, energy, transportation, manufacturing, and agriculture.

Further, it can be levied on downstream consumers, midstream traders or upstream production depending on which achieves the highest emissions reduction coverage for the lowest administrative burden.

There is a need to determine the relevant tax base and incidence of levying carbon tax in Kenya, informed by the sectors that rank as highest emitters in the country.

However, exemptions would need to be provided as necessary for certain sectors or industries, to ensure a careful balance between economic, social and environmental goals.

For example, while the agricultural sector is currently the largest source of total GHG emissions in Kenya, consideration of how a carbon tax in this sector affects food security, will be paramount.

The applicable tax rate is also another important issue for consideration. Notable factors that determine the carbon tax rate include revenue raised, GHG emissions reductions, or alignment with peer countries and competitors to ensure a level playing field.

Competitiveness and leakage should also be high on the list of considerations. Since the goal is to encourage firms and consumers to reduce GHG emissions, the efficacy of carbon tax is measured based on how much this goal is met by firms and industry players.

Unfortunately, some companies are likely to shift production to countries not covered by a carbon tax, leading to ‘leakage’.

Read: Drivers to pay daily congestion charge in war against pollution

This challenge can be managed through the application of carbon taxes to imported goods or providing rebates to trade-exposed industries or through tax exemptions.

Wambua is a partner, in Environmental Law Practice while Kanyi is a partner, in Tax and Exchange Control Practice, Cliffe Dekker Hofmeyr.