Taxes, incentives have big role in environmental sustainability


Environmental sustainability has emerged as a major theme across the globe. This has largely been driven by climate change and is in line with the United Nations’ Sustainable Development Goal 13, which requires stakeholders to take urgent action to combat climate change and its impact.

Governments are deploying different legislative and policy tools to encourage investment in products and activities that are deemed to be environmentally friendly. These include tax incentives. At the same time, disincentives in the form of taxes, levies or other related fees are being imposed on products and activities that are deemed to have a negative effect on the environment.

Across Europe, the European Union agreed to reduce greenhouse gas emissions by at least 55 per cent by 2030 compared to 1990 levels. This is set to be achieved through increased use of renewable energy, efficient energy use, rollout of low emission transport modes, introduction of measures to prevent carbon leakage and provision of tools to prevent and grow natural carbon sinks.

An environmental tax, according to Eurostat, is generally defined as a tax whose base is a physical unit (or a proxy of a physical unit) of something that has a proven, specific negative effect on the environment.

The tax is expected to directly or indirectly increase the cost of a good or activity that is deemed to be harmful to the environment relative to other less harmful activities or goods.

It is classified into four main categories; energy, transport, pollution and resource. Energy taxes are focused on energy production and products. These include petrol and diesel. Transport taxes largely focus on ownership and use of motor vehicles, among others.

Pollution taxes, on the other hand, are focused on emissions to air and water, management of solid waste and noise. Lastly, resource taxes are linked to the extraction or use of natural resources.

Environmental taxes can be levied on the final product or on the raw materials that are used to manufacture the product and are based on the quantity of output or the sale price.

Alternatively, the taxes are targeted at increasing the variable and fixed costs of inputs that are used to produce environmentally harmful goods or activities.

For instance, Kenya in 2017 outlawed the manufacturing, sale and distribution of single-use plastic carrier bags. Excise duty at the rate of 10 per cent was also introduced in 2021 on plastics.

On the other hand, targeted incentives such as tax deductions, allowances or rebates are granted to people who are engaged in activities or the production of products that are considered to have a positive effect or reduce negative effects on the environment.

By and large, organisations will need to factor the growing role of environmental taxes, resource efficiency and low-carbon activity incentives into their strategies, investment decisions and environmental, social and governance policies.

The views expressed here are not necessarily those of Ernst & Young.

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