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Carbon tax: A timely solution for Kenya's climate goals

 Carbon tax is levied on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. [iStockphoto]

The effects of the global climate crisis are being felt across the world, not least in developing countries, including Kenya.

Vulnerable people are most impacted, with droughts, floods, livestock diseases and armed conflicts wiping out their livelihoods. This underscores the urgency with which Kenya must move to develop sustainable ways of combating global warming.  

Taxes, such as carbon tax, and tradable permit systems are some of the tools that countries around the world are using to enhance their environment and climate policy.

Carbon tax is one of the main ways through which some countries are seeking to curb carbon emissions. It is levied on the production, distribution or use of fossil fuels based on how much carbon their combustion emits.

One of the aims of the tax is to discourage organisations from operating with excessive carbon footprints and instead encourage a transition to more sustainable alternatives.

As such, since carbon tax is essentially a form of pollution tax, it should be charged as an indirect tax with greenhouse gas emissions to the environment and society being incorporated into the price of carbon-intensive production activities.

Intended use

In designing carbon tax laws, the government should clearly articulate the intended use and consequence of carbon tax to the public.

These include using carbon tax revenues to reduce the country’s debts; reducing other taxes such as income or business tax when enforcing carbon tax; or using it as a means of increasing expenditure in social programs that benefit the citizens.

In practice, most governments recycle the revenue from carbon taxes back to the consumers through reductions in income taxes levied, especially for low-income households most affected by the carbon taxes, or through increased budget allocations for social services.

The World Bank’s Carbon Pricing dashboard indicates that 45 countries had by 2021 adopted either carbon tax laws or Emissions Trading System (ETS) to price emissions beyond a certain level or to cap emissions produced.

Kenya, like many other countries, has joined the movement to fight global warming and restore the environment.

President William Ruto, at the 27th Conference of Parties, affirmed that Kenya had joined the global fight to attain zero carbon emissions by 2050.

This will be attained through the enforcement of mechanisms such as carbon tax or an emissions trading system. Presently, Kenya has adopted the emissions trading system as a means of reducing greenhouse emissions.

In a bid to incentivise businesses to reduce greenhouse emissions, the Finance Act, 2022 reduced the corporate income tax rate for entities that operate a carbon market exchange or emissions trading system that is certified by the Nairobi International Financial Centre Authority (Nifca).

The income tax rate was reduced from 30 per cent to 15 per cent in the first 10 years of operation. By reducing the rate, the government hopes to encourage uptake of the Nifca facilities by entities operating a carbon market exchange or emission trading system which will consequently encourage reduction of greenhouse emissions.

Additionally, Nifca signed a collaboration agreement with Singapore-based global carbon exchange, AirCarbon Exchange to support the growth of climate finance in Kenya by establishing a locally accessible marketplace for carbon offsets.

Carbon offsets are essentially vouchers to make up the difference. For instance, a company with high carbon emissions purchases a voucher to compensate for the carbon dioxide that it has emitted.

This money is then used elsewhere in the world to fund the reduction of the same amount of carbon dioxide emitted by the purchasing company.

Since Kenya has lower carbon emissions rate relative to the Organisation for Economic Cooperation and Development countries average, the carbon vouchers can be utilised in Kenya, therefore providing a potential market.

Several carbon trading projects are already underway in Kenya. For example, in the Gazi and Makongeni areas of the south coast, Mikoko Pamoja, a community-led initiative, sells carbon credits from mangrove conservation activities to organisations looking to manage their carbon footprints.

However, the trading operates in a voluntary market and there are no laws that govern carbon trading.

The introduction of carbon tax would be a welcome step because not only will the tax be an additional revenue stream for the government, which can be used to counteract economic harm, but it will also ensure that emission of greenhouse gases is controlled.

Moreover, carbon tax is clear and specific because one can see the revenue being collected based on the emissions.

- The writer is a tax and legal associate at Deloitte East Africa. The views presented are her own and not necessarily those of Deloitte.

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