Kenya has sought the assistance of the International Monetary Fund (IMF) with introducing a carbon tax on goods without sparking social unrest after the deadly protests against new taxes in June and July.
The IMF is expected to help identify the products that would attract the tax that is gaining currency in the developed world.
Kenya could also introduce an emissions trading system (ETS) — a cap-and-trade system that allows those industries with low emissions to sell their extra allowances to larger emitters.
The government’s previous attempt to introduce a pollution tax, the so-called eco levy, through the Finance Bill, 2024 flopped after youth-led protests forced the State to withdraw the proposed law that contained a slew of taxes.
In Europe, the carbon tax has targeted sectors importing “carbon-intensive goods” such as cement, fertiliser, iron and steel.
African countries like Ghanaians require payment of an annual levy for the carbon emissions produced by their petrol or diesel-powered vehicles.
“Implementation of other reform measures is progressing, albeit with some delays, including the one on carbon pricing for which we have requested IMF technical assistance,” said the IMF in reference to a notice from the Treasury.
“Implementation of the carbon tax will need to be complemented with a strengthened social safety net to protect the most vulnerable. On the latter, the World Bank is taking the lead.”
In Africa, Kenya will join countries like Ghana,South Africa and Mauritius that have introduced a form of carbon tax.
Like in Kenya, several citizens in Ghana opposed the charge, which they see as an added burden amid an ongoing economic crisis.
But environmental groups endorsed the tax, saying it will cut the country’s emissions and help raise more revenue for the government.
Kenya previously proposed an eco levy of between Sh98 and Sh1,275 per unit or kilogramme on dozens of products.
The idea behind the tax was to use money raised from the levy to fund projects that will help reduce the damage to the environment.
The levy targeted goods like smartphones, base stations, microphones and stands, and sound recording or reproducing units.
Others were diapers, plastic packing materials, rubber tyres, radio and broadcasting equipment, batteries, office machines, electronic calculating machines, data processing machines and processing units.
The carbon tax is one of the reform measures that Kenya agreed to with the IMF through the lender’s Resilience and Sustainability Fund (RSF).
The RSF was approved by the IMF in July 2023 and aims to reinforce Kenya’s efforts to address climate-related challenges and catalyse further private climate financing.
The IMF has committed to loan Kenya $541.3 million (Sh69.8 billion) under the RSF, out of which it has so far disbursed $180.4 million (Sh23.2 billion).
In turn, the Treasury committed to implement carbon pricing in line with IMF recommendations “to better reflect the externalities of fossil fuel consumption and to achieve emissions reduction targets in line with the updated NDC [Nationally Determined Contribution]”.
NDCs lay out how each country will contribute to the global temperature goals outlined under the Paris Agreement. The IMF has, however, revealed that Kenya delayed the introduction of the carbon tax amid the Gen-Z protests, which left more than 60 Kenyans dead.
“As reported during the previous RSF review, introduction of carbon pricing… is delayed in view of the socio-political challenges facing new revenue measures,” said the IMF.
“Following an initial discussion with the Fund TA team on carbon pricing, the authorities indicated that they need to explore feasibility, especially in light of recent social unrest triggered by the 2024 Finance Bill and that engagement with stakeholders will be critical.”
The introduction of a carbon tax is one of several reform measures that Kenya was supposed to meet by the end of September under the RSF arrangement but were missed in light of the protests.
Others are the integration of climate risk in project appraisal, adoption of priority fiscal incentives in selected sectors, and adoption of two regulations to promote energy efficiency and distributed renewable power generation.
The IMF has, however, warned that the implementation of the carbon tax will need to be complemented with a strengthened social safety net to protect the most vulnerable sections of the population.
The government is currently implementing a number of social assistance programmes for the elderly, youth, orphans, persons living with disabilities and those living in hunger-stricken areas under the umbrella name Inua Jamii.
According to the World Bank, 39 countries have either implemented or are considering carbon taxes in several forms, particularly on fuel.
The bank has listed Kenya, Botswana, Morocco, Mauritania and Cote d’Ivoire as the countries in Africa that are considering carbon taxes in 2024.
Switzerland and Liechtenstein have the highest carbon taxes in the world, with both charging a tax of $130.81 (Sh16,968) per tonne of CO2 equivalent in 2023.
The Organisation for Economic Co-operation and Development (OECD) reckons that while Kenya does not have a carbon tax on fuel, the excise duty it charges on the product can be considered a carbon tax.
Excise tax, also known as ‘sin tax’, is often charged on vices to discourage their consumption by the society. But Kenya charges the tax on fuel at Sh21.52 per litre of petrol, despite the commodity being essential in the economy.
“Kenya does not levy an explicit carbon price. Fuel excise taxes, an implicit form of carbon pricing, cover 18.9 percent of emissions in 2021, unchanged since 2018,” says the OECD.
A new carbon tax on fuel would further increase the cost of the product, which is already heavily taxed and attracts nine charges and levies.
Railway development levy (RDL), value added tax (VAT), excise duty, road maintenance levy (RML) and anti-adulteration levy are also charged on the product.
Other taxes incurred on the product are petroleum development levy, merchant shipping levy, petroleum regulatory levy and import declaration fee.
