The World Bank is pushing Kenya to introduce a carbon tax on fuel that would offer the Treasury Sh40.5 billion in revenues and raise pump prices.
The multilateral lender reckons that the tax will help plug budget holes while helping cut consumption of fossil fuels to ease climate change.
Fuel prices have a big effect on inflation in Kenya, which depends heavily on diesel for transport, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
“Carbon taxation can help Kenya meet its commitments under the Paris Agreement and further curb climate change externalities,” the World Bank says in a new report.
Under the Paris pact, nations have committed to a long-term goal of limiting average temperature rises to less than 2°C above pre-industrial levels and to attempt to limit them even further to 1.5°C.
While scientists say fossil fuel use must be reduced to meet the goal, countries have failed to reach any international agreement on set phaseout dates for unabated coal, gas or oil use.
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 as a carbon tax.
Excise tax, also known as ‘sin tax’, is often charged on vices to discourage their consumption by 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.
These include the railway development levy (RDL), value added tax (VAT), excise duty, road maintenance levy (RML) and anti-adulteration levy.
Other taxes incurred on the product are petroleum development levy, merchant shipping levy, petroleum regulatory levy and import declaration fee.
The levies and taxes account for a larger share of pump prices. The combined taxes and levies were Sh80.50 on a litre of petrol, whose price was Sh176.72. The World Bank says the carbon tax would generate additional revenues estimated at 0.25 percent of GDP, which is currently equivalent to Sh40.5 billion.
It says climate benefits linked with carbon taxes include less air pollution, arguing that reduced travel on costly fuel could result in fewer traffic accidents, saving lives and reducing health costs.
The World Bank acknowledges the direct impact of the carbon tax on transport costs and inflation.
It reckons 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 to the elderly, youth, orphans, persons living with disabilities and those living in hunger-stricken areas under the umbrella name Inua Jamii.
The World Bank recommends that 30 percent of proceeds from the carbon tax should be distributed in lump-sum cash transfers to 40 percent of the poorest households.
“Implentation of the tax would not hurt the poor but would still correct for environmental distortions and still yield around 01.8 percent of GDP in fiscal revenues,” the World Bank says.
According to the World Bank, 39 countries have either implemented or are considering carbon taxes in several forms, particularly on fuel.
The bank in a separate report has listed Kenya, Botswana, Morocco, Mauritania and Cote d’Ivoire as the countries in Africa that are considering carbon taxes.
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.
Kenya last year sought the assistance of the International Monetary Fund (IMF) on how to introduce a carbon tax on goods without sparking public fury after the deadly protests against new taxes that forced withdrawal of the Finance Bill, 2024.
The IMF assistance is expected to help Kenya 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.
In Africa, Ghana requires payment of an annual levy for the carbon emissions produced by their petrol- or diesel-powered vehicles.
South Africa and Mauritius are the other African countries 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.
The Treasury has mulled over introducing a carbon tax in its medium-term revenue strategy (MTRS).
“During the strategy period, the government will explore the possibility of introducing a carbon tax based on the carbon content of fossil fuels. Motor vehicle emissions contribute to air pollution, which also has significant health effects,” the Exchequer notes in its MTRS.
Last year, the government proposed a motor vehicle tax of 2.5 percent of the value of the motor vehicle to be collected by an insurer at the point of issuing motor vehicle insurance.
The proposed tax, which was dropped in the defeat of the Finance Bill, 2024, was set at a minimum of Sh5,000 and a maximum of Sh100,000.
