Why Kenya’s carbon tax debate is no longer about climate

As Kenya enters another budget and Finance Bill cycle focused on revenue mobilisation, industrial growth and economic resilience, an important policy conversation is quietly emerging in the background: should Kenya begin preparing for carbon pricing?

For many policymakers, the debate around carbon tax has largely been viewed as an environmental issue. But globally, the conversation has moved far beyond climate policy. Carbon pricing is rapidly becoming a trade, competitiveness and industrial policy issue.

That shift is being driven largely by the European Union’s Carbon Border Adjustment Mechanism (CBAM). CBAM is often described as a climate regulation, but in reality, it represents a major restructuring of how global trade may increasingly operate in a carbon-constrained economy. The mechanism itself did not emerge in isolation.

It is the product of nearly two decades of increasingly aggressive climate policy within the European Union. As Europe tightened emissions regulations through its Emissions Trading System, European manufacturers began paying rising carbon costs for producing carbon-intensive goods such as steel, cement and aluminium.

This created concerns that firms could simply relocate production to countries with weaker climate rules, a phenomenon known as “carbon leakage” while imported products continued entering Europe without equivalent carbon costs. In response, the EU introduced CBAM to level playing field by attaching a carbon price to certain imports based on their embedded emissions.

Practically, the era where companies could participate in global markets without credible carbon accounting systems is rapidly coming to an end. The scale of this transition is substantial.

The EU estimates CBAM-linked revenues could exceed €14 billion (Sh2 trillion) annually by 2030, while carbon prices under the EU Emissions Trading System have fluctuated between approximately €60 (Sh9,000) and €100 (Sh15,000) per tonne of carbonCO₂ in recent years.

For export-oriented economies such as Kenya, these are no longer abstract climate figures. They are emerging determinants of trade competitiveness. This is why Kenya’s carbon tax discussion should no longer be framed narrowly as an environmental but should be approached as part of a broader national competitiveness strategy.

One of the most overlooked aspects of CBAM is that countries without domestic carbon pricing systems may effectively transfer carbon revenues abroad. Under the EU framework, importers can deduct carbon costs already paid in the exporting country.

This means Kenyan exporters could eventually pay carbon-related charges to foreign jurisdictions if Kenya lacks its own credible carbon pricing framework.

Without domestic systems, Kenya risks exporting economic value that could otherwise help finance green industrialisation, renewable energy expansion, clean transport systems and climate-smart manufacturing locally. The question is no longer whether carbon pricing will affect Kenyan businesses. It already is.

The more important question is whether Kenya wants to proactively shape its own transition framework or wait for external markets to impose one indirectly through trade rules.

This does not necessarily mean Kenya should rush into imposing a broad carbon tax immediately.

Kenya’s electricity grid is among the greenest in Africa due to significant geothermal and renewable energy penetration. The country also has a relatively advanced sustainable finance ecosystem, growing ESG reporting momentum and strong digital infrastructure.

Those strengths matter because the future competitive advantage may not simply be low-cost production, but verifiably low-carbon production.

However, before any carbon tax or border adjustment mechanism can function effectively, Kenya must first build the underlying carbon measurement infrastructure. Simply put, you cannot tax what you cannot measure.

Many firms still lack robust systems for measuring Scope 1, 2 and 3 emissions consistently. Sustainability reporting remains uneven across sectors, while emissions data quality varies significantly. Companies that can produce reliable, verifiable and decision-useful emissions data are likely to enjoy better access to export markets, climate finance and international supply chains. Those that cannot may struggle to compete.

For policymakers, this creates an opportunity to rethink carbon pricing not as a punitive tax measure, but as a long-term economic transformation tool.

A well-designed Kenyan carbon pricing framework could support green manufacturing incentives, industrial decarbonisation, renewable energy expansion, climate-smart agriculture, export competitiveness programmes and SME transition support.

Importantly, carbon-related revenues could be ringfenced toward economic transition priorities rather than absorbed into general fiscal expenditure. Kenya must also avoid creating excessive compliance burdens too quickly. Small and medium-sized enterprises should not be overwhelmed with reporting obligations before adequate capacity building, digital reporting systems and sector guidance are in place.

A phased approach would likely be more effective beginning with carbon disclosure requirements, piloting high-emission sectors, strengthening emissions verification systems, introducing targeted incentives for green investments and gradually expanding carbon pricing mechanisms over time.

Technology will also become critical. The future of sustainability regulation will increasingly rely on digital reporting, AI-enabled supervision and real-time emissions monitoring rather than static annual disclosures. This is why investments in sustainability data systems, ESG reporting frameworks and digital regulatory infrastructure should be viewed as economic competitiveness investments not simply compliance exercises.

There is also a broader geopolitical reality emerging.

Countries around the world are beginning to redesign trade systems around embedded carbon emissions and climate transparency. Climate policy, trade policy and industrial policy are rapidly converging into one economic conversation.

For Kenya, the greatest risk may not be introducing carbon pricing too early. It may be remaining unprepared while global trade systems increasingly price carbon on Kenya’s behalf.

The lesson from Europe is therefore not that Kenya should copy CBAM exactly. It is that the future global economy will increasingly reward countries and companies that can demonstrate credible, measurable and low-carbon production systems.

Kenya’s policymakers should start preparing accordingly.

The writer is manager, professional standards & sustainability, ICPAK