Kenya recently published the Medium-Term Revenue Strategy (MTRS) which has proposed the introduction of a carbon tax. Carbon tax is levied on the amount of greenhouse gas (GHG) emissions within a specified period.
Statistics from the World Bank show that several countries have a carbon tax in the pipeline, including Ethiopia and Botswana. South Africa introduced a carbon tax in 2019. Kenya has indicated its intention to follow in their foosteps.
The Finance Act 2022 enacted a reduction in the corporate tax rate to 15 percent for companies engaged in carbon market exchange certified by the Nairobi International Financial Centre Authority within the first 10 years of their operations.
Tax leakages are inevitable and notably our manufacturing index continues to deteriorate, with many firms forced to change their operations. A reduced manufacturing index indicates relatively low emissions from manufacturing plants thus introducing a carbon tax and factoring competitiveness, a shift by these manufacturers to another tax jurisdiction with relaxed tax practices is inevitable. This places the government in a dilemma in addressing the looming unemployment and GDP index.
For the successful implementation of a new tax regime, the decision is informed by identifying the tax incidence. Carbon tax incidence could be drawn from multi-sectors ranking on the volume of emissions and burning of fossil fuel. For efficiency purposes, advanced technological infrastructure will be integral in GHG emissions analysis and reporting, and further grant credits where there is a reduction.
In other words, the carbon market will be integral to facilitating this transaction. Revenue collected from carbon tax must have a clear destined purpose and be largely limited to funding activities that directly address climate change such as afforestation, exploring other energy-generating options and sensitisation campaigns.
This is to ensure sustainable balance and that the benefits of carbon tax are realised. Tax exemptions come in handy to provide equilibrium between inputs and outputs. We ought to exempt a few inputs that support the manufacturing of clean energy and restrict the importation of motor vehicles with high combustion power.
This also means that we explore other sources of clean energy such as wind power, and promote the aspect of independent power producers (IPP) to come up with alternative ideas more of a collaborative public-private partnership (PPP) approach and power incentives.
It is imperative that the government carefully weighs the impact of tax rate adjustments owing to the rise in the cost of living and the deteriorating shilling in the international market. The intended purpose of the carbon tax and other tax measures must be elaborate with no room for ambiguity. With global warming on the rise and calling for a swift response, there is a need to strike a balance between sustainable economic development and promoting social welfare.
The writer is an Associate at Ernst & Young LLP (EY).
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