Kenya publishes draft National Green Fiscal Incentives Policy Framework

Executive summary

The Government of Kenya published a draft National Green Fiscal Incentives Policy Framework on 30 January 2023 for public comments. The policy framework addresses a wide array of areas including policy goals and guiding principles, situational analysis of green fiscal reforms across key sectors in Kenya and green fiscal policy interventions.

Some of the key policy tools that are set out include the use of carbon tax, rebates, subsidies, tax exemptions, ecological fiscal transfers, research grants, concessional loans, guarantees, interest rate subsidies, creation of a green bank among others.

These measures are anticipated to help stimulate a shift in production, consumption and investment into low-carbon climate resilient and environmentally sustainable practices. They are also set to spur private sector green investment.

The policy framework has identified policy actions that are of interest to the Government of Kenya. These are specific fiscal policies and actions that are required for specific sectors, and they include disaster risk management, water and the blue economy, manufacturing, waste management, electricity, and transport, among others.

The policy framework also provides an overview of the governance structures to implement the policy.

This Alert highlights the key provisions in the draft National Green Fiscal Incentives Policy Framework.

Detailed discussion

Threats posed by climate change and other environmental challenges have led nations to undertake measures geared towards transition to a low-carbon-climate resilience development path. The expected range of benefits include:

• Stronger growth, greener investment, and higher innovation

• Enhanced natural capital

• Enhanced resilience to climate and other shocks

• Better management of transition risks

• Adherence to international obligations

New green fiscal policies

The Government has identified the need for new and additional green fiscal policies that relate to how it spends and raises financial resources to steer the economy towards a green pathway. These policies have been identified as critical because of the following reasons:

• Taxes and subsidies can influence the costs, prices and profits in a wide range of markets. They can be used to stimulate a shift in production, consumption and investment in low-carbon, climate-resilient and environmentally sustainable practices. They are a cost-effective way to deliver environmental outcomes and can uncover innovative solutions to environmental challenges that would otherwise be ignored.

• Some fiscal instruments such as concessional loans, guarantees and interest rate subsidies can be effective tools in overcoming investment barriers and leveraging private sector green investments. These instruments have consistently leveraged private capital that is many multiples of the committed public spending. This has been achieved across multiple country contexts and economic sectors.

• In other cases, government spending can directly target the delivery of environmental outcomes that the private sector might otherwise ignore. Some (largely adaptation) solutions such as disaster risk reduction and management activities, or the restoration of degraded lands may never attract sufficient private spending. Direct government spending may be the quickest and easiest way to achieve the desired outcomes.

• The way in which the government raises capital (including through green bonds, etc.) can signal to stakeholders the importance that the government attaches to delivering particular outcomes.

Policy goals and guiding principles

The policy framework aims to identify and prioritize the implementation of green fiscal actions that will enable Kenya to exploit the opportunities available to accelerate the transition to a low-emission development pathway and enhance environmental sustainability. These will be achieved through:

• Directing government planning, budgeting and spending/procurement toward green production and consumption

• Providing a framework for fiscal incentives to attract private sector investment into a low-carbon emission, climate-resilient and environmentally sustainable economy

• Providing a framework for generating additional revenue streams for the government

There are nine principles that have informed the development of the policy and will guide the implementation of the specific actions. These are as follows:

Predictability

The framework will provide greater certainty in government policy to encourage higher private sector investment in green growth. Sunset clauses for phasing out incentive schemes will be developed to provide certainty for the investors.

Cost-effectiveness

The policy promotes cost-effectiveness. The focus should be on fiscal policies that have been seen to be cost-effective. Specific interventions will be analyzed to ensure value for money.

Polluter-pays principle

The policy will provide ways of allocating the costs of pollution prevention and control to polluters to encourage the rational use of scarce environmental resources by evoking the Polluter Pays Principle.

Monitoring, evaluation and learning

The policy and its individual actions will have their impacts closely monitored and periodically evaluated so that lessons can be drawn that will enhance their effectiveness over time, responding to an evolving market context.

Coherence

The individual actions developed under this policy will be additional. There will be a focus on both ensuring that all policies are aligned to achieve the same objective, and on avoiding unnecessary policy duplication or overlap.

Consultative

The policy and its individual actions are developed in a consultative manner, drawing on the full range of expertise within Kenya and internationally, allowing those who will be both positively and negatively affected by potential changes to express their perspective and to have an opportunity to suggest improvements.

Inclusiveness

The policy and its actions will promote the participation of private investors and communities, including small-, medium- and large-scale enterprises. This will, in turn, support the Government’s employment and wealth-creation initiatives.

Transparency and accountability

Spending on green fiscal policies and any revenues raised will be managed in line with the provisions of the Constitution of Kenya and the Public Finance Management Act (2012) on sound public expenditures management.

Equity

The policy and its individual actions will promote reallocation and redistribution of resources while taking cognizance of the needs of the most vulnerable sectors and members of society.

Cross-cutting issues

The following have been identified as cross-cutting issues that are critical in the implementation of the policy framework:

• Green investment – the draft policy seeks to design, develop and institute a green investment bank and credit guarantee schemes and instruments to enhance access to finance. It will also develop a priority list for national green investments.

• Carbon tax – the draft policy mandates that the National Treasury with the role of designing and presenting a proposal for carbon tax through the annual government budget. This should include the carbon tax rate, coverage, and how to allocate revenues that will be raised as well as how the country will ensure it remains competitive. This will help reduce Green House Gas (GHG) emissions and also to provide a revenue stream that can be used to meet broader government objectives.

• Foreign direct investment – Kenya is one of the largest recipients of foreign direct investment (FDI) in Africa. Notably, a third of the FDI in 2019 was directed to climate-related investments.

• Capital markets – private funding can be secured through the issuance of green bonds that are listed on the capital markets thus enhancing liquidity of the bonds and enhancing their attractiveness to investors.

Green fiscal actions to reduce emissions

The draft green fiscal policy incentives framework has identified policy actions that are of interest to the Government of Kenya. Specific fiscal policies and actions are required for specific sectors. It follows that the policy actions are tailored towards the identified sectors.

These are as highlighted below:

Disaster risk management

To mitigate against adverse climatic conditions, the policy proposes the development of insurance products to augment existing crop and livestock insurance, allocate additional funding for climate information services, establish a compensation fund for victims of climate impacts and the devolution of meteorological services to the County level.

Water and the blue economy

The proposed policy actions touching on this include measures geared towards reduction of acquisition cost of water harvesting, storage and flood mitigation infrastructure; funding of research into utilization on invasive species. It also proposes to impose tax measures on large scale fishing companies and trawlers to enhance sustainable fishing.

Health and sanitation

To combat climate related health risks, the draft policy proposes to develop grants for bio control of mosquitoes and organic pesticides, impose a higher financial penalty for improper waste disposal and exempt from tax the importation of energy efficient medical equipment.

Food, agriculture and nutrition security

The draft policy proposes to enhance green technology in agricultural production through the use of electric trucks, integrated crop management technology and organic farming. It also proposes to incentivize cooperative development that supports strategies including land consolidation and mechanization and, hence, promotes large-scale crop production and value addition.

Forests, wildlife and tourism

The draft framework intends to consider available options for promoting tree planting on public and private lands, to reach 10% of land covered by forests. The policy also proposes to use ecological fiscal transfers and payment for ecosystem services to accelerate reforestation and afforestation. To this end, it also proposes to factor in afforestation or reforestation in the national carbon tax design.

Human settlements and infrastructure

In the proposed draft policy, road designs are to be amended to include “roads for water” concept to improve their resiliency. It also proposes to provide tax incentives for building materials locally manufactured using more than 50% recycled content in their production. Tax incentives for solar passive structures, fiscal incentives to encourage setting construction waste/ materials re-use facilities and the importation/ local manufacture and sale of water-saving devices will also be availed.

Electricity

The policy proposes the phasing out of thermal plants. It also proposes to provide concessional funding or public support to pre-investment geothermal resource assessments. Towards expanding off-grid connectivity, the draft policy proposes tax exemptions and credits for off-grid renewable energy installations. To increase the number of households connected to electricity, it proposes to design consumer-level incentives.

Clean cooking

The policy also proposes to grant tax exemptions and waivers to companies that produce clean cooking technologies. It also proposes to build consumer awareness campaign about benefits of clean cooking technologies. To increase the use of clean energy at the household level, it is proposed that a pay-as-you-go or pay-as-you-consume models for clean cooking appliances is designed.

Manufacturing

The aim of the policy framework is to promote efficient production. This is to be done through promoting the private sector use of energy-efficient machinery. The draft policy proposes the development of green standards and eco-labelling for products and services.

Transport

The Kenyan Government intends to shift public expenditure towards electric mass transit. To this end, the draft policy proposes to provide incentives for the import, manufacture and assembly of electric and hybrid motor vehicles, motorcycles and their spare parts. To boost support for charging infrastructure, the Government will offer incentives for electric vehicle and e-mobility infrastructure. The draft policy proposes a congestion charge in major cities targeted at changing the traffic flow. There is also a proposed change in the transport fuel tax rate, particularly in combination with carbon tax, this will enable a comparison of fuel-use changes compared to growth in vehicle miles travelled.

Waste management

The draft policy proposes to establish a waste management fund mechanism to incentivize sustainable approaches as part of a broader finance strategy. The policy also mandates the National Treasury and Ministry of Environment and Forestries to explore incentives to encourage private sector firms into waste management sector. It will consider waste fees to promote greener waste management and explore circular business model incentives.

It is notable that the success of the policy framework is dependent on various agencies contributing and coordination of their actions. These include National Treasury and Ministry of Environment and Forestries, and Ministry of Energy, among others.

This has been addressed by allocation of specific lead actors for each policy area which includes specific policy activities and key performance indicators.

Next steps

Stakeholders should take into consideration the policy framework and determine how this will impact their current and future operations.

Stakeholders are also encouraged to share their comments and recommendations for inclusion in the final Green Fiscal Incentives Framework by Tuesday, 2 March 2023.

Once the Ministry of National Treasury and Economic Planning takes into consideration proposals by the various stakeholders, the policy framework will be tabled before the Cabinet for approval and adoption. Thereafter the policy will be used as the basis of any related laws and regulations to facilitate the implementation of the action points.

For additional information with respect this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

• Francis Kamau                                                                                                                                                                                               

• Christopher Kirathe                                                                                                                                                                                      

• Hadijah Nannyomo                                                                                                                                                                                         

• Robert Maina                                                                                                                                                                                                 

• Kevin Kirui

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

• Bruno Messerschmitt

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

• Kwasi Owiredu

Ernst & Young LLP (United States), Pan African Tax Desk, New York

• Brigitte Keirby-Smith

• Dele A. Olagun-Samuel

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.