World Bank proposes carbon tax, additional levies on alcohol and tobacco for Kenya

The World Bank wants Kenya to introduce a carbon tax to mitigate climate change externalities while also raising revenue to lower its debt-to-GDP ratio, which currently stands at 65.5%.

The multilateral lender’s latest public finance review for the country suggests a carbon tax on fuel be introduced at the point of entry to encourage reduced emissions, stimulate innovation in greener technologies, and create revenue streams that can fund climate adaptation and mitigation measures.

Currently, the Energy and Petroleum Regulatory Authority (EPRA) imposes several taxes on fuel imports among them Value Added Tax (VAT), excise duty, road maintenance levy, and petroleum development levy.

Now, the World Bank suggests that introducing a carbon tax on imported fuels, raising it gradually to $25 per ton of CO2 by 2030 (about Ksh.3,235) would yield additional revenues of about 0.25 percent of the GDP by this time.

The lender estimates that about two-thirds of the tax would fall on the transport sector.

“There are climate co-benefits associated with carbon taxes, including less air pollution and, in the transport sector, fewer road traffic accidents, saving lives and reducing health costs,” the World Bank says.

Currently, Kenya’s Medium-Term Revenue Strategy for the 2024/25 to the 2026/27 financial years identifies the potential for a dedicated carbon tax.

At the same time, the World Bank is suggesting higher excise taxes on alcohol, tobacco, and sugar-sweetened beverages, which it terms a considerable and growing contributor to mortality and morbidity.

“Collectively, consumption of these products accounted for 9.7 percent of all deaths in Kenya in 2019. This is a significant increase in the 7.5 percent of deaths in Kenya in 1990 attributable to consumption of these products. It is also significantly higher than the regional average for 2019 of 7.4 percent,” the report says.

The bank proposes increases of 117 percent on alcohol and 50 percent on tobacco, projecting that it will return tax rates to 2016 levels and have the potential to return revenue to 2016 levels and increase tax revenues from 0.27 to 0.60 percent of GDP.

At the same time, the World Bank suggests that removing the tax on healthier alternatives such as water will increase their affordability and incentivize substitution from drinks with a high sugar content.

“The loss of tax revenues can be offset by increasing taxes on sugar-sweetened beverages,” it says.