The World Bank is urging Kenya to adopt a carbon tax and significantly raise excise taxes on harmful products such as alcohol, tobacco, and sugar-sweetened beverages. The move, according to the Bank, would help reduce the country’s rising public debt while addressing the environmental and health challenges facing its population.
In its latest Public Finance Review for Kenya, the multilateral lender recommends implementing a carbon tax on imported fuels at the point of entry. The proposed measure aims to curb emissions, stimulate investment in cleaner technologies, and generate revenue to fund climate mitigation and adaptation initiatives.
The World Bank suggests that Kenya should gradually increase the carbon tax to $25 per ton of CO₂, about Ksh.3,235, by the year 2030. This could generate additional revenues equivalent to 0.25 percent of the GDP, while also delivering environmental benefits.
“Introducing a carbon tax would not only encourage energy efficiency and innovation but also provide co-benefits such as improved air quality and fewer road traffic accidents, especially in the transport sector,” the report states.
Currently, Kenya imposes various levies on fuel imports, including VAT, excise duty, road maintenance levy, and petroleum development levy. The proposed carbon tax would be an addition to this list and is expected to impact the transport sector most heavily.
At the same time, Kenya’s Medium-Term Revenue Strategy (2024/25 to 2026/27) has acknowledged the feasibility of a dedicated carbon tax. The World Bank’s recommendations now provide both fiscal and environmental justification for fast-tracking this initiative.
‘Sin Taxes’
But the carbon tax is not the only suggestion on the table.
The World Bank is also advocating for higher excise taxes, often referred to as ‘sin taxes’, on products linked to lifestyle diseases and premature deaths. These include alcohol, tobacco, and sugar-sweetened drinks.
According to the Bank, consumption of these products was responsible for 9.7 percent of all deaths in Kenya in 2019, a dramatic increase from 7.5 percent in 1990 and significantly higher than the 7.4 percent regional average reported for the same year.
To combat this trend and raise more public funds, the World Bank recommends:
- A 117 percent increase in alcohol excise duties
- A 50 percent rise in tobacco taxes
These adjustments would return tax rates and revenues to 2016 levels, potentially boosting tax collections from 0.27 to 0.60 percent of GDP.
In a bid to promote healthier consumption habits, the World Bank also advises removing taxes on alternatives such as bottled water. This could improve accessibility and encourage consumers to switch from sugary drinks to healthier options.
The Bank adds that any revenue loss from removing taxes on healthy options could be offset by increasing levies on high-sugar beverages.
“The loss of tax revenues can be offset by increasing taxes on sugar-sweetened beverages,” the report says.
