World Bank Recommends Fuel Carbon Tax in Kenya to Generate Sh40.5 Billion

The World Bank has recommended that the Kenyan government impose a carbon tax on fuel, estimating that such a levy could generate up to Sh40.5 billion (approximately US $305 million) annually. The proposal is part of the Bank’s 2025 Kenya Public Finance Review and aims to accelerate Kenya’s transition to a low-carbon economy, support its 2030 climate goals under the Paris Agreement, and correct market distortions that make fossil fuels appear artificially cheap. Crucially, the Bank advises taxing fuels “at the point of entry” into Kenya—such as import terminals or refineries—instead of relying on vehicle taxation, as this more accurately reflects the social cost of carbon emissions while fitting within Kenya’s administrative capabilities.

Background: Kenya’s Fiscal and Climate Context

Since the early 2000s, Kenya has pursued a dual agenda of economic growth and environmental sustainability. Under the Vision 2030 development blueprint, energy security, infrastructure expansion, and poverty reduction have been central pillars. However, rapid urbanisation—particularly in Nairobi and Mombasa—has driven up transport fuel consumption, contributing to CO₂ emissions and a rising fiscal deficit.

In May 2025, only one month after Kenya exited the IMF Extended Credit Facility, the government’s budget deficit remained at a concerning 7.5 percent of GDP. Revenue shortfalls, exacerbated by prolonged value-added tax (VAT) exemptions on petroleum products and high public debt, have forced policymakers to explore new revenue streams. Meanwhile, Kenya’s 2009 Climate Change Act and its National Climate Change Action Plan (NCCAP 2018–2022) commit the country to reduce greenhouse gas (GHG) emissions by 32 percent below business-as-usual levels by 2030 (conditional upon international support), and to achieve 100 percent green electricity by 2030.

Against this backdrop, the World Bank’s 2025 Kenya Public Finance Review identifies a dedicated carbon tax on fossil fuels as a fiscally sound and environmentally beneficial measure. The Medium-Term Revenue Strategy (MTRS 2025–2028), prepared by the Kenya Revenue Authority (KRA) and the Treasury, already lists a carbon levy as an option for revenue mobilisation and green growth.

The World Bank’s Proposal: Fuel Carbon Tax vs. Vehicle Taxation

Rather than levying carbon-related fees at the tailpipe—via vehicle registration taxes, annual licenses, or fuel efficiency surcharges—the Bank recommends targeting fuel at the point of entry, i.e., when petroleum products enter Kenya via ports, pipelines, or local refineries:

“Implementing a carbon tax on imported fuels would more accurately reflect the social cost of carbon and align with Kenya’s existing Customs and Border Control mechanisms,” notes the report.

Vehicle taxation, while politically popular, faces administrative hurdles: Kenya’s National Transport and Safety Authority (NTSA) and county governments would need to overhaul motor vehicle registration systems, adopt new emission-testing protocols, and manage rebates for electric vehicles. By contrast, KRA can integrate a carbon levy—measured in Shillings per liter or kilogram of fuel—into existing import duty or excise tax schedules, minimising implementation delays.

Key advantages of a fuel-entry carbon tax include:

1. Simplicity: One uniform levy on each liter of petrol or diesel at import terminals (Mombasa, Kisumu).
   
2. Transparency: Publicly available data on fuel imports, refined volumes, and fuel composition (e.g., sulphur content, energy density) can inform periodic adjustments.
   
3. Scalability: A phased approach—starting at US $5 per tonne CO₂ equivalent in 2026 and rising to US $25 per tonne by 2030—gives industries and consumers time to adapt.
   
4. Revenue Certainty: With Kenya importing over 5 billion liters of refined fuel annually, even a modest Sh2 per liter levy could raise Sh10 billion in the first year.
   

Projected Revenue and Economic Impacts

1 Revenue Estimates: Sh40.56 Billion by 2030

According to the World Bank, a carbon tax that gradually increases to US $25 per tonne CO₂ by 2030 would generate revenues equivalent to about 0.25 percent of GDP—or Sh40.56 billion in today’s terms. The revenue trajectory would be roughly:

• 2026: US $5 per tonne → Sh10 billion
  
• 2027: US $10 per tonne → Sh20 billion
  
• 2028: US $15 per tonne → Sh30 billion
  
• 2029: US $20 per tonne → Sh35 billion
  
• 2030: US $25 per tonne → Sh40.56 billion
  

These projections assume stable fuel import volumes (~ 5 billion liters annually) and a consistent carbon content of 2.67 kg CO₂ per liter of petrol (derived from the IPCC Guidelines for national greenhouse gas inventories). Should imports dip—due to local refining capacity expansion or a surge in electric vehicle (EV) uptake—revenues would adjust accordingly.

2 Correcting Market Distortions

By making fossil fuels more expensive, the tax internalises the external costs—such as air pollution, respiratory illnesses, and climate change impacts—that are not currently captured in the market price. In economic terms, the carbon tax shifts the supply curve upward by the amount of the externality cost, leading to:

• Reduced Consumption: Higher fuel prices encourage demand switching—e.g., using public transport instead of private cars, or adopting fuel-efficient motorcycles (boda bodas).
  
• Productivity Gains: Firms facing higher input costs may invest in energy efficiency (LED lighting, solar panels), reducing long-term operational expenses. For example, KenGen has already invested in geothermal power, lowering its average cost of generation.
  
• Accelerated Green Investments: Developers of wind (Lake Turkana) and solar (Garissa Solar) projects can attract capital more easily when the levelised cost of electricity (LCOE) for renewables competes favorably against taxed diesel generators.
  

Equity Considerations and Safety Nets

1 Regressive Impact on Poor Households

Fuel taxes are inherently regressive, meaning that lower-income households spend a larger share of their income on fuel and related goods (e.g., public transport, kerosene cooking fuel). The World Bank acknowledges that:

In Kenya, the poorest 20 percent of households allocate about 12 percent of their monthly income to fuel and transport, compared to 6 percent for the richest quintile. An immediate Sh5 per liter carbon levy could raise the price of petrol from Sh200 to Sh205, increasing a boda boda rider’s weekly fuel bill by Sh250, significantly affecting their disposable income.

2 Proposed Cash Transfers: Protecting Vulnerable Kenyans

To mitigate regressive effects, the Bank recommends dedicating 30 percent of carbon tax revenues to cash transfer programmes for vulnerable households. For example:

• Hunger Safety Net Programme (HSNP): Already operational in northern Kenya, HSNP provides multi-monthly transfers of Sh6,000 per household. An infusion of Sh12 billion from carbon tax revenues could expand coverage to an additional 200,000 households, reducing food insecurity.
  
• Inua Jamii Pensions: Covering 150,000 ultra-poor elderly and Persons with Severe Disabilities (PWDs) at Sh2,000 per month. Enhanced funding could double benefits or widen coverage.
  
• Drought Recovery Cash Transfers (DRCT): Launched in response to the 2021–2022 Horn of Africa drought, these temporary transfers target pastoralist communities in Wajir, Mandera, and Isiolo. Carbon tax revenues could provide resilience funding to cope with climate extremes.
  

These conditional or unconditional cash transfers are designed to cushion the poorest from higher transportation and commodity costs, while incentivising retention of children in school (through linkages to cash assistance) and access to healthcare.

Environmental Benefits: Emissions Reductions and Green Growth

Reducing National Carbon Footprint

Kenya’s total annual CO₂ emissions stood at 45 million tonnes in 2023 (World Bank data), with transport contributing 20 percent of that figure. A fuel carbon tax—by raising the price floor—could reduce petrol and diesel consumption by up to 5 percent within five years, translating to a cut of 0.45 million tonnes of CO₂ annually. Over a decade, that’s equivalent to removing 100,000 cars from Kenyan roads (assuming average annual emissions of 4.5 tonnes CO₂ per car).

Stimulating Innovation and Investment

By raising the relative cost of fossil fuels, the carbon tax encourages:

• Private Sector R&D: Manufacturers of solar-powered cold storage for farmers in Makueni and Narok find their products more competitive versus diesel generators.
  
• Green Financing: Kenya’s Green Bond Programme, launched in 2022, could see increased issuance as investors seek assets that mitigate carbon risks. The Nairobi Securities Exchange (NSE) has already listed three green bonds totaling Sh30 billion—financing renewable energy and afforestation projects.
  
• Job Creation: Expanding renewable installations (solar panels, wind turbines) could create 10,000 direct jobs in manufacturing, installation, and maintenance by 2030, according to a Kenya Climate Innovation Center (KCIC) analysis.
  

By internalising external costs, a carbon tax dovetails with Kenya’s 2030 Nationally Determined Contribution (NDC), which targets a 32 percent emission reduction (conditional) and 47 percent emission reduction (unconditional) by 2030 compared to business-as-usual.

Implementation Mechanism: Taxing at Point of Entry

1 Customs and Border Control Systems

Kenya already levies import duties and excise taxes on petroleum products using the Kenya TradeNet System (KTS). To incorporate a carbon tax:

1. Amend the Excise Duty Act (Cabinet Memorandum and parliamentary approval) to include a “Carbon Excise Duty” line item, set per liter of fuel.
   
2. Update Tariff Codes (HS Codes) for HS 2710 (petroleum oils and oils obtained from bituminous minerals) to include a carbon charge.
   
3. Customs Valuation: The KRA’s customs officers calculate the total tax due at the point of entry—combining the carbon levy with existing excise, VAT, and import duties.
   
4. Revenue Collection: Funds are remitted into the Consolidated Fund, earmarked in the budget for climate adaptation, social safety nets, and green infrastructure.
   

2 Refinery and Bulk Distribution Taxation

For locally refined fuels—such as at Kenol Kobil and Kenya Petroleum Refineries Limited (KPRL)—the same carbon levy applies when products exit the refinery:

1. Fuel Movement Monitoring: The Energy and Petroleum Regulatory Authority (EPRA) issues movement permits to transporters, recording volumes.
   
2. KRA Verification: KRA excise officers verify the Monthly Production Reports from refineries and collect carbon excise before products are delivered to wholesale terminals.
   
3. Bulk Distribution Levy: Oil marketing companies (e.g., TotalEnergies, Gulf Energy) pay the carbon tax on volumes lifted from refineries before retail dispensing.
   

3 Coordination Between KRA, EACC, and NEMA

Ensuring the carbon tax is both efficient and transparent requires interagency collaboration:

• Kenya Revenue Authority (KRA): Responsible for tax collection, audit, and enforcement. Develops training modules for customs and excise officers on carbon accounting and compliance checks.
  
• Ethics and Anti-Corruption Commission (EACC): Monitors for misuse of revenues, collusion, and illicit evasion schemes—especially at informal land borders with Uganda and Tanzania.
  
• National Environment Management Authority (NEMA): Certifies carbon content assessments, ensuring accuracy in fuel composition (e.g., ethanol blends) and verifying that tax rates match emission factors.
  

By leveraging existing infrastructure—such as the Integrated Customs Management System (ICMS) and the National Payment Platform (NPP)—KRA can minimize additional administrative costs, ensuring that at least 90 percent of revenues are collected without significant leakage.

International Comparisons: Lessons from Other Jurisdictions

1 South Africa’s Carbon Tax

In June 2019, South Africa implemented a carbon tax starting at ZAR 120 (US $8.50) per tonne of CO₂, with built-in offset allowances (up to 5 percent) and phase-in relief over four years. Key takeaways include:

• Phased Approach: By gradually reducing allowances, South Africa prepared industries—particularly power and steel—for full tax implementation by 2023.
  
• Revenue Use: The National Revenue Fund earmarks 20 percent of carbon tax revenues for renewable energy subsidies and public transport improvements.
  
• Impact: CO₂ emissions grew at 1.5 percent annually between 2018–2022—slower than the 3.2 percent pre-tax average—indicating moderate effectiveness in reducing emissions.
  

Kenya can adopt a similar phased relief mechanism, allowing sectors like transport, manufacturing, and agriculture to adjust, while funding clean energy projects from early revenues.

2 Uganda’s Proposed Fuel Levy

In 2023, Uganda’s Ministry of Finance proposed a US $5 per tonne fuel levy (approximately UGX 18 per liter). Though later shelved due to political pushback, the proposal highlighted:

• Public Opposition: Widespread protests prompted Parliament to defer, showing the importance of public outreach and safety nets.
  
• Cross-Border Leakage: Uganda’s porous borders risked fuel smuggling to evade the levy, leading to broader price distortions.
  

Kenya’s relatively robust Customs enforcement at Lunga-Lunga and Busia border posts—and plans to strengthen border patrols—can help minimize illicit cross-border trade if a fuel carbon tax is imposed.

3 Global Examples: From Canada to Sweden

• Canada: The federal Pan-Canadian Carbon Pricing System, launched in 2019, imposed a C$20 per tonne levy, rising to C$50 by 2025. Provinces could design their own systems provided they met the federal benchmark (“backstop”).
  
  • Revenue Return: All carbon tax revenues are returned as “climate action incentive payments” to households—delivered through income tax credits—ensuring progressivity.
    
  • Result: Emissions per capita declined by 10 percent from 2018–2022 (Environment and Climate Change Canada).
    
• Sweden: Since 1991, Sweden’s carbon tax has made it one of the lowest-carbon economies among OECD nations. By 2022, the tax stood at SEK 1,190 (US $128) per tonne, supplemented by tax reductions for energy-intensive industries facing international competition.
  
  • Outcome: GDP growth averaged 2 percent from 2000–2020, while CO₂ emissions dropped by 25 percent—demonstrating that high carbon prices can coincide with robust economic performance.
    

Kenya can draw on these examples by:

1. Returning Revenue: Funding cash transfers or tax rebates to protect low-income households.
   
2. Protecting Competitiveness: Offering targeted relief to energy-intensive industries (e.g., cement, steel) to prevent job losses.
   
3. Clear Policy Signals: Setting a transparent, multi-year carbon pricing schedule—so businesses can plan capital investments accordingly.
   

Complementary Measures: Subsidy Reforms and Renewable Alternatives

1 Phasing Out Fuel Subsidies

Kenya’s annual fuel subsidy—estimated at Sh25 billion in 2024—distorts market signals by capping pump prices. In 2023, the government reduced subsidies by 25 percent, shifting to a targeted Direct Benefit Transfer (DBT) for public service vehicles (PSVs) such as matatus and boda bodas. A full phase-out by 2026, aligned with a carbon tax, could:

• Free Fiscal Space: Reallocate Sh15 billion from subsidies to public transit infrastructure.
  
• Improve Efficiency: Remove distortions that encourage excessive fuel use—a quarter of total consumption is linked to diesel subsidies for industry and power generation.
  

2 Investment in Public Transport and Electric Mobility

A higher fuel price floor must be accompanied by affordable alternatives:

• Bus Rapid Transit (BRT):
  
  • Nairobi launched its first BRT corridor (Nairobi–Kitengela) in 2022, carrying 30,000 passengers daily.
    
  • Carbon tax revenues could finance three additional BRT corridors—Westlands–Kasarani, Mombasa Road–Industrial Area, and Thika Superhighway—reducing private car usage by 10 percent within two years.
    
• Electric 2- and 3-Wheelers:
  
  • Kenya’s Energy Act 2019 includes provisions for EV incentives, but uptake remains below 1,000 vehicles nationwide.
    
  • A carbon tax that increases petrol prices by Sh5 per liter makes electric motorcycles (priced at Sh150,000 vs. Sh100,000 for their petrol equivalents) cost-competitive over a two-year lifecycle (assuming Sh20,000 annual fuel savings).
    
• Rail Electrification:
  
  • The Nairobi Commuter Rail pilot—using electric multiple units (EMUs) on the Thika line—has reduced CO₂ emissions by 15 percent per passenger-kilometer compared to diesel trains.
    
  • Phased expansion to Kitale, Naivasha, and Malindi corridors could be funded from carbon tax proceeds.
    

3 Scaling Up Renewable Energy

Kenya already derives 90 percent of its electricity from renewables—largely geothermal (40 percent), hydro (30 percent), and wind (15 percent)—but transport remains almost entirely fossil-fuel-dependent. Redirecting carbon tax revenues can further bolster:

• Off-Grid Solar:
  
  • The Last Mile Connectivity Project, focusing on solar mini-grids for remote areas like Turkana and Garissa, could receive an additional Sh5 billion, expanding access to 150,000 households.
    
  • A public-private co-financing model—in partnership with entities like M-KOPA—could provide affordable pay-as-you-go solar systems.
    
• Large-Scale Wind and Solar Farms:
  
  • The Lake Turkana Wind Power facility (310 MW) and the Garissa Solar Plant (54 MW) have proven viability. Carbon tax funds could underwrite off-taker guarantees, reducing financing costs for developers aiming to add 500 MW of combined capacity by 2030.
    
• Green Hydrogen Pilot Projects:
  
  • The Kenya Green Hydrogen Strategy (2024) envisions producing 50,000 tonnes of green hydrogen annually by 2030, primarily at Olkaria—leveraging geothermal steam for electrolysis. Early pilots require Sh3 billion; carbon tax allocations could cover 50 percent of grant-funded feasibility studies.
    

Stakeholder Reactions: Industry, Civil Society, and Academia

Private Sector

• Kenya Association of Manufacturers (KAM):
  
  • While supportive of “climate-smart” policies, KAM warns that abrupt carbon tax hikes could raise manufacturing costs by 5 percent, affecting export competitiveness in markets like the East Africa Community (EAC).
    
  • KAM proposes a tiered relief structure:
    
    • Phase 1 (2026–2027): Exempt export-oriented sectors (e.g., textiles) up to 50 percent of their carbon tax liabilities, subject to verified GHG audits.
      
    • Phase 2 (2028–2030): Gradually reduce exemptions to 25 percent, encouraging long-term energy efficiency investments.
      
• Kenya Petroleum Refineries Limited (KPRL):
  
  • Urges the government to ensure that carbon tax rates do not undermine local refining viability: KPRL currently supplies 30 percent of the nation’s refined product requirements.
    
  • Advocates for a differential rate:
    
    • Imported fuels taxed at US $10 per tonne (2026) rising to US $25 by 2030, while locally refined fuels face a US $5 per tonne rate for the first three years—reflecting the higher upfront investment in domestic refining capacity.
      

Civil Society and Environmental Groups

• Greenpeace Africa:
  
  • Strongly endorses the carbon tax, stating that “Kenya must lead by example in East Africa. A carbon levy is essential to curb fossil fuel dependence, reduce urban air pollution, and meet our NDC commitments.”
    
  • Proposes that 10 percent of carbon revenues be ring-fenced for urban reforestation and air quality monitoring stations in Nairobi, Mombasa, and Kisumu.
    
• Africa Climate Action Network (ACAN-Kenya):
  
  • Urges the government to consult communities in the Ogiek Conservancy (forest ecosystem stewards) before monetizing carbon, ensuring that indigenous groups receive direct benefits.
    

Academia

• University of Nairobi’s School of Economics (Prof. Jane Kamau):
  
  • Shares findings from a 2024 study showing that a Sh3 per liter carbon levy would reduce vehicular CO₂ emissions by 8 percent over five years, while increasing household transport costs by 2.5 percent—a manageable trade-off if social safety nets are in place.
    
• Strathmore University’s Centre for Climate Research (Dr. Samuel Mwangi):
  
  • Emphasizes the need for robust MRV (Measurement, Reporting, Verification) systems: “Without accurate data on fuel volumes, composition, and downstream consumption patterns, the government risks under-collecting or over-collecting revenues.”
    
  • Recommends piloting the carbon tax in Mombasa (the main import port) for six months—allowing KRA to refine processes before rolling out nationally.
    

Challenges and Risks: Inflation, Competitiveness, and Enforcement

1 Inflationary Pressures

Kenya’s headline inflation was 8.3 percent in April 2025, driven partly by global oil price spikes. A new carbon levy could add Sh2–5 per liter to pump prices—initially raising inflation by 0.2–0.4 percentage points. Key concerns include:

• Pass-Through Effects: Transport costs feed directly into food prices—particularly staples like maize and rice, which rely on long supply chains.
  
• Consumer Backlash: In 2018, a fuel price protest in Nairobi led to three-day strikes by transport associations, forcing the government to delay a planned excise increase.
  

Mitigation Strategies:

• Transparent Communication: Early engagement with public transport operators, agricultural cooperatives, and consumer associations to explain the rationale and benefits of the tax.
  
• Temporary Buffer: A one-year freeze on other tax increases (VAT, excise) to offset the carbon levy’s impact on overall price levels.
  

2 Competitiveness of Key Sectors

• Agriculture: Higher diesel prices affect agro-processing (milling, irrigation). The Kenya Tea Development Agency (KTDA) warns that a 40 percent increase in diesel costs could shrink profit margins by 7 percent, risking layoffs of seasonal workers.
  
• Manufacturing: Cement and steel producers—already facing high electricity costs—may see energy-intensive production become unprofitable without targeted relief or efficiency grants.
  

Proposed Solutions:

• Temporary Industry Rebates: For sectors that are trade-exposed, a sliding rebate schedule that phases out by 2030.
  
• Green Bonds for SMEs: Provide low-interest financing for energy efficiency upgrades (e.g., electric furnaces, efficient boilers) to help manufacturers adapt.
  

3 Enforcement and Leakage

• Smuggling and Informal Trade: Kenya shares porous borders with Uganda and Tanzania, where fuel prices are lower. Smugglers may divert taxed fuel into informal markets, reducing tax compliance.
  
• Corruption Risks: In 2022, the Kenya National Bureau of Statistics (KNBS) estimated that 15 percent of fuel distributed in Western Kenya bypassed formal channels—rustling off as unreported “black market” volumes.
  

Countermeasures:

• GPS Tracking of Fuel Tankers: Mandating all licensed distributors to install GPS devices (already piloted by EPRA) to monitor movements.
  
• Random Inspections: Joint KRA-EACC task forces conducting unannounced checks at border crossings (e.g., Busia, Malaba) and at bulk storage facilities (e.g., Gulf Energy terminals).
  
• Digital Invoicing: Implementation of e-invoicing to ensure every liter of fuel sold corresponds to a recorded tax payment—leveraging the National Treasury’s Integrated Financial Management Information System (IFMIS).
  

Next Steps and Policy Roadmap

The Roadmap for adopting a fuel carbon tax involves sequential phases:

1. Stakeholder Consultations (Q3 2025)
   
   • Convene public forums in Nairobi, Mombasa, and Kisumu—involving civil society, business associations, and county governments.
     
   • Technical Working Group (TWG) under the Ministry of Finance to finalise the Carbon Tax Framework, including rate schedules, exemption clauses, and administrative guidelines.
     
2. Drafting Legislation (Q4 2025)
   
   • Cabinet Submission:
     
     • Amend the Tax Procedures Act to incorporate a Carbon Excise Duty.
       
     • Amend the Finance Act 2025 to specify rates (e.g., Sh2 per liter in 2026 rising to Sh10 per liter by 2030).
       
   • Parliamentary Approval:
     
     • First Reading in National Assembly in November 2025, followed by Committee Deliberations (Budget & Appropriations, Finance).
       
     • Enactment by December 2025, allowing implementation to begin on January 1, 2026.
       
3. Capacity Building (Q1 2026–Q2 2026)
   
   • KRA Training:
     
     • On carbon accounting, fuel volume monitoring, and digital tracking systems.
       
   • Public Information Campaign:
     
     • Government to launch a multi-media campaign (“Green Lives, Blue Skies”) explaining why the tax is necessary and how revenues will be used.
       
   • Pilot Implementation:
     
     • Tax applied at Mombasa Port and Kenol Kobil Refinery for a six-month period (January to June 2026), with monthly monitoring of revenue collections and market responses.
       
4. Full Rollout (Q3 2026)
   
   • National Expansion:
     
     • Carbon tax applied to all fuel imports and domestic refinery outputs.
       
   • Safety Net Deployment:
     
     • 30 percent of revenues directed to HSNP and Welfare to Work Programmes in Nairobi, Mombasa, Kisumu, and five rural counties.
       
   • Mid-Term Review:
     
     • By December 2026, the TWG compiles a report assessing:
       
       1. Revenue Performance against targets (e.g., Sh15 billion in six months).
          
       2. Social Impact: Changes in poverty rates, transport costs, and public sentiment (via household surveys).
          
       3. Emission Trends: Preliminary data on fuel consumption and CO₂ emissions from transport.
          
5. Periodic Adjustments (2027–2030)
   
   • Annual adjustments to the carbon tax rate—building from US $5 per tonne in 2026 to US $25 per tonne in 2030—reflecting inflation, exchange rate movements, and Kenya’s progress toward its NDC targets.
     
   • Transparency Mechanisms: Quarterly publication of revenue allocations, safety net disbursements, and environmental indicators on the Ministry of Environment and Forestry (MEF) portal.
     

Conclusion

Introducing a fuel carbon tax in Kenya represents a critical opportunity to align the country’s fiscal consolidation efforts with its climate commitments. By taxing carbon at the point of entry—either at ports, pipelines, or local refineries—Kenya can:

• Mobilize Sh40.5 billion annually by 2030, strengthening public finances and reducing reliance on debt.
  
• Internalise environmental costs, sending a clear price signal that discourages fossil fuel consumption and stimulates investment in renewables and energy efficiency.
  
• Correct market distortions that currently make petrol and diesel artificially cheap, encouraging consumers and businesses to adopt sustainable alternatives.
  
• Enhance equity by allocating at least 30 percent of revenues to cash transfers for vulnerable households—shielding them from higher transport and commodity costs.
  
• Generate co-benefits—from improved air quality and public health in urban centres like Nairobi and Mombasa to enhanced transport sector resilience and green job creation.
  

However, successful implementation will hinge on transparent governance, robust administrative capacity at KRA and EPRA, and public buy-in. Kenya must learn from comparative experiences—such as South Africa’s phased approach and Canada’s revenue-return model—to design a carbon tax that is progressive, predictable, and politically feasible. By coupling the levy with targeted social safety nets, investments in public transit, and renewable energy subsidies, Kenya can ensure that its poorest citizens are protected while averting climate risks.

As Nairobi finalizes its Medium-Term Revenue Strategy (2025–2028), the fuel carbon tax emerges not just as a revenue instrument but as a cornerstone of Kenya’s green growth trajectory. If enacted by late 2025 and implemented in early 2026, the levy could mark a transformative shift—catalyzing investments in cleaner transport, sustainable agriculture, and low-carbon industry, and setting Kenya firmly on a path to meet its 2030 climate goals. In an era of mounting debt pressures, the time to act is now: taxing carbon is not only fiscally prudent, it is an imperative for future generations.

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By: Montel Kamau

Serrari Financial Analyst

3rd June, 2025