The National Treasury recently published the Draft Green Fiscal Incentives Policy Framework “the
Framework” to steer Kenya’s economy onto a desired low-carbon climate-resilient green development
which is critical in achieving a green economy.

The Framework sets out actions and economic mechanisms to be undertaken by the government in implementing the Framework. Sectors such as agriculture; food and nutrition security; water and sanitation; blue economy; disaster risk financing; health and sanitation; forestry; human settlement and infrastructure; energy; transport; manufacturing and waste management.

These sectors have been identified as major contributors to the green economy due to their natural resource characteristics that contribute 42% of Kenya’s GDP. Stakeholders such as county governments have also been identified in the Framework as key players in implementing the Framework by the National Treasury with evaluation set for within five years.

Publication of the Framework stems from the need to create a resilient economy post Covid-19 and the threats and challenges caused by climate change and aid in achieving the set 32% goal in reducing emissions under the Nationally Determined Contribution. Countries worldwide have also adopted various actions to achieve a green economy as a response call to the Paris Agreement, the agreement on Sustainable Development Goals and the United Nations Call for Action on Adaptation and Resilience, combatting climate change and environmental risks. For instance, China has pledged to reduce CO2 emissions to net zero by 2060.

In addition to the international obligations to the reduction of greenhouse gas emissions and transition
to a low-carbon society. The Constitution of Kenya guarantees the right to a clean and healthy
environment to every Kenyan.

Priority Sectors

The Framework outlines various fiscal development policies and initiatives towards the selected economic sectors. Some of the proposed economic sectors’ fiscal policies are as highlighted below: The Disaster Risk Financing Strategy outlines the various disaster risk financing instruments that are available for responding to disasters such as drought and floods which take significant amounts of government expenditure. International best practices that are being considered by the government include; catastrophe bonds (CAT bonds) which work in the usual manner of a government bond but with an exception of waiver of interest whenever there is a catastrophe.

The Framework aims at introducing several policy measures under disaster risk management, these include promoting livestock insurance, introducing financing such as CAT bonds and increasing funding for resilience-building programs such as the hunger safety net program (HSNP) and other resilience cash transfer programs for vulnerable and marginalized communities.

The Blue economy has great potential for the green economy. However, increased demand for seafood has led to uncontrolled fishing. The Framework considers international practices of introducing fisheries quotas that can be  traded among the fishermen. The issuance of blue bonds has also been presented as a consideration for the Kenyan government.

The Framework proposes that the government will impose tax measures on 42 large-scale fishing companies and introduce fishing quotas to establish quantitative upper limits for fishing catches with quota rights either being non-tradable or tradable.

Agriculture

Drought has greatly affected the agricultural sector which mainly relies on rainfall and is slowly adopting
industrialized methods. This has led to food insecurity which continues to prevail. The Framework also
notes that agriculture is the major source of gas emissions, a situation aggravated by the use of
synthetic and organic fertilizers.

The Framework highlights the Climate Smart Agriculture (CSA) Framework Program that targets agricultural GHG emissions by increasing livestock productivity through the adoption of industrialized agriculture. The Framework considers the experience in India where direct subsidies and tax exemptions are important levers in encouraging sustainable farming. The Government proposes to support innovative water harvesting techniques and also provide incentives to promote technologies for water-efficient irrigation systems.

Manufacturing

The industry and manufacturing sector is a critical economic sector that contributes to 7.5% of Kenya’s
GDP. However, it contributes to 7% of GHG emissions due to the use of fossil fuels and other industrial
processes.

Fiscal initiatives such as energy audits, specialized training, and the Energy Management
Award developed by the established Centre for Energy Efficiency and Conservation (CEEC), which
ensures manufacturers run energy efficiency and conservation programs designed to identify energy
wastage.

The Framework has highlighted a trend in South Africa’s SA Green Building Council, 2019 which
provides for a tax rebate of US$0.07/kWh for energy savings accrued. To claim the deduction,
businesses must be able to show the energy savings over 12 consecutive months, when compared to the
previous 12 months of baseline measurement.

Under the manufacturing sector, the Framework proposes the provision of fiscal incentives needed to lower the cost of renewable energy relative to fossil fuel-intensive energy sources. This will accelerate the development of green energy alternatives and technologies to allow the integration of all variable renewable energy power.

Cross-Cutting Issues

The Framework appreciates commercial banks as an important source of investment finance for green
projects with banks providing KES 27 billion in climate finance in 2018. Additionally, it recognizes the
reluctance in capital markets investment in green products originating in Kenya, which explained the
reason why the first corporate green bond attracted interest from foreign institutional investors.

Carbon tax and correct carbon pricing have also been considered under the Framework as an incentive
for private investors which will facilitate the switch to clean energy and enhance the implementation of
the ‘polluter pays’ principle. European countries have been highlighted as frontrunners in implementing
CO2 taxes that are now implemented throughout the world including South Africa which recently
introduced a carbon tax to reach its 2025 GHG emission goals.

The Framework recognizes the Government’s proposal of designing and including carbon tax under its budget.
Green Financing Actions To enhance efforts made by the banking sector, the Framework proposes to establish a green investment bank that will offer financial instruments which could potentially include credit guarantees,risk-reduction facilities, debt and equity. The Bank will also develop incentives for investment in green
bonds, blue bonds, carbon credit transactions and resilience bonds. These bonds will be a major source
of funds for building the green economy and achieving NDC.

Further to providing financial instruments, the Government proposes to maintain a Green Investment Register that will enable investors to identify government green projects that will promote green public procurement at both levels of government. To encourage investment, the Government proposes to support green innovation technologies and to
further cushion the green technology innovators through ‘sandboxes’ which involve support during the
innovation testing stage.

Analysis

Green bonds though still in the early formation stage, there is limited green funding, especially in terms
of green credits this is mostly caused by limited banks participating in green project financing. Limited
demand for green financing could be the reason why there are limited participating banks.

Development of the green bonds will lead to the diversification of capital markets instruments that will
not only attract foreign investors who wish to invest in clean assets but also provide a broad base for
local investors such as pension schemes. The government’s participation will instil confidence and
improve the limited demand for green bond investment.

Additionally, the proposed Green Investment Bank will play a key role in changing the perception of local investors in diversifying their investments and the role such investments play in implementing climate change goals such as COP27 targets and the SDGs.

Financial instruments such as loans and guarantees on green investments will support private green
investments. Currently, only the Central Bank of Kenya, the IFC and the African Development Bank have
provided risk guarantees. Local banks and insurance companies should be facilitated by the government
to enable them to provide such guarantees.

Implementation of the Framework proposals will catapult Kenya towards achieving its NDC-set goals and
growing a resilient and sustainable economy.