By CPA Robert Maina
Sustainable development is at the epicentre of governments’ national agenda across the world. This is driven by the adverse effects of climate change and the global efforts through the United Nations to curb its effects and reverse the destruction to the natural environment.
Policymakers have identified green fiscal incentives as a crucial aspect in encouraging environmentally friendly behaviour while at the same time supporting sustainable development goals. Through the United Nations the world has come together to ensure coherence and unison in the fight against climate change. Annual events organized by the United Nations Framework Conventions on Climate Change bring together Heads of State, ministers, negotiators, climate activists, civil society representatives and private sector players.
The forum has historically addressed among other issues the reduction of greenhouse gas emissions, building resilience, adaptation and delivery of commitments to finance climate action in developing countries. Kenya has made clear its intention to employ green fiscal incentives in driving sustainability through the green fiscal incentives framework. The importance of green fiscal incentives Green fiscal incentives refer to policies that use the tax system or other financial instruments to encourage environmentally friendly behaviour. They serve a dual role of being a tool that seeks to achieve sustainable development goals through economic growth and promotion of environmental protection.
The incentives encourage individuals and businesses to adopt sustainable practices, promote the use of clean technologies, and drive innovation in the development of green products and services. Traditional fiscal policies have not achieved the required changes to transition into a green economy. This has led to slow progress in transition due to the high costs and minimal incentives to the private sector.
Range of green fiscal policies
There are various green fiscal policies that are available to the government to steer the economy in the right direction and influence behaviour change. These
include the following:
i. Taxes and subsidies
These can influence the costs, prices and profits of a wide array of goods and services. Proper application of taxes and subsidies are expected to stimulate a shift in production, consumption and investment in low-carbon, climate-resilient and environmentally sustainable practices.
They are also deemed to be cost-effective in delivering environmental outcomes and allow for innovative solutions to environmental challenges.
ii. Financial incentives
There is a wide array of financial incentives that can be applied by the government to give impetus to the global drive towards sustainability. For instance, fiscal instruments such as concessional loans, guarantees and interest rate subsidies assist in overcoming investment barriers and leveraging private sector green investments.
This encourages private capital deployment which is much greater than the average public investment in green projects.
iii. Government spending
Undoubtedly, there are certain areas that the private sector ignores due to lack of sufficient return on investment. These in most cases relate to climate change adaptation which includes disaster risk reduction and management activities, or the restoration of degraded lands
It is therefore that the government invests in these areas to achieve thedesired outcomes.
iv. Capital markets
The government can signal the importance of certain economic activities and outcomes by engaging in a specific activity. For instance, the creation of an enabling regulatory framework to enable the private sector to raise green capital can encourage economic activities in that area. Green bonds are an example of a targeted financial instrument that is geared towards greening the economy.
Potential green fiscal policy actions
There are various green fiscal policy actions that can be employed at different times and to different industries. These include the following:
a) Carbon taxes
Kenya has proposed the introduction of a carbon tax to facilitate the switch to green energy and foster the ‘polluter pays’ principle. There are various aspects that can be considered in the roll out to ensure that it is aligned with local conditions. Some of the critical aspects are as follows:
• Predictability of the carbon pricing/tax policy: The country should have a clear and predictable carbon pricing policy to provide certainty and stability for businesses and investors. The carbon tax should be designed to complement, rather than add an additional unwarranted cost which will have more negative economic outcomes through increased cost of living.
• Due to dynamics in different industries the introduction of carbon taxes should be cognizant of the uniqueness of each industry, its contribution to pollution vis-à-vis its economic benefits.
• It should be flexible in the sense that it can be adjusted, when necessary, under certain economic conditions.
•The Government should ensure that the revenue generated from carbon taxes is used to fund climate-friendly projects and initiatives. This should be achieved by ring-fencing carbon taxes through proper legislation.
•Exemptions and rebates should be extended to certain industries: Some indutries may be more vulnerable to the impact of carbon taxes than others. Those that bear the biggest brunt should be considered when exemptions and rebates are being granted by the government.
Green fiscal incentives refer to policies that use the tax system or other financial instruments to encourage environmentally friendly behaviour. They serve a dual role of being a tool that seeks to achieve sustainable development goals through economic growth and promotion of environmental protection. The incentives encourage individuals and businesses to adopt sustainable practices, promote the use of clean technologies, and drive innovation in the development of green products and services.
b.) Carbon offsetting mechanisms
There are several mechanisms that can be used to offset carbon. These include the following:
This allows the purchase of carbon credits from certified carbon offsetting projects that have already reduced or removed carbon emissions elsewhere. This provides the company an opportunity to offset the carbon emissions produced in their production and supply chain.
•Border carbon adjustment:
Some countries have proposed or implemented a border carbon adjustment (BCA) mechanism. This is a tariff or tax on imported goods based on their carbon footprint.
It is meant to level the playing field for domestic producers who have already paid carbon taxes or implemented emissions reduction measures.
•Carbon offsetting programs:
It provides companies and organizations an opportunity to invest in projects that reduce or remove carbon emissions.
They include renewable energy, reforestation, and energy efficiency measures. The company then offsets the carbon emissions from other activities within their production cycle.
c. ) Phased application of carbon taxes
The application of carbon taxes can be phased to ensure that they provide industries with an opportunity to realign their operations. This approach can take various forms including the following:
• Targeted industries: The government identifies industries that are more responsible for emissions. Typically, these include powerngeneration, transportation, and heavy manufacturing.
• Gradual implementation: Rather than impose a single, high carbon tax rate on the target industries, a phased approach implements a lower tax rate initially and gradually increase the rate over time. This allows industries to adjust to the new costs and take steps to reduce their emissions.
• Flexibility: A phased approach may also allow for flexibility in how industries can comply with the carbon tax. For example, an industry may be given the option to purchase carbon credits or invest in renewable energy as an alternative to paying the tax.
• Investment in emissions reduction: As the carbon tax rate increases, therevenue generated can be invested in emissions reduction measures, such as renewable energy infrastructure, research and development, and incentives for energy efficiency improvements.
By and large, the government can implement these and other measures to achieve the intended final outcome of driving the economy to a low-carbon and greener economy in the medium and long term.
Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.