Taxation as a Tool for Environmental
and Health Regulation

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By CPA James Fredrick Ochieng

The ongoing debate on climate change has brought to fore the contribution of all aspects of life to the
support or degradation of the environment. From farming practices to urbanization, manufacturing to mining, conservation to transport, hospitality to construction, everything can be tied to climate change and broadly to the environment. This comes either as a contributor to sustainable environment or as a contributor to environmental degradation.

Governments and other nongovernmental actors the world over have devised various ways of incentivizing or ‘punishing’ players whose operation affect the environment one way or another. Most government and nongovernmental organizations provide incentives for environmental conservation through funding of the activities, providing good publicity to compliant companies to increase their market share while others offer incentives like Carbon Cap and Trade which is designed to limit levels ofemissions of certain Green House Gases (GHGs).

The Cap and Trade is an effort to control environmental degradation without creating financial expenses to industries through carbon tax. Cap and Trade programs have been designed with the motive to gradually reduce and control environmental pollution by providing companies with the incentive to adopt clean industry alternatives. Set amount of permits are issued to companies that put a caps on permitted carbon dioxide emissions. Industries that go above their limits are taxed while those that trade below thelimits are allowed to sell the unutilized credits.

The caps on credits reduce over time, giving companies the incentive to source for better and cheaper
alternatives. Alternative methods that corporations use for environmental and business sustainability is the use of recyclable material in their manufacturing process. Instead of going say for fresh trees for
paper or manufacturing new plastic products, these companies choose to recycle old papers, used plastics or other used products to make new ones. This saves cost, energy and most importantly protect the environment from pollution and degradation.

In most country, there is no absolute law that require corporations to apply the stated interventions above. Most do them out of corporate obligations as corporate social responsibility and good corporate citizenship initiatives. This has forced governments to intervene by putting various measures to control industry operations and protect the environment. Some interventions are regulatory in nature while others are meant to puncture a hole in the corporation’s wallet as a deterrent. An alternative to dealing with polluting corporations which are posing dangers to communities around them is to close them down.

This is an extreme measure that the government would take in a worst case scenario. The government
would ordinarily want to strike a balance between the negatives and the positives that are brought about by certain industries. Some industries while posing health risks to the society also contribute immensely to the welfare of the state through payment of taxes, job creation and infrastructural improvement,
provision of goods and services and generally raising the standards of living of communities within and beyond its area of operation.

Examples include, bottled water, soft drinks, cosmetics, cigarette and alcohol, betting and gambling. Most of these companies deal in luxury, perhaps non-essential provision of goods and services but which have mass consumption bordering on cravings or addiction and hence they are an easy target for government taxation. Absolute closure of these industries breed a more problematic, almost dangerous alternative of counterfeiting, smuggling, bootlegging and clandestine production. While these companies are expected to pay corporation tax on their income, additional taxes are levied to discourage consumption of their products by making them expensive and out of reach of the majority.

The distribution of these goods or services are also restricted to some age categories and mostly confined to adult use. Taxation also enables the government to generate revenue that could be used to improve service delivery and rehabilitation of people and the natural environment that has been affected by the presence of these companies and the nature of their operations. The principal weapon that the government apply to manage or discourage environmental and health concern by these corporation is the application of taxation. This kind of taxation which is meant to limit or discourage use of certain products is popularly referred to as sin tax.

It can be in the form of a higher custom duty for imports and excise duty for goods and services whether imported or provided locally. It could also be charged in the form of levies as prescribed by parliament from time to time. The tax is levied on these products that are perceived to be socially and morallyharmful, medically or environmentally costly to society. Governments are also adopting ‘Carbon Tax’ as a form of sin tax to incentivize companies that are adopting green practices towards environmental sustainability while taxing those that are net emitters of GHGs to compensate for the negative impact of their operations.

Carbon tax is used a measure of lowering carbon emissions and countering the impact of climate change.
Kenya targets GHGs emissions reduction of 32% by the year 2030. Among the incentives to achieve this
is the amendment of the third schedule of the Finance Act of 2022 which was assented to on 21st June 2022. The amendment introduced a 15% corporation tax for the first ten years from the year of commencement of operation for companies operating a carbon market exchange or emission trading system certified by the Nairobi International Finance Centre Authority.

Several countries have introduced the carbon tax which besides being a deterrent, also supplement government as an alternative revenue stream. More than forty countries globally have implemented some form of carbon pricing either through cap and trade programmes or through direct taxation. New Zealand was the first country in the world to introduce carbon tax in the year 2005 payable at the rate of N$11 per metric tonne of carbon emitted. Some Nordic countries had made earlier attempts on carbon tax in various forms as early as 1990.

South Africa was the first country in Africa to introduce carbo tax at the rate of US$8.35 per metric tonne of carbon dioxide emission through the Carbon Tax Act No. 15 of 2019. It is the only country to have implemented carbon tax in Africa so far. Carbon tax is touted to be the most efficient and lowest in costof tackling climate change. Through the draft National Green Fiscal Incentives policy framework published by the National Treasury in December of 2022.

The government of Kenya intends to among others initiate green fiscal reforms and policy interventions that is geared towards “steering the Kenyan economy onto a desired low-carbon, climate-resilient green development pathway through a variety of fiscal and economic mechanisms. The policy is meant to provide a framework for fiscal incentives to attract private sector investment in a low carbon emission, climate resilient and environmentally sustainable economy. It is also meant to provide additional revenue streams for government.

The framework explores a “polluter pay” principle to facilitate switch to clean energy through carbon tax as a cost efficient way of reducing GHGs emissions and providing an alternative revenue stream for meeting other government objectives. For a sin tax to work well, there needs to be viable alternatives for the partakers to feel the punitive tax and get the message that this is a discouragement while pointing to a better alternative for example quitting the habit or seeking more viable and sustainable alternatives.


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