How fiscal policies can drive the green economy revolution

To accelerate Kenya’s journey toward a net-zero future by 2050, businesses need more than just regulation—they need a clear pathway paved with opportunities and incentives. Creating a tax framework that rewards sustainable innovation and penalizes environmental harm can help transform national economic landscapes. With the right policies, businesses can rapidly adopt cleaner technologies, reduce their carbon footprint, and drive the nation closer to its climate goals while boosting competitiveness and fostering long-term resilience. 

Achieving sustainability requires a collective effort from all sectors, and fiscal policies are among the most powerful tools governments have to drive this transformation. Taxation, subsidies, and incentives shape the behavior of businesses and consumers alike. By aligning tax policies with sustainability, governments around the world are making great strides toward reducing emissions, fostering clean technology, and promoting greener economic practices. 

Read also: The sustainability perspective on Kenya’s plan to implement car tax

Globally, governments are taking bold steps to advance sustainability through fiscal policies. The European Union (EU), for example, has established the Green Deal, a comprehensive policy that aims for carbon neutrality by 2050. This initiative is supported by significant investments in renewable energy and the circular economy, ensuring that industries move toward more sustainable practices. The EU’s Sustainable Taxonomy provides a standardized framework to direct capital toward green activities, ensuring that financial flows support environmental objectives. By setting clear definitions of what constitutes sustainable investments, taxonomy helps ensure that public and private funds are aligned with climate goals. 

In the United States, the Inflation Reduction Act marks one of the most ambitious fiscal policy initiatives to support sustainability. This act includes billions of dollars in tax credits for clean energy production, electric vehicles, and energy efficiency improvements. By offering significant financial incentives, the U.S. government is promoting widespread adoption of clean technologies and green infrastructure. The Act also focuses on reducing emissions from industrial sectors, which are among the most challenging to decarbonize, fostering innovation and job creation in sustainable industries. 

China, the world’s largest carbon emitter, has taken a different approach with its national carbon market, the largest in the world. The market operates by putting a price on carbon emissions, encouraging companies to adopt cleaner technologies to reduce their emissions. Companies that exceed their emission limits must buy credits from companies that pollute less, creating a financial incentive for companies to become more environmentally efficient. This market-based approach has proven effective in driving down emissions while maintaining economic growth. 

Japan is pushing for hydrogen energy as a key part of its carbon neutrality strategy. The Japanese government has introduced a range of tax incentives and subsidies for companies investing in hydrogen energy and other energy-efficient technologies. Japan also offers tax breaks for businesses that adopt energy-efficient building practices, further reducing the nation’s carbon footprint. These fiscal measures not only cut emissions but also boost the competitiveness of Japan’s economy in the global market for green technologies. 

Kenya, too, is taking significant steps toward a sustainable future, though more effort is needed to reach its ambitious 2050 net-zero target. One notable initiative is the introduction of a tax incentive for carbon trading. This incentive, assented to on June 21, 2022, sets a 15% tax rate for companies participating in carbon exchanges and emissions trading systems for the first 10 years of their operations. This policy helps attract businesses to the emerging carbon market and encourages them to reduce their greenhouse gas emissions. 

Carbon markets allow companies to buy and sell carbon credits, with each credit representing one tonne of carbon dioxide or its equivalent. By trading these credits, businesses can offset their emissions or sell excess credits if they pollute less than allowed. Carbon exchanges use traditional trading infrastructure to create a central marketplace for this intangible product. Compliance markets, regulated by central authorities, set and enforce emission limits, while voluntary markets allow entities to offset their emissions based on ethical concerns or corporate social responsibility initiatives. 

Kenya’s carbon trading policy is a step in the right direction, but there is room for the government to expand its support for green growth. The country could introduce more targeted tax breaks for companies investing in renewable energy, energy efficiency, and other green technologies. Incentivizing the private sector to adopt circular economy principles, such as waste reduction and resource efficiency, would also contribute to a more sustainable economy. 

While Kenya has made significant strides, more effort is needed to fully realize its sustainability potential. Beyond tax incentives for carbon trading, the government should consider additional measures, such as subsidies for renewable energy projects and tax credits for businesses that implement energy-efficient technologies. Stronger support for green businesses will not only help Kenya meet its climate goals but also position the country as a regional leader in the green economy. 

To achieve net-zero emissions by 2050, Kenya needs to accelerate its transition to a sustainable economy by creating a comprehensive fiscal policy framework. Increased investment in green innovation, along with a robust system of incentives and penalties, can drive businesses to adopt sustainable practices more rapidly. With the right policies in place, Kenya has the potential to become a global leader in sustainable development, creating a greener, more prosperous future for all.