Kenya prepares businesses for a new era of emissions accountability
By Our Staff Writer
NAIROBI — Kenya is strengthening its climate governance architecture to harness carbon markets and emissions pricing as tools for sustainable growth. In the past year, policy reforms and institutional measures have reshaped the regulatory landscape for carbon pricing, carbon markets and climate-related compliance. For businesses, especially small and medium enterprises and large corporates with climate commitments, understanding these shifts has become imperative.
At the core of this shift is Kenya’s evolving approach to explicit carbon pricing, a mechanism that places a direct cost on greenhouse-gas emissions. Unlike South Africa, which in 2026 increased its carbon tax rate to R308 per tonne of CO₂-equivalent and aligned offsets with its carbon budgeting system, Kenya does not yet levy an explicit carbon price on emissions from industry, energy or agriculture. According to the Organisation for Economic Co-operation and Development, Kenya’s Net Effective Carbon Rate, a measure of how emissions are priced through taxes or standards, in 2023 covered just 15 to 16 percent of greenhouse-gas emissions, mainly via fuel excise taxes, with no standalone carbon levy in place.
Regulatory architecture and market signals
Kenya’s legislative foundations for carbon markets are anchored in the Climate Change Act (Cap. 387A) and the Climate Change (Carbon Markets) Regulations, 2024, which came into force in May 2024. These regulations establish requirements for carbon projects, including registration, verification and community benefit-sharing, and align domestic practice with international standards such as Article 6 of the Paris Agreement.
In February 2026 the government launched the Kenya National Carbon Registry, a sovereign digital platform for recording, authorising and tracking carbon market transactions. Deborah Barasa, Cabinet Secretary for Environment, Climate Change and Forestry, described the registry as the digital heartbeat of Kenya’s green economy and said it would enhance transparency and investor confidence.
The registry’s establishment reflects a broader global trend toward strengthening carbon market infrastructure but also signals an implicit recognition that carbon markets, where credits represent emissions reductions or removals, are increasingly central to climate finance and corporate climate strategy. According to legal and financial experts, Kenya is now one of Africa’s leading carbon credit producers, issuing more than 52 million credits by 2024 across forestry, agriculture, sustainable cookstoves and renewable energy projects.
Taxation and market uncertainties
Despite the regulatory scaffolding, significant questions remain about how carbon revenues and credits will be taxed. Under Kenya’s Value Added Tax Act, goods and services not designated as exempt or zero-rated attract VAT at 16 percent. Carbon credits are not explicitly defined as either goods or services, leaving developers uncertain about whether VAT should apply to sales or purchases. Alex Kanyi, Partner in Tax and Exchange Control at law firm Cliffe Dekker Hofmeyr, said this ambiguity risks pricing, cash flow and compliance challenges for project developers and traders. Clarice Wambua, Consultant in Environmental Law at the same firm, noted that without statutory clarity, disputes with the Kenya Revenue Authority are likely.
The stakes are high. In January 2026 the Tax Appeals Tribunal set aside a KSh6.9 billion transfer-pricing assessment imposed by KRA on a cross-border carbon credit project, concluding that the Kenyan affiliate had acted as a service provider while economic ownership lay with a US parent. The ruling emphasised that tax liability follows economic substance, a potentially significant precedent for structuring carbon investments.
Implications for SMEs and Corporates
For domestic firms, the current policy matrix offers both opportunities and hazards. Carbon projects can provide a revenue stream, create jobs and spur investment in low-carbon technologies. A recent workshop on Kenya’s carbon market noted that nature-based projects have delivered income, improved health outcomes and supported local infrastructure, though challenges such as land-use conflicts and coordination across government agencies persist.
Yet the absence of an explicit carbon levy means that Kenya’s broader emissions landscape remains largely unpriced. Across most sectors, emissions are not subject to a direct carbon cost, limiting the incentive for mitigation beyond voluntary commitments. An OECD analysis found that only about 16 percent of Kenyan greenhouse-gas emissions were subject to a positive Net Effective Carbon Rate in 2023 and average implicit carbon prices were modest by international standards.
For firms considering compliance with emerging sustainability standards or supply-chain decarbonisation, this creates complexity. Global investors increasingly expect carbon pricing and transparency as part of environmental, social and governance criteria, yet in Kenya the regulatory regime remains in flux.
Toward explicit carbon pricing
A debate is growing over whether Kenya should adopt an explicit carbon levy. Proponents argue it would align domestic incentives with international climate commitments and generate predictable revenues to support climate adaptation. Studies in other contexts have shown that modest increases in carbon taxes can reduce per capita CO₂ emissions by measurable amounts over time. Critics, however, fear that an explicit carbon price could burden firms that lack access to cleaner alternatives, particularly SMEs. Tailored exemptions, credits or transitional mechanisms would be necessary to avoid disproportionate impacts on sectors such as manufacturing and transport.
Compliance timeline and next steps
Currently there is no formal schedule for implementing a standalone carbon levy in Kenya. Policymakers have prioritised strengthening institutional capacity through the Kenya National Carbon Registry, clarifying taxation rules and embedding community benefit-sharing into carbon market governance. For businesses, adapting to this environment involves rigorous carbon accounting, alignment with emerging standards and engagement with regulators as policy evolves. Companies active in carbon projects are advised to develop robust carbon footprint baselines and reporting systems ahead of future regulatory changes, engage legal and tax expertise to navigate VAT treatment and cross-border transfer-pricing risks, and participate in sectoral consultations to shape fair and predictable carbon pricing frameworks.
Kenya’s carbon-pricing journey remains a work in progress. The government’s moves to formalise markets, enhance transparency and address tax uncertainties are positive steps. But without clear pricing signals, the transition to a low-carbon economy may continue to unfold unevenly, a reality that companies operating in Africa’s emerging climate economy must understand and prepare for.
