Diesel, water prices to rise on fight against pollution

Customer attendant serving a client at Rubis Petroleum Station on Koinange Street, Nairobi

Customer attendant serving a client at Rubis Petroleum Station on Koinange Street, Nairobi on January 15, 2023. Kenyans are staring at higher consumer prices of diesel and water if proposals by the state to safeguard the environment through prohibitive new carbon taxes are adopted. 

Photo credit: Dennis Onsoongo | Nation Media Group

Kenyans are staring at higher consumer prices of diesel and water if proposals by the state to safeguard the environment through prohibitive new carbon taxes are adopted.

In the proposals made by the National Treasury, the government has proposed a change in the taxation of fuel, which would see different fuel products taxed based on their contribution to greenhouse gas (GHG) emissions.

“Transport fuel taxes are already very common in many countries. However, given that the carbon intensity of diesel is roughly 13 per cent higher per litre than that of petrol, a more environmentally aligned tax system involves taxing diesel at the same rate as or higher than petrol,” the Treasury said. It gave an example of South Africa, which taxes the two fuels almost equally at $0.38 (Sh47.31) and $0.37 (Sh46.06) per litre of petrol and diesel, respectively.

If adopted, the proposal would see rises in consumer prices of diesel, which would have an impact on not only the transportation of goods but also on the output and prices of items such as industrial and farm produce as well as thermal power.

Diesel prices remain the most subsidised by the state owing to the economic contribution of the fuel. The Energy and Petroleum Regulatory Authority has since last year priced super petrol higher and used the amount to cushion diesel consumers through cross-subsidisation.

The latest data by the Kenya National Bureau of Statistics shows that Kenya consumes about 2.3 million tonnes of diesel every year, accounting for 44 per cent of total fuel consumed in Kenya.

Treasury observed that though the Excise Duty Act 2015 addressed aspects of transport pollution through tax incentives on imported cars with low-engine capacity, the law retained generous waivers on petroleum and gas storage facilities, which encouraged stock up of environment-polluting fuels.

Presently, the Excise Duty Act 2015 provides for a graduated system of import duty for vehicles of different capacities. Fully electric-powered motor vehicles face only a 10 per cent duty charge, rising to 35 per cent for imported vehicles of more than 2500cc engine capacity.

“However, there are some transport sector measures in place that are not consistent with the objectives of the green economy such as the 50 per cent capital expenditure deduction on the year of first use of a petroleum or gas storage facility. Such an externality can be corrected through the introduction of carbon taxes” it adds—pointing to potential rises in prices of petroleum products since such costs are passed on to users.

Sustainable mass rapid transport

The proposal comes amid goon the promote electric and other eco-friendly vehicles by shifting public expenditure in the transport sector toward sustainable mass rapid transport infrastructure, incentivising importation of electric vehicles, as well as introducing congestion charging, which would see motorists driving in some cities pay more.

Treasury has also proposed the development of water tariffs that would see water consumers charged based on their residential areas, with those consuming high amounts of water likely to be charged higher rates to subsidise rates for low-consumption households.

“The governments will also explore the current system of water charging, with the intention of developing a set of water tariffs that provide the right incentives for water efficiency and preservation while also recognising the needs of Kenya’s vulnerable population,” the documents state.

It cites the case of Colombia, which has adopted a system where richer, higher-use households are charged a higher rate to offset subsidies for poorer, subsistence-use households.

Manufacturers in the country also face a new carbon tax that the government plans to charge companies contributing to GHG emissions, with Kenya’s manufacturing sector said to contribute at least 7 per cent of the country’s total emissions by 2015.

The document further proposes the introduction of eco-labelling schemes to identify products meeting prescribed environmental criteria, which the government will prioritise in procurement.

Treasury said, if approved, the design and legislation of the tax will be factored into the budget, where issues such as the tax rate, coverage and how to allocate revenues raised and competitiveness provisions will be addressed.

The document also proposes a phase-out of thermal power plants that contribute heavily to GHG emissions and more incentives for renewable sources of energy, while asking the government to negotiate with independent power providers for a mutual phase-out plan.