Background

Kenya is an eastern African country with a tropical climate along its coast and an arid climate in its interior. It consists of low plains, which rise to the central highlands, and are divided by the Great Rift Valley, as well as a fertile plateau in its western region. Its main environmental problems are water pollution from industrialization and urbanization, as well as from agricultural practices. Lake Victoria, for example, suffers from a water hyacinth infestation. Deforestation, soil erosion, desertification and poaching are also major environmental problems within the country. Although agriculture only accounts for around 30% of Kenya’s GDP, 75% of the Kenyan labor force is employed in this sector. Roughly 42% of the country’s GDP is derived from natural resource sectors, and the country has had recent findings of oil, natural gas and coal.

Overall Fiscal Profile

Kenya has had robust economic growth in recent years – except for a downturn linked to the global financial crisis – and its GDP grew at an estimated 5% in 2013. The government adopted an expansionary fiscal policy in response to the global financial crisis, which raised public debt but since 2011, the government has put in place a program to reduce the fiscal deficit and thereby reduce the public debt. Inflation has been problematic in the past, but has now declined to 8% as of end of 2013. Kenya’s current account deficit is expected to reach 8.3% of GDP in 2013-2014. Tax revenue is about 20% of GDP, higher than its neighbors Tanzania, Ghana and Uganda.

Policy and Legal  Framework for a Green Economy

The Kenya Vision 2030, the country’s long-term development blueprint, aspires to transform Kenya into a middle income country by 2030 by focusing on three pillars: social, political, and economic. Achieving this vision will require substantial amounts of energy; and the government aims to tap into renewable energies in the long term. The Medium-Term Plan (2013-2017), explicitly focuses on green growth opportunities through renewable energy exploitation, carbon credits, resource efficiency promotion and clean production systems. Additionally, the plan has integrated green job creation, such as in the fields of organic farming, renewable energy, forestry, planning, and waste management as part of its employment creation strategy – “The Green Jobs Approach”  which will map current and future green job opportunities. The MTP endorsed the development of a national green economy strategy and as a result, the Kenya National Green Economy Strategy and Implementation Plan is currently being drafted.

In addition to policies and action plans, the government has developed the Greening Kenya Initiative Trust, a flagship Vision 2030 program that was formed in November 2010. Its aim is to drive green growth and mitigate climate change in Kenya by developing specific programs (such as clean cook stoves, climate smart agriculture, and green schools), environment-related professional courses and other green training initiatives. Moreover, it aims to promote green consumerism, sustainably manage deltas and wetlands, and mobilize resources for the  implementation of green initiatives.

A National Climate Change Response Strategy (2010) was also adopted, which notes that climate change is already impacting Kenya, mainly through changing rainfall and temperatures. It outlines current and proposed initiatives in key sectors (such as water, forestry, agriculture, energy, and wildlife) that are needed to mitigate and adapt to climate change. For instance, energy efficient technologies and low-carbon transportation are seen as key sectors for adapting to climate change. The overall cost of implementing the  mitigation programmes identified in the Strategy is Ksh. 235.83 billion (approximately US$ 3.14 billion) on average per year over 20 years.

Fiscal Measures for a Green Economy

UNEP’s “Green Economy Assessment Report of Kenya”, published in 2014, highlighted that Kenya’s transition to a green economy through fiscal investment of 2% of GDP could produce substantial benefits: by 2030, a green economy could outperform business as usual by 12% or KES 3.6 trillion (equivalent to US$ 45 billion). Per capita national income would also nearly double from KES 39,897 (US$ 498.70) to KES 69,702 (US$ 871.30). These investments could also stimulate the agricultural yield by 15 per cent from its current baseline as well as reduce energy consumption by 2 per cent. Additionally, renewable energy could grow by 20 per cent. Based on the findings, positive returns could be realized within seven to ten years.

In the energy sector, the Ministry of Energy implemented a renewable energy feed-in tariff (FIT) program in 2008, which allows producers to sell their energy to the grid at a guaranteed price for an extended period of time, thereby ensuring investment security, reducing bidding costs, and encouraging private sector participation in power generation. The FIT was subsequently revised in 2010 to accommodate geothermal, biogas, and solar energy resources and the period of the power purchase agreements was extended from 15 to 20 years. The FIT is expected to generate 1300 MW of electricity generation and create jobs –  as many as 200,000 in the sugar cane sector alone.

To provide additional fiscal incentives for renewable energy generation, the government removed import duties on renewable energy equipment in 2011.  Additionally, electricity tariff increases were imposed on households with higher electricity consumption levels contributing to demand side efforts In the agriculture sector, the government allocates financial resources to irrigation, the distribution of drought-resistant seeds as well as concessional loans to promote greenhouse farming. This support is geared towards implementing the “Ending Drought Emergencies” Plan through the mechanization of agriculture and the revival of cooperatives and farmers unions.

Fossil Fuel Subsidy Reform

Fossil fuel use is quite heavy in Kenya. For instance,  fossil fuel sources account for 32.5% of electricity generation in the country. The recent discovery of petroleum and natural gas deposits – plus substantial coal deposits in Turkana and Lamu counties respectively –  suggests that fossil fuels will continue to be the dominant source of energy in the country for the foreseeable future.

In Kenya, the mid 1990s marked the beginning of reform efforts; with a push to unbundle electricity generation from transmission and distribution, in order to improve the efficiency of the energy sector and promote private participation. These efforts culminated in the 2004 Energy Policy and 2006 Energy Act. In 2005, electricity prices were reformed by raising tariffs to cost recovery levels and introducing an automatic price adjustment in order to depoliticize the setting of energy prices. In addition, the government unbundled the power sector to separate the generation arm of the state-owned enterprise, KenGen, from the transmission and distribution arms (KPLC) and focused on improving service delivery.  As a result, electricity subsidies fell from 1.5% of GDP in 2001 to 0 in 2008. One of the reasons cited for the success of the reform is that they were part of a “broader package” that addressed supply side concerns while simultaneously gaining support by delivering improved electric services.

The government of Kenya has also subsidized connection costs instead of electricity price subsidies, which  helped expand coverage in remote and rural areas from 650,000 connections in 2003 to 2 million by 2013. The government pledged to use the additional revenues from higher tariffs to develop the domestic renewable energy market. Tariff reform was also useful in attracting private investment in expanding generation capacity in the power sector.  Lastly, the state-owned enterprises are more efficient following the reforms taken to unbundle the power sector and to improve service delivery, all while avoiding staff retrenchments.

Some challenges remain. For instance,  the government plans to exempt kerosene, fuels, and other fuel oils from VAT to a zero rate for a transitional period until 2015.

Additional Reading

Government of the Republic of Kenya (2007). Kenya Vision 2030 Popular Document. Retrieved from: http://www.vision2030.go.ke/cms/vds/Popular_Version.pdf

Government of Kenya (2010). National Climate Change Response Strategy. Retrieved from: http://cdkn.org/wp-content/uploads/2012/04/National-Climate-Change-Response-Strategy_April-2010.pdf

IMF (2013). Energy Subsidy Reforms. Lessons and Implications. Retrieved from: http://www.imf.org/external/np/pp/eng/2013/012813.pdf

UNEP (2015). Summary of Green Economy Fiscal Policy Assessment – Kenya. Download here

UNEP (2015). Fiscal Policy Scoping Study – Kenya – Working Paper.Download here

UNEP (2014). Green Economy Assessment Report Kenya. Download here