Kenya’s burgeoning carbon market faces mounting uncertainty as experts warn that the lack of a clear value added tax (VAT) treatment for carbon credits could distort pricing and undermine investor confidence in the sector, YNews.digital has reported.
Under Kenya’s VAT Act, all goods and services not expressly exempt or zero-rated are subject to the standard 16% levy.
Carbon credits, however, are not explicitly defined in the law, leaving companies unsure whether they should charge VAT on sales or pay it on purchases.
Legal specialists say this regulatory gap has become a pressing issue as Kenya emerges as one of Africa’s largest voluntary carbon credit producers, with more than 52 million credits issued by 2024—across sectors like forest conservation, renewable energy, sustainable agriculture, and clean cookstoves.
Relevant: Singapore, UK, And Kenya Launch Coalition To Boost Carbon Markets
“There is really a gap in terms of how to look at taxing carbon credit revenues,” corporate commercial lawyer Alex Kanyi, who is also partner at Cliffe Dekker Hofmeyr (CDH), was quoted as saying by YNews.digital.
“Without clarity, disputes with KRA [Kenya Revenue Authority] are likely, especially as the sector grows and revenues increase,” Clarice Wambua, an environmental law consultant at CDH, added.
Carbon project developers, investors and traders are watching closely, warning that unclear tax obligations could affect pricing, cash flow forecasts and compliance costs across the emerging market.
Some experts argue that aggressive taxation could dampen participation in climate action and impede private capital flows that are vital for scaling carbon projects.
The issue gained prominence in part because of a recent court ruling addressing corporate income tax and transfer pricing in connection with a carbon project.
Although that case did not directly resolve the VAT question, it underscored broader ambiguity in how Kenya taxes carbon revenues.
Stakeholders in the country’s climate finance ecosystem are urging authorities to issue explicit guidance or amend the VAT framework to clarify how carbon credits should be treated.
Read more: COP30: African Union Demands Fairer Carbon Pricing, $50B In Adaptation Finance
