Kenya’s emerging carbon market needs incentives rather than punitive taxation if firms are to meaningfully participate in climate action, experts have warned.
Alex Kanyi, Partner for Tax and Exchange Control at law firm Cliffe Dekker Hofmeyr, and environmental law consultant Clarice Wambua say the strongest safeguard for carbon trading is a clear, predictable policy that supports project developers rather than treating them as primary tax targets.
“The best insurance for carbon trading is incentivising firms, not making them feel like they are being targeted as a tax source to the point of suppression,” Wambua said.
On his part, Kanyi said poorly timed or aggressive tax enforcement risks discouraging investment in projects that are critical to climate mitigation.
Their remarks come a day after the Tax Appeals Tribunal overturned a Sh6.9 billion tax assessment against a Kenyan firm linked to a large carbon offset project.
The ruling centres on a long-running dispute between the Kenya Revenue Authority (KRA) and Wildlife Works Sanctuary Limited, a Kenyan firm that provided operational support services to the Kasigau Corridor REDD+ Project, one of Africa’s most prominent forest conservation carbon initiatives managed by a US-based parent company.
KRA had issued tax assessments amounting to Sh6.9 billion for the period between 2018 and 2021, arguing that carbon credit revenues accrued in Kenya and that the Kenyan entity performed the core functions of the project, thereby justifying corporation tax and withholding tax on what it treated as deemed dividends.
However, the Tribunal found that Wildlife Works Sanctuary Limited acted strictly as a service provider, while the risks, funding, marketing, and revenue recognition related to the carbon credits rested with Wildlife Works Carbon LLC in the United States, effectively dismantling the tax authority’s transfer pricing adjustments.
While the Tribunal ruled in favour of the taxpayer, the experts caution that the decision does not exempt carbon revenues from taxation in Kenya, but rather highlights procedural and evidentiary gaps in how the assessments were applied.
“This is not a loss in the roadmap to carbon taxation or carbon trading,” Wambua said.
“The income is still taxable in Kenya. What the Tribunal is telling us is that tax administration must be evidence-based, structured, and aligned with how carbon projects are actually designed and implemented,” Kanyi added.
Partner for Tax and Exchange Control at law firm Cliffe Dekker Hofmeyr, Alex Kanyi, during a past event. (Photo: Courtesy)
Kenya remains one of Africa’s most active participants in the global carbon market, with more than 52.4 million carbon credits issued as of 2023–2024, according to World Bank data.
The projects span land-based projects such as forest conservation and non-land-based initiatives, including clean cooking, solar energy, and green transport solutions.
The country has, in recent years, moved to strengthen its legal framework, amending the Climate Change Act in 2023 and introducing Carbon Markets Regulations in 2024, while draft carbon trading and carbon registry regulations published in 2025 aim to establish a national system for tracking and monetising emissions reductions.
Yet taxation remains one of the most complex and contested aspects of the sector.
Under the Income Tax Act, carbon revenues are subject to corporate tax, with a preferential 15 per cent rate available to certified carbon market exchanges operating under the Nairobi International Financial Centre.
The law is, however, silent on how revenues should be allocated where multiple local and foreign entities are involved.
According to Kanyi, the Wildlife Works case underscores the risks of relying on projections rather than audited financials when taxing carbon income, particularly in a sector that lacks harmonised global tax guidance.
Globally, there is no explicit framework under the OECD Model Tax Convention or United Nations tax instruments governing the taxation of carbon credit revenues.
This leaves countries to rely on domestic laws and source-based taxation principles, which can vary significantly across jurisdictions.
In Kenya’s case, the ruling reinforces the position that income from carbon credits generated within the country is taxable locally, even if sold abroad, but also sends a strong signal to tax authorities on the need for clarity, documentation and consistency in enforcement.
At the same time, the government has made clear that environmental taxation remains central to its fiscal strategy, with the Medium-Term Revenue Strategy for FY2024/25–2026/27 outlining plans to explore a carbon tax on fossil fuels as part of broader fiscal consolidation efforts.
The strategy proposes gradually increasing excise taxes on fossil-fuel-powered vehicles, evaluating levies on heavy equipment such as tractors and excavators, and reviewing tax incentives for electric vehicles.
The move signals that Kenya intends to expand carbon taxation even as it positions itself as a regional hub for carbon trading.
For carbon market participants, the message from the Tribunal ruling and policy roadmap is twofold.
Climate-linked revenues will be taxed, but firms that structure projects transparently, maintain robust documentation, and engage regulators early stand a better chance of operating sustainably within Kenya’s fast-evolving green economy.