Kenya has recently announced bold tax incentives (among them excise duty and VAT exemptions for import of Electric Vehicle (EV) parts and reduced stamp duty for EV infrastructure developments) to accelerate the transition to E-mobility and signal serious climate ambition. But will these incentives deliver the intended transition in a fiscally sustainable and accountable way? And are tax incentives an effective mechanism of climate policy?
Tax incentives represent a significant cost, making it important to evaluate their policy value to determine whether they are effective and efficient. A policy is considered effective if, when implemented, it achieves its intended impact and is considered efficient if it is the least costly way of achieving the intended impact. Ex ante evaluations in this regard are important to provide a justification for introducing incentives, estimate their costs (and those of other policy alternatives such as subsidies) and to define their possible impacts. Ex post evaluations are equally important to estimate the actual costs- both direct and indirect- once incentives are in place for some time. For the case of the EV incentives, this would require development of an ex-ante and ex-post evaluation framework that answers key questions such as: what are the objectives of the incentives; what market failure problem they are addressing; whether tax incentives are the best approach to address this failure; and what are their projected costs and their anticipated economic impacts. All this information ought to have been included in the E-mobility Policy.
The government in its E-Mobility Policy has done well in some aspects (such as in defining policy goals for EV incentives) but has failed in others. The policy projects EVs adoption using the current growth rate but fails to show how the proposed tax incentives will shift this growth. Therefore, if the government is not targeting higher growth compared to the business-as-usual (BAU) scenario in EVs adoption, then it does not make sense to introduce tax incentives. The policy appears to use the Compounded Annual Growth Rate (CAGR) of 10.5 percent recorded for the period 2016 to 2021 as its BAU projection, but this is quite low compared to other estimates: the EVs sector is projected to grow by about 27 percent across major African markets over the next 15 years with a projected Compounded Annual Growth Rate (CAGR) of 56 percent by 2030. Therefore, choosing an artificially low BAU will inflate the estimated impact of the incentives, making them appear more significant than they otherwise would be.
On revenue impact, the government estimates that E-mobility will result in Road Maintenance Levy Fund (RMLF) revenue shortfall of Ksh 17 billion in 2033 and will increase to Ksh 90 billion in 2043. However, these estimates do not account for the impact of the proposed incentives, nor do they include estimates of all fuel taxes. Some estimates indicate that Kenya’s fuel‑tax collections will drop by approximately $693 million by 2043. Similarly, the government does not include targets for growth in local manufacture and assembly of EVs and targets for charging infrastructure development. The government therefore has neither defined the intended policy impact (including reducing emissions) nor has it estimated all direct and indirect costs for the proposed policy measures making it hard to assess their effectiveness and efficiency.
One way to determine whether a policy is appropriate is to compare it with approaches tried elsewhere. For example, Ethiopia has adopted a relatively bold strategy. In 2024, Ethiopia banned the import of fossil fuel-powered vehicles and reduced tariffs on EVs. Within two years, the strategy has delivered multiple benefits. First, the share of EVs has increased from 1 percent to about 6 percent; above the global average of 4 percent. Secondly, rising EVs demand has spurred local EVs assembly, with 17 operational plants, targeted to increase to 60 by 2030. Thirdly, beyond direct assembly jobs, the two-wheeler EV segment could generate 150,000–200,000 gig jobs over the next 15 years. Beyond incentives, Ethiopia is implementing complementary measures such as mandating EV chargers at fuel stations and showrooms; this contrasts with Kenya’s proposed reduction in stamp duty to spur EV infrastructure development. Ethiopia’s experience demonstrates that government policies, including tax incentives, are likely to have multiple benefits. Kenya should therefore learn from Ethiopia’s example to determine whether the current incentives are adequate and what complementary measures are needed to accelerate the transition to EVs.
Beyond reporting fiscal costs, the design and reporting on tax incentives should allow for oversight and review. Although incentives do not appear as line items in the budget, they represent foregone revenue and therefore constitute public spending. Good fiscal governance requires reporting on tax expenditures to promote transparency and accountability. Estimates of revenue foregone from EVs incentives should be included in future Tax Expenditure Reports. This information alongside the objectives and impacts of these incentives will enable Parliament, oversight institutions, and the public to scrutinize whether incentives deliver value for money.
In conclusion, climate ambition and fiscal credibility are not competing goals. Embedding climate-linked incentives within transparent, costed, and reviewable policy frameworks would strengthen both. The issue is not whether EV incentives should exist, but whether their form and governance allow their trade-offs and outcomes to be meaningfully assessed. To be effective and efficient, tax incentives must be carefully designed to align their costs and benefits to fiscal policy, long-term development and climate objectives.
This blog has been co-authored by Veronicah Ndegwa, Senior Research Analyst and Timothy Kiprono, Project Officer at the Institute of Public Finance.
