Exploring Carbon Pricing in Developing Countries: A Macroeconomic Analysis in Ethiopia

Abstract

This study uses a Computable General Equilibrium model to analyze policy scenarios for a carbon tax on greenhouse gas emissions from petroleum fuels and kerosene in Ethiopia. The carbon tax starts at $5 per ton of carbon dioxide in 2018 and rises to $30 per ton in 2030; these rates are translated into taxes on the different energy types covered, depending on their carbon contents. Different scenarios examine the impacts with revenue recycling through a uniform sales tax reduction, reduction of labor income tax, reduction of business income tax, direct transfer back to households, and use by the government to reduce debt. Because petroleum fuels and kerosene are a relatively small part of the Ethiopian economy, the carbon tax has small impacts on overall economic activity and greenhouse gas emissions. In proportional terms, however, the impact on greenhouse gas emissions from these energy sources is notable, depending on the recycling scenario. The assumed carbon tax trajectory also can raise significant revenue—up to $800 million per year by 2030. The impacts on the poor through increased cost of living are not that large, since the share of the poor in total use of the taxed energy types is small. In terms of induced income effects through employment changes, urban households tend to experience more impacts than rural households, but the results also depend on the household skill level and the revenue recycling scenario.