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.

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.

of the World Bank. World Bank colleagues Dirk Heine and Angela Naneu Churie Kallhauge provided very helpful peer-review comments. The authors are especially grateful for the extensive efforts by Niraj Palsule to fill substantive gaps in successive drafts of the report and to otherwise improve its content. Thanks are due also to Deepika Davidar of the World Bank, who edited the report. Funding support from the CF-Assist Trust Fund and the Government of Norway is gratefully acknowledged.The findings, interpretations and conclusions herein are those of the author(s) and do not necessarily reflect the views of the Ethiopian Development Research Institute, World Bank, the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. vi fuelwood in the latter. Using price-based measures to restrict land clearing and fuelwood use is challenging; however, several promising ideas are beginning to emerge in recent studies. Other possibilities include expanding both current reforestation programs and current clean cooking programs that reduce fuelwood demand through more efficient wood fuel cookstoves and through fuel-switching, especially in urban areas. Both reforestation and clean cooking initiatives can provide large co-benefits through increased ecosystem protection, and improved health by reducing air pollution exposure. Revenues from a carbon tax could be used in various ways to support such initiatives. Beyond researching efficient expansion of reforestation and clean cooking measures, another fruitful avenue for investigation is how changes in current industrial and trade policies could expand access to more energy-efficient and less-polluting technology and capital. Further analysis that considers a broader range of economic instruments to mitigate emissions from land-use and land-use change is recommended. This includes: (i) land tax or subsidies that encourage land rehabilitation, reforestation, maintenance of natural forests; (ii) payments for environmental services; and (iii) land clearing taxes.