- The document presents a study on the macroeconomic and environmental effects of carbon tax policies in Ethiopia. - The study uses a computable general equilibrium model to simulate the impact of three carbon tax scenarios on key economic indicators, emissions, government revenues/expenditures, and household welfare. - The results show that GDP, consumption, and exports decline under the carbon tax scenarios, while government revenues and expenditures increase. Household and labor incomes are negatively impacted while emissions are reduced. Higher carbon tax rates lead to greater changes from the baseline.

1. To be presented at
Fifth International Conference on Climate Change Adaptation
2016, Canada
Macroeconomic and Environmental Effects of Emission
Reduction Policies in Ethiopia: The Case of Carbon
Tax
By Tarekegne Wubie Wassie
PhD candidate, LASER, University of Milan, Italy
October, 2016
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2. Presentation outline
1. Introduction
1.1. Background
1.2. Motivation
1.3. Objectives1.3. Objectives
1.4. Policy Relevance
2. Methods and Data
3. Results
4. Conclusion
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3. 1. Introduction
1.1. Background
 Conventional approach to economic growth gave
the floor up to the environmentally sustainable
approach.
 Resulted from the need to mitigate adverse effects
of climate change on global economy and future
fate of life’s survival.
 Both developed and developing countries victims
of climate change
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4. 1.1. Background...
 Global efforts led to several agreements including
UNFCCC being a main global response.
 Kyoto Protocol of the UNFCCC put heavier burden Kyoto Protocol of the UNFCCC put heavier burden
on developed ones; but incentives for developing
countries to join the international community.
4

5. 1.1.Background... T
 Two reasons:
1) Development without considering the environment can’t be
sustainable. The share of global emissions originating in
these countries will grow to meet their social and
development needsdevelopment needs
 In addition, reduction of emissions has co-benefits of better
health.
2) Developing countries have a lower mitigation cost and
a large share of GHG abatement potential.
 Seems why many developing countries agreed to reduce
emissions on Paris climate conference and hence submitted
their INDCs (UNCCC, 2015).
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6. 1.2. Motivation
 Ethiopia
 Initiated CRGE in 2011- aim building green economy by
reducing future emissions.
 If the economy goes under BAU, emissions would more than
double in 2030 (FDRE, 2011)double in 2030 (FDRE, 2011)
 Submitted its INDCs to UNFCCC secreteriat in Oct 2015-
emission reduction target of 64% in 2030 from BAU scenario.
 One way of doing so carbon tax- Economists and
international organizations have been suggesting
market based instruments in general and carbon tax
in particular to reduce emissions.
 Due to command-and-control measures inefficient
and costly.
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7. 1.2. Motivation...
Why carbon taxes?
 emission prices considered efficient as they seek to
address market failures & not share the
distortionary nature of other taxes that do notdistortionary nature of other taxes that do not
address externalities.
 Generate revenue as other taxes do and reduce
emissions.
 Good approximations of the economic cost of
reducing emissions
(Whitehead, 2012; Roger and Zimmerman (1992).
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8. 1.1. Motivation...
 Empirical literatures from developed countries
suggest carbon tax would decrease carbon emissions
significantly and might not dramatically reduce
economic growth.economic growth.
 Although significant number of studies on the
economy-wide effects of carbon tax, limited number
of studies are found in developing countries in general
and sub-Saharan Africa in Particular.
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9. 1.1. Motivation...
 E.g. Amin et al (2008)) analysed the effects of output
specific carbon tax on the Malaysian economy and
found that the reduction in emissions is proportional
to the reduction in output levels-to the reduction in output levels-
 serious methodological drawback since emissions were
assumed to be linearly related to the levels of output
rather than that of inputs.
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10. 1.1. Motivation...
 Alton et al. (2012) South Africa revealed a CO2 tax that
is consistent with the national emission reduction
target results in moderate adverse impact on national
absorption and employment.absorption and employment.
 Not comprehensive in the sense that emissions other
than CO2 were excluded from the analysis.
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11. 1.1. Motivation...
 Addressing these issues, this study will contribute to the
literature of the economy-wide effects of carbon tax in
developing countries in general and sub-saharan Africa in
particular.
 More importantly, as the magnitude of the costs that More importantly, as the magnitude of the costs that
carbon taxes bring to the economy is quite different across
studies in different countries, this specific study on the
Ehiopian economy will serve as an input for the
implementation of the CRGE strategy as well as the
country’s INDCs.
 Given that Ethiopia has already set an emission reduction
target, it is quite interesting to see what happens to the
economy if carbon taxes are introduced.
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12. 1.3. Objectives
 To examine the effect of Carbon tax on
 Key macroeconomic variables
emission levels emission levels
 welfare of people
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13. 1.4. Policy Relevance
 Ethiopia objective of achieving middle income
status by 2025 while keeping emisssions low.
 initiated the CRGE strategy in 2011 which aims at
keeping 2030 emissions to their levels in 2010.keeping 2030 emissions to their levels in 2010.
 submitted its INDCs to the UNFCCC secretariat,
stating that it intends to reduce 2030 emissions by
64% from the BAU scenario.
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14. 1.4. Policy...
 Consultants from ECA-MoFED indicated a need for a
quantitative assessment that takes into account direct
and indirect effects of the various CRGE-related
interventions in the country.
 Fits well to the national policies of the country Fits well to the national policies of the country
 results of this project serve as
 input in sharpening the policy design and implementation
in emissions in various sectors.
 important input for GTP-II: government is planning to
mainstream CRGE and INDC in to GTP-II with much
more emphasis.
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15. 2. Methods and Data
Methods
 environmental CGE model
Why CGE?
 Ability to integrate economic theory with real-world
data (Ross et al, 2007)data (Ross et al, 2007)
 Eps experience strong GE effects (Bergman, 2005)
 ME models suffer from heterogeneous theoretical
underpinning as well as their requirement of long time
series data for estimation.
 PE models fail to show interaction among sectors.
 A full picture of the effects need CGE models
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16. 2. Methods...
 Built on the IFPRI standard CGE model.
Extensions:
 Newly added parameters: Emission coefficients and
price of carbon.price of carbon.
 Emission coefficients represent the amount of
emissions per birr worth of inputs and/or outputs
 Emissions in to three to calculate emission coeficients
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17. 2. Methods...
 Stationary:
ca
ca
ca
INTA
CEMISAA
0
0
coefAA 
Where coefAAca= emission coeficient of
activity a from using commodity c
CEMISAA0ca=Emission of Activity a from
 Activity:
 HH consumption:
caINTA0
a
a
a
QA
CEMISA
coefA 
ch
ch
ch
QH
CEMISHH
coefHH
0
0

CEMISAA0ca=Emission of Activity a from
using commodity c (initial value) ,
INTA0ca=value of commodity c used by
activity a
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18. 3. Methods...
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19. 3. Methods...
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20. 3. Methods...
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21. 3. Methods...
 Carbon tax on activities added as a production cost in
the activity cost function.
 affects the profit maximizing decision of the activities.
 also affects the government’s budget balance. also affects the government’s budget balance.
 The same thing applies to the households’ problem:
carbon tax affects the households’ income and
consumption expenditure
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22. Data...
 The study makes use of the modified 2009/10
Ethiopian SAM developed by EDRI and emission data
measured in tones of CO2e (include CO2, CH4 and
N2O) consistent with SAM accounts disaggregated by
sources of emission which was developed by (EEPFE).
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sources of emission which was developed by (EEPFE).
 the estimated total emission is 174.55 mt CO2e which is
different from the estimation of the CRGE strategy
(150 mt CO2e) .
 Because of the inclusion of GHG emissions from
household operations which was not included in the
CRGE strategy.
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23. 4. Results
Simulations-based on different carbon price studies which
are meant to approximate the social cost of carbon in
developing countries.
 SIM1: USD 7.4 per ton of CO2e which is the suggestion by SIM1: USD 7.4 per ton of CO2e which is the suggestion by
Nordhaus (Charles Komanoff, 2008).
 SIM2: USD 10 per ton of CO2e which is the suggestion by
the carbon tax centre (Charles Komanoff, 2008).
 SIM3: USD 16 which is the regional carbon price for Africa
and Latin America suggested by Florian Landis and
Thomas Bernauer (2012) in their estimation of global and
regional carbon prices that represent social cost of carbon.
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24. Table 1. Effects on selected macroeconomic indicators
(% changes from the base)
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25. Table 2. Effects on Government income, expenditure, household &
factor income (Percent change from the base)
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26. Table 3. Effects on emissions (%
change from the base)
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27. Table 4. Welfare Effects
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28. 4. Conclusion
 In real terms, GDP, national absorption, private
consumption and exports showed a declining trend
under the three simulations.under the three simulations.
 substantial increase in both government income and
expenditure with the introduction of carbon tax.
 Negative effect on household and labour income
 successively higher rates of tax lead to higher
percentage changes in the variables of interest-lower
rates bring moderate change from the baseline.
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29.  Promising reduction on emissions
 Welfare of households affected more
 Environmental benefits not accounted
Adverse effects of carbon tax-moderate- and could be Adverse effects of carbon tax-moderate- and could be
tolerated when we see the unaccounted
environmental benefits.
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30. THANK YOU.THANK YOU.
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