Environmental and Economic Implications of Emission Reduction Policies in Ethiopia : The Case of Carbon Tax

Ethiopia has given wider attention to reducing future emissions because the recently recorded fast and non-oil based growing economy will not be sustainable unless a green economy trajectory approach is followed. Following the recent Paris Climate Conference, Ethiopia reaffirmed its determination to fight climate change by submitting its Intended Nationally Determined Contribution with the aim of reducing 2030 emissions to their levels in 2010. The main objective of this study is to analyze the economy-wide implications of carbon tax in Ethiopia by tying emissions with the levels of input used in production and/or consumption thereby tracking emissions by source. For this, a computable general equilibrium model is employed and is calibrated on the modified 2010 SAM of Ethiopia. Using literature as a guide, an emission tax is assumed to be birr per ton of emission in this study. The results of the simulation experiments show that emission tax has negative but modest effect on real GDP, domestic absorption (real), price level and aggregate activity output in the short-run. On the other hand, private consumption, exports, household income and welfare of people show considerable reduction under the emission tax policy. This is also accompanied by a significant reduction in emissions. In fact, successively higher rates of emission tax lead to higher percentage changes in the variables of interest where higher rates bring significant change from baseline.