ECONOMY-WIDE ESTIMATES OF THE IMPLICATIONS OF INDC POLICIES FOR ETHIOPIA (A RECURSIVE DYNAMIC CGE MICRO-DATA ANALYSIS)

Economic and Environmental Effects of INDC Policies for Ethiopia (A Recursive Dynamic CGE Analysis) Mitigation of climate change has become unavoidable discussion item in policy making agendas in both developed and developing counties. Having understood the important role played by developing nations in fighting against climate change, Ethiopia submitted its Intended Nationally Determined Contributions (INDC) to the UNFCCC secretariat with an emission reduction goal of 64% in 2030 compared to the BAU scenario. The main objective of this study is to analyse the economic and environmental effects of the implementation of Ethiopia’s INDC policy in the form of carbon tax. In doing so, a recursive dynamic computable general equilibrium (CGE) model is employed and is calibrated on the updated 2009/10 SAM of Ethiopia with the corresponding emission data of the same year. Four simulation scenarios have been introduced. In the first simulation, carbon tax revenue has been allocated entirely for government consumption, whereas in the second simulation, the carbon tax revenue has been equally divided between government consumption and households in form of lump sum transfer. In the third and fourth simulations, productivity gains from government expenditure allocated to health and education sectors are combined with the respective first two simulations. The results of simulation experiments on selected macroeconomic variables indicate that, in real terms, GDP, national absorption and household consumption are found to be adversely affected relative to the baseline scenario, the impact being considerably high in the first simulation. The simulations with productivity gains, in relative sense, have improved the negative effects of the carbon tax abatement policy on the economic variables. The implication of this is that policies that increase productivity of government expenditure have better spillover effects on GDP than those of household consumption. Finally, to achieve the emission reduction target set out in the INDC policy of Ethiopia with reasonable cost to the economy, the country has to invest in clean technologies that are meant to improve emission efficiency as most of the emissions emanate from activities in the agricultural sector, and for this end, huge international support is required.