Distributional Effects of Carbon Tax in Ethiopia : A Computable General Equilibrium Analysis

Developing countries are increasingly giving attention to carbon pricing to reduce theiremissions, particularly in meeting their nationally determined contribution under the Paris Climate Agreement.However, they would like to understand the potential economic, distributional, and environmental impacts ofcarbon pricing policies before they consider implementation. Using a computable general equilibrium model of Ethiopia,this study examines the effects of a hypothetical carbon tax (US$20/total carbon dioxide) under several alternativeschemes to recycle carbon tax revenue to the economy. The study finds that a carbon tax would be regressive in allschemes considered except those when the tax revenue is recycled, as a cash transfer, to household income groupseither equally or inversely proportional to their incomes. The schemes that make the carbon tax progressive also causea higher reduction of carbon dioxide emissions, thereby ensuring the alignment of equity and environmental outcomesof the carbon tax. However, these schemes are not necessarily economically efficient because they cause higherreductions of gross domestic product compared to other options considered.