Economic and Distributional Impacts of Selected Carbon Pricing Policies for the Arab Republic of Egypt

The Arab Republic of Egypt is the 24th largest carbon dioxide emitter from fossil fuel combustion in the world and the third largest emitter in the Middle East and North Africa region after the Islamic Republic of Iran and Saudi Arabia. Egypt has set a target of reducing one-third of its national greenhouse gas emissions under the Paris Climate Agreement. Pricing instruments, such as the removal of existing fossil fuel subsidies and the introduction of a carbon tax, help the country to achieve its emission reduction targets. However, the economic, social, and environmental impacts of such policies are unknown. This study develops a computable general equilibrium model for Egypt to investigate the economic, distributional, and climate change mitigation effects of fossil fuel subsidy removal and introduction of a carbon tax under alternative schemes to recycle the saved subsidies and carbon tax revenues. Four revenue recycling schemes are considered: public debt reduction, equal or progressive cash transfers to households, and cutting corporate income taxes. The numerical results indicate that removing existing petroleum subsidies and introducing of a carbon tax of LE 600 per ton of carbon dioxide would reduce national carbon dioxide emissions by up to 11 percent without significantly affecting the economy. When the saved subsidies and carbon tax revenues are given back to households through cash transfers, the income of poorer households would rise relative to that of richer households, ensuring that this revenue recycling scheme is progressive. The policies affect commodity prices and sectoral output not only in different magnitudes, but also in different directions across the revenue recycling schemes.