Distributional and Economy-Wide Impacts of a Carbon Tax in Ethiopia

This study evaluates the macroeconomic, environmental, and distributional effects of introducing a US$20 per tome 〖CO〗_2 tax on fossil fuels in Ethiopia. We employ a top-down macro–micro framework that links the DEMETRA computable general equilibrium model with the ETMOD tax–benefit microsimulation system to evaluate alternative revenue-recycling strategies, income-tax reductions, sales-tax cuts, and lump-sum transfers to households. The carbon tax reduces fossil-fuel emissions by 5.89% while causing a modest GDP decline of 0.17%, with carbon-intensive sectors, particularly transport and water, experiencing the largest contractions. Revenue recycling strongly influences outcomes: sales-tax reductions minimize GDP losses and are the only strategy that lowers poverty. The carbon tax would be regressive, but recycling its revenues makes it progressive, with sales-tax reductions yielding the greatest equity gains. The findings indicate that a carefully designed carbon tax, accompanied by an effective revenue-recycling strategy, can facilitate Ethiopia’s low-carbon transition, promote equitable outcomes, and safeguard vulnerable households.