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BusinessEthiopia mulls carbon tax on vehicles

Ethiopia mulls carbon tax on vehicles

The plan is to reduce emissions

Ethiopia’s Finance Minister, Ahmed Shide, has revealed plans to introduce a new form of tax to reduce carbon emissions from transportation in the future.

He made the remark amid challenging times for the federal government, which is struggling to manage budget deficits resulting from unmatched growth in revenues and expenditures.

The proposed carbon tax is currently in the conceptual phase and is intended not only to boost tax revenues but also to create innovative financing opportunities for climate action and address the challenge of growing carbon emissions.

Ahmed’s announcement coincides with the Ministry of Finance’s ongoing tax reform, which includes revisions to the Value Added Tax (VAT), excise tax, and income tax regulations.

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The Minister announced that studies will be conducted to introduce this form of tax that also broadens the government’s tax regime, “especially on private transport modes” emitting the highest gases.

“We have to strengthen climate financing activities. The main one is domestic resource mobilization, which includes strengthening taxation and reforming the tax to GDP contribution,” he said in a launching ceremony of Ethiopia’s Long-Term Low Emission and Climate Resilient Development Strategy (LT-LEDS) on May 11, 2023.

During the launch of the strategy at Friendship Square, Demeke Mekonnen, deputy prime minister and foreign minister, and several other ministers were present.

Citing information from the United Nations Framework Convention on Climate Change (UNFCCC), Ahmed said that about USD 5.8 trillion is required to address challenges resulting from global climate change.

The newly launched long-term low emission and climate resilience strategy of Ethiopia is planned to be achieved by 2050, with a total cost of about USD 157 billion needed to reach the goal of net-zero emissions by then.

Excluding investments related to climate, on which multibillions of dollars were mobilized, he revealed that the government mobilized about a billion dollars during the last 14 years in climate finance facilities, directly sourced to climate change-specific projects.

Reform in the transportation sector is a major step to achieving the net-zero carbon emission plans, according to Adefris Worku (PhD), a forestry expert and national green legacy coordinator.

Transport is one of the industries that emits the most greenhouse gases, accounting for around 20 percent of total emissions globally. According to the expert, the industry must decrease its carbon footprint through legislative reforms that may limit the use of gasoline vehicles.

“It is possible to reduce carbon emissions through policy changes, including taxation on transportation. But providing other transportation alternatives when discouraging the use of fuel-based vehicles is necessary,” he said.

The expert also mentioned how increasing fuel prices and imposing indirect taxes such as excise tax are part of the activities to discourage the public from using low- or no-gas-emitting transport modes. “For me, incentivizing is more fruitful in luring the public into climate-friendly use of transportation,” Adefris said.

The government has previously introduced different tax and duty exemptions for the importation or assembly of electric vehicles while imposing a high rate of excise tax on old vehicles that use the most fuel.

In accordance with the 2015 Paris Agreement on Climate Change, Ethiopia plans to reach net-zero carbon emissions by 2050 through the new strategy revealed by the Ministry of Planning and Development.

Successful application of the LT-LEDS is expected to enable Ethiopia to save up to USD 41 billion in energy costs, reforest two million hectares of land, and restore 16 million hectares of deserved land.

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