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AEC 2010 - Fiscal Space and Carbon Sequestration in Ethiopia: A Potential Non-traditional Source of of Development Finance to Meet the MDGs


The financial and economic crisis accentuated an already challenging situation for Ethiopia. Coming in the heels of the food and fuel crisis from which Ethiopia was just beginning to recover, the slump in world trade from the financial and economic crisis tightened the fiscal space in Ethiopia in term of revenue from exports. This also followed a situation where revenue collection as a percentage of GDP had been declining for the earlier five years. The Ethiopia MDG Needs Assessments exercise conducted in 2004-2005 revealed that the cost of meeting the MDGs in Ethiopia is about US$ 121 per capita per year , of which public sector costs are estimated at US$ 91 per capita per year. On the other hand, revenue collection per capita increased from about US$ 18 in 2001/02 to about US$ 42 in 2007/08. Given this trend, revenue collection will reach the needs of meeting the MDGs by 2021/22, some six years after the 2015 deadline. Within this context, this paper looks at carbon sequestration and trading as an option for increasing fiscal space in Ethiopia. This, as one of the many other possible options of nontraditional source of development finance, could complement the traditional sources of Official Development Assistance and gains from efficiency in tax administration. Drawing from the REDD principles, the paper finds that within certain parameters of carbon trading, Ethiopia could increase its fiscal space by up to US$ 140 million which is 0.4 percent of GDP (2009) or 3.4 percent of revenue and grants of the same year. Of course realizing this fiscal space calls for a complex policy interventions, some of which falls within the realm of the international carbon market.

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