Fossil Fuel and Food Tax Incidence in Ethiopia

Abstract

Most studies suggest that environmental taxes are regressive, making them less attractive policy options. The general objective of this paper is to analyze and compare fossil fuel and food tax incidence in Ethiopia in different expenditure groups of households considering urban and rural parts of Ethiopia separately. We use three related methods. First, we compute the budget share of fossil fuel and food in household expenditures for each category of households. Suits coefficients and concentration curves are also calculated in order to compare the degree of regressivity/progressivity. We also report tax burden from private fuel consumption, public fuel consumption, kerosene and butane gas, total transport and total fossil fuel consumption and from food items. The results suggest that fossil fuel taxes in Ethiopia are not regressive; rather they are progressive even if the progressivity varies across items considered. However, when we consider kerosene and butane gas in urban areas, tax burden would be regressive unlike other fuel types. On the other hand, the budget shares for food decrease as total expenditure increases. Generally, food tax burden in rural as well as urban areas of Ethiopia is regressive. Tax burden from public transport fuel use falls more heavily on the rich than the poor, the effect being even higher for private fuel consumption. However, in the case of kerosene, butane gas and food, the tax burden on the poor is higher than on the rich. If policy makers want to make sure that fuel and food taxes do not hurt the poor, then an increase in fuel tax could be complemented with some tax relief or subsidy for kerosene, butane gas and food items. In addition to the distributional effects, this may help address local and global environmental problems.

Keywords: Fossil fuel, regressive, progressive, tax, food, urban, rural, Ethiopia