PublicDisclosureAuthorized PublicDisclosureAuthorized PolicyResearchWorkingPaper10791 EconomicandDistributionalImpactsofSelectedCarbonPricingPoliciesfortheArabRepublicofEgypt GovindaR.TimilsinaSamuelSebsibie DevelopmentEconomicsDevelopmentResearchGroupJune2024 PolicyResearchWorkingPaper10791 Abstract TheArabRepublicofEgyptisthe24thlargestcarbondiox-ideemitterfromfossilfuelcombustionintheworldandthethirdlargestemitterintheMiddleEastandNorthAfricaregionaftertheIslamicRepublicofIranandSaudiArabia.Egypthassetatargetofreducingone-thirdofitsnationalgreenhousegasemissionsundertheParisClimateAgree-ment.Pricinginstruments,suchastheremovalofexistingfossilfuelsubsidiesandtheintroductionofacarbontax,helpthecountrytoachieveitsemissionreductiontargets.However,theeconomic,social,andenvironmentalimpactsofsuchpoliciesareunknown.Thisstudydevelopsacom-putablegeneralequilibriummodelforEgypttoinvestigatetheeconomic,distributional,andclimatechangemitiga-tioneffectsoffossilfuelsubsidyremovalandintroductionofacarbontaxunderalternativeschemestorecyclethe savedsubsidiesandcarbontaxrevenues.Fourrevenuerecy-clingschemesareconsidered:publicdebtreduction,equalorprogressivecashtransferstohouseholds,andcuttingcorporateincometaxes.ThenumericalresultsindicatethatremovingexistingpetroleumsubsidiesandintroducingofacarbontaxofLE600pertonofcarbondioxidewouldreducenationalcarbondioxideemissionsbyupto11per-centwithoutsignificantlyaffectingtheeconomy.Whenthesavedsubsidiesandcarbontaxrevenuesaregivenbacktohouseholdsthroughcashtransfers,theincomeofpoorerhouseholdswouldriserelativetothatofricherhouseholds,ensuringthatthisrevenuerecyclingschemeisprogressive.Thepoliciesaffectcommoditypricesandsectoraloutputnotonlyindifferentmagnitudes,butalsoindifferentdirec-tionsacrosstherevenuerecyclingschemes. ThispaperisaproductoftheDevelopmentResearchGroup,DevelopmentEconomics.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebathttp://www.worldbank.org/prwp.Theauthorsmaybecontactedatgtimilsina@worldbank.org. ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent. ProducedbytheResearchSupportTeam EconomicandDistributionalImpactsofSelectedCarbonPricingPoliciesfortheArabRepublicofEgypt GovindaR.TimilsinaandSamuelSebsibie1 KeyWords:Climatechange,Carbonpricing,Fossilfuelsubsidy,Carbontax,Generalequilibriummodel,Distributionalimpacts,Egypt JELClassification:C68,Q43 1GovindaTimilsina(gtimilsina@worldbank.org)isaSeniorEconomistattheDevelopmentResearchGroup,WorldBank.SamuelKebede(ssebsibie@gmail.com)wasaShort-termConsultanttotheWorldBankduringtheimplementationthisstudy. EconomicandDistributionalImpactsofSelectedCarbonPricingPoliciesfortheArabRepublicofEgypt 1.Introduction TheArabRepublicofEgyptisthe24thlargestCO2emitterfromfossilfuelcombustionintheworldandthethirdlargestemitterintheMENAregionaftertheIslamicRepublicofIran(7thlargest)andSaudiArabia(11thlargest)(WorldBank,2022a).Totalgreenhousegas(GHG)emissionsin2019were1.6timesashighasin1990;andpercapitaemissionsincreasedby47%duringover1990–2019(WorldBank,2022b).Thecountryishighlyvulnerabletoclimatechangeduetoincreasedwaterscarcity,lossofbiodiversityandfoodinsecurity(WorldBank,2022).ConsideringthegrowthofGHGemissions,itsvulnerabilitytoclimatechange,2andrealizingtheglobalresponsibilitytoaddressclimatechange,Egypthasactivelyparticipatedininternationaleffortstocombatclimatechange.EgyptratifiedtheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)in1994.UndertheParisClimateAgreement,Egypthassetatargetofreducingone-third(33%)ofitsemissionsinthebaselinein2030(GovernmentofEgypt,2022).AsindicatedinitsNationallyDeterminedContribution(NDC),theemissionmitigationtargetwillbeachievedthroughvariousmeasures,suchasremovingfossilfuelsubsidies,promotingrenewableenergy,improvingenergyefficiency,andtransitioningtolow-carbontransportation.Egypt’scommitmenttocontributetoglobaleffortstoaddressclimatechangeisalsoreflectedinitshostingofthe27thConferenceoftheParties(COP)totheUNFCCCinNovember2022.DespiteEgypt’stargetofreducing33%ofitsGHGemissionsasspecifiedinitsNDC,anacuteknowledgegapexistsonhowmeetingtheNDCtargetwillaffecttheoveralleconomyandhowtheseimpactswillbedistributedacrosshouseholds. Carbonpricinginstruments,suchasacarbontax,arethemainpricinginstruments consideredbymanycountriestoreducetheirGHGemissionsbecausetheyareeconomically 2AccordingtotheFourthAssessmentReportoftheIntergovernmentalPa