Promoting Inclusive Green Growth and Sustainable Finance through Environmental Tax: A System Dynamics Model for Ethiopia

Abstract

Ethiopia's homegrown economic policy aspires to build a climate-resilient green economy through environment-friendly policies. The target is to build an economy that can absorb carbon emissions by 64% and achieve a carbon-neutral economy in the long run. This study applied a system dynamics model to examine the nexus between environmental tax, inclusive green growth, and sustainable finance. It is built on three sub-systems: economic growth, environmental sustainability, and social equity. Four idiosyncratic policy scenarios were simulated to show the various policy implications of introducing ecotax in the Ethiopian tax system including, a zero ecotax policy, imposing ecotax and investing in a green economy, investing all the taxes from pollution into the economy and an equal split of ecotax revenue between green investment and economic growth. The implication of each policy on growth, environmental sustainability, and income equality has also been examined. The findings showed that introducing ecotax and putting all into GDP resulted in non-sustainable growth and distributing ecotax revenue between growth and green investment was found to be a better mechanism to reduce pollution emissions and maintain environmental sustainability and also promote sustainable growth.  The novelty of this study lies in its examination of the relationship between environmental tax, inclusive green growth, and sustainable finance within the context of Ethiopia's homegrown economic policy. By exploring these policy implications and their effects on various dimensions, this study contributes to the understanding of how ecotax implementation and revenue distribution can align with Ethiopia's aspirations for a climate-resilient, green economy.

Keywords: Inclusive Green growth, Ecotax, Sustainable Finance, Green Economy, System Dynamic

DOI: 10.7176/JESD/14-13-05

Publication date:August 31^st 2023