Economic and distributional impacts of climate change: The case of Ethiopia

Climate change is likely to harm developing economies that generate major portion of their GDP from climate sensitive sectors. This paper computes economy-wide impact of climate change and its distributional consequence with the help of a sector wise disaggregated general equilibrium model using Ethiopia as a case. The projected climate shock reduces output in the sector with the strongest forward and backward linkage to the rest of the economy and redistributes income by changing the returns to inputs owned by various agents. The results suggest that climate change will make the prospect of economic development harder in at least two ways: first, by reducing agricultural production and output in the sectors linked to the agricultural sector, which is likely to reduce Ethiopia's GDP by about 10% from its benchmark level; and second, by raising the degree of income inequality in which the Gini-coefficient increases by 20%, which is likely to further decrease economic growth and fuel poverty. Thus, climate change is expected to increase the fraction of people in poverty by reducing the size of the total pie and redistributing it more unevenly.