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Editor: Name Cover design: Cybil Nyaradzo Maradza ii Contents Acknolwedgements ................................................................................................................................................................................ v Executive Summary ................................................................................................................................................................................ vi References ..................................................................................................................................................................................................... xix Abbreviations ............................................................................................................................................................................................... xxi 1. ASSESSING GREEN COMPETITIVENESS IN ETHIOPIA: BACKGROUND AND APPROACH .................................................................................................................................... 1 Introduction ............................................................................................................................................................................................ 2 Conceptual Framework ................................................................................................................................................................. 4 References .............................................................................................................................................................................................. 7 2. SUPPLY-SIDE IMPACTS FROM CLIMATE CHANGE ...................................................................................... 8 References .............................................................................................................................................................................................. 14 3. DEMAND FOR SUSTAINABILITY .................................................................................................................................... 15 How will climate change affect trade access in Ethiopia’s key markets and change how buyers of key exports make sourcing decisions? ..................................................................................................... 16 Sustainability Legislation in Export Markets ................................................................................................................ 17 Sustainability Demands from International Buyers and Investors .............................................................. 19 References .............................................................................................................................................................................................. 24 4. SECTORAL ANALYSIS .............................................................................................................................................................. 26 Textiles and Apparel ........................................................................................................................................................................ 27 Coffee .......................................................................................................................................................................................................... 36 Cut Flowers ............................................................................................................................................................................................ 43 Aviation ...................................................................................................................................................................................................... 46 References .............................................................................................................................................................................................. 55 5. CONCLUSION AND POLICY RECOMMENDATIONS ........................................................................................ 63 iii BOXES Box 2.1. Spatial and Sectoral Variability of Climate Change Impacts ...................................................... 9 Box 3.1. Case Study: Lessons from Wastewater Treatment Plants and Sludge Disposal ........ 22 Box 4.1. Vietnam’s Strategies for Green and Climate-Smart Industrial Transition ....................... 34 Box 4.2. Circular Economy Opportunities: Spent Coffee Husk Valorization ......................................... 37 Box 4.3. Peru’s EU Deforestation Regulation Compliance Journey ........................................................... 39 Box 4.4. Circular Economy Opportunities: Biofertilizers .................................................................................... 44 Box 4.5. Advantages and Disadvantages of Castor and Ethiopian Mustard for SAF Production ............................................................................................................................................................ 52 FIGURES Figure 1.1. Conceptual Framework of Green Competitiveness ........................................................................... 4 Figure 2.1. Key Natural Hazard Statistics ............................................................................................................................ 9 Figure 2.2. Projected temperature and precipitation scenarios for Ethiopia, 1995 to 2014 ......... 11 Figure 2.3. Cumulative Economic Losses for the Ethiopian Economy by Climate Impact Channel ............................................................................................................................................................. 11 Figure 4.1. Cotton Production ....................................................................................................................................................... 29 Figure 4.2. Environmental Impact of the Global Garment and Textiles Sector Value Chain .......... 31 Figure 4.3. Renewable Energy as Share of On-Grid Power ................................................................................... 33 Figure 4.4. Ethiopia Exports by Product, 2021 ................................................................................................................. 36 Figure 4.5. Coffee Value Chain ...................................................................................................................................................... 37 Figure 4.6. Cut Flower Exports: Ethiopia versus key cut flower exporters, 2000–21 ......................... 43 Figure 4.7. Ethiopia’s Exports to the European Union ................................................................................................ 47 Figure 4.8. Ethiopian Air Freight to the European Union .......................................................................................... 47 Figure 4.9. Ethiopia’s Fuel Imports Relative to Total Imports ............................................................................... 51 MAPS Map 4.1. Cotton Production Areas in Ethiopia ............................................................................................................. 29 Map 4.3. Countries Participating in CORSIA .................................................................................................................. 50 TABLES Table 1.1. Rationale for Sector Selection .......................................................................................................................... 6 Table 2.1. Impacts of Climate Change on Businesses and Supply Chains ............................................... 12 Table 2.2. Crop Yields under Different Climate Scenarios in Ethiopia ......................................................... 12 Table 4.1. Textile and Garments Strengths, Weaknesses, Opportunities, and Threats ................... 27 ANNEXES AND APPENDIXES Annex 1A. Country Context and Policy Framework ..................................................................................................... 68 Appendix A. Key European Union Sustainability Legislation ................................................................................... 80 Appendix B. Stakeholders Interviewed ..................................................................................................................................... 83 Appendix C. Case Study: Wastewater Treatment and Sludge Management in Hawassa Industrial Park ............................................................................................................................................................... 85 iv Acknowledgments A World Bank core team co-led by Philip Grinsted (private sector specialist) and Milaine Rossanaly (senior private sector specialist) and which included Matthew Butler (senior consultant) and Juan Andres Cartwright (senior economist, extended-term consultant) developed this report. The broader team included Bezawit Eshetu (Consultant), Ejigayehu Teka Habte (Program Assistant), Wondwosen Teka Hussen (consultant), and Taarika Joan Peres (intern). The work was conducted as part of the Ethiopia Governance Advisory and Technical Support (P179405) under the overall guidance of Alwaleed Fareed Alatabani (practice manager, East Africa). It builds on previous work conducted by the International Finance Corporation and the World Bank on eco- industrial parks and other topics. The team is grateful for the leadership and guidance from the government of Ethiopia task force that was set up for this report. The task force comprises (in alphabetical order) Ato Mensur Dessie (director, Multilateral Environmental Agreements Negotiation Coordination, Ministry of Planning and Development); Ato Nigussie Godana (then director, Textiles and Garment Industry Development Research Institute); Ato Sileshi Lemma (deputy director general, Ministry of Industry); Ato Girma Mamo (project coordinator, National Quality Infrastructure Development Project, Ministry of Trade and Regional Integration); Wro Tenaye Mengistu (Ethiopian Investment Commission); and Ato Esmael Mohammed (climate change team leader, Ministry of Industry). The team is thankful for the support from numerous government officials and the valuable consultations with them, including Ato Tesema Adamu (Ethiopian Civil Aviation Authority); Dr. Adugna Debela (director general, Ethiopian Coffee and Tea Authority); Ato Dereje Debele (Ethiopian Civil Aviation Authority ); Ato Girma Gemechu (then director general, Environmental Protection Authority); Ato Mergia Kuma (head of the Environmental and Social Safeguards Department at the Industrial Park Development Corporation); and Mohammed Hussein Seid (deputy director general, Leather Industry Development Institute). The World Bank team would like to sincerely thank the representatives from the domestic and international private sector for their various engagements, including the Ethiopian Textile and Garment Manufacturers’ Association, Roundtable on Sustainable Biomaterials, and the Ethiopian Horticulture Producer Exporters Association (EHPEA). This report benefited greatly from the collaboration with representatives from the Delegation of the European Union in Addis Ababa and from development partners, including Deutsche Gesellschaft für Internationale Zusammenarbeit, United Nations Development Programme, United Nations Industrial Development Organization, Japan International Cooperation Agency, IDH Sustainable Trade Initiative, Solidaridad, and the Tony Blair Institute. The team is grateful for the valuable feedback from World Bank Group peer reviewers Antoine Coste (senior economist) and Etienne Kechichian (senior economist). This work benefited from the guidance and inputs from various World Bank Group colleagues, including Megersa Abera Abate (senior transport economist); Biruktayet Assefa Betremariam (senior agricultural specialist); Sinem Demir (operations officer, International Finance Corporation); Senidu Fanuel (senior private sector specialist); Ross Hughes (senior environmental specialist); Welela Ketema (senior agricultural specialist); Tehmina S. Khan (lead economist, program leader); Bisrat Teshome Mekonnen (private sector specialist); Elliot W. Mghenyi (lead agriculture economist); Vincent Palmade (lead economist); Shane Sela (senior economist); Nah-yoon Shin (extended-term consultant); Xiaoping Wang (lead energy specialist); Rahel Alemu Workneh (consultant); and others. v Executive Summary vi EXECUTIVE SUMMARY Environmental and climate factors play an severe. Therefore, this assessment is particularly increasing role in shaping Ethiopia’s economic timely. Particularly as Ethiopia has already lost competitiveness, and this report aims to provide an economic momentum in recent years, due to issues like overview of these shifts.¹ This novel report is a high- the suspension of Ethiopia’s duty-free market access level assessment of how certain factors could affect to the United States under the African Growth and Ethiopia’s economic competitiveness: (i) supply- Opportunity Act in January 2022, and several domestic side impacts of climate change and environmental and international crises (e.g., supply chain disruptions degradation, and (ii) demand-side changes caused by caused by increased geopolitical tensions and wars, a a growing number of sustainability requirements in domestic conflict). Furthermore, positive developments key export markets, notably sustainability regulations such as the African Continental Free Trade Area and decisions by international buyers. Concentrating and the Common Market for Eastern and Southern on four sectors that are both critical to Ethiopia’s Africa, may increase regional trade over the short and economy and exposed to environmental and climate medium terms, but are unlikely to compensate for any factors—coffee, textiles and garments, cut flowers, reductions of exports to high-income markets. and aviation—illustrates these shifts. The objective is to identify cross-cutting trends of how sustainability While productivity gains and economic factors affect Ethiopia’s economic competitiveness, transformation have also been slow or stalling but the sector-specific angle helps identify pressing and the country’s public finances have been challenges that policy makers in Ethiopia need to declining –recent foreign exchange reform may address. Note that the selected sectors are used to help shift course. Ethiopia has been facing growing illustrate the trends described in this report and do macroeconomic imbalances, including high levels of not imply a recommended prioritization. Many other debt, high inflation, and a severe foreign exchange sectors essential to Ethiopia’s green transformation shortage because of declining or stalling exports are not discussed. Moreover, although the report and a severely overvalued exchang rate. This led acknowledges that social and environmental aspects for instance to a gap between the official and are deeply intertwined, it does not cover topics parallel exchange rate of the Ethiopian birr (Br) to such as occupational health and safety, inclusion, US dollars of approximately 100 percent (UNDP living wages, and gender rights. The assessment 2023) in recent years. With rising foreign exchange applies a mixed methods approach by drawing on shortages, Ethiopia began accumulating bilateral insights from interviews with experts conducted debt arreas and in December 2023, became the third online and in person in Ethiopia (conducted mainly African nation to default on its debt. However, the between November 2023 and April 2024, see annex Ethiopian government has initiated a series of major 1), analysis of trade and economic data, and an reforms to reduce macroeconomic imbalances and extensive literature review. revive growth. The introduction of a floating foreign exchange rate on 29 July 2024 demonstrates the This report underlines the macro criticality of green government’s commitment to undertaking these competitiveness for Ethiopia, embedded in the reforms. While it is too soon to fully assess the wider economic and political context. The selected impact of this reform, it is expected to substantially sectors accounted for over half of Ethiopia’s goods and benefit export-oriented sectors. The government services exports in 2022, and they face exposure to or has also reiterated its commitment to resolve the significant impacts from possibly stricter sustainability shortcomings in the country’s business enabling regulations, notably in high-income countries from the environment that persist to this date, including European Union to which a growing volume of Ethiopia’s extensive licensing and preferential policies for exports flows. Over the short to medium term, these state-owned enterprises. Ethiopia’s exposure to regulations put a substantial share of export earnings climate change impacts, environmental degradation, at risk when macroeconomic challenges are already and sustainability demands in export markets may vii GREEN COMPETITIVENESS IN ETHIOPIA not be a leading factor in this multifaceted crisis, but legislation in key export markets will add to the it interacts with the country in important ways and requirements with which firms in Ethiopia need to is expected to become more important in the future. comply. For example, the EU Deforestation Regulation (EUDR) is already affecting Ethiopia’s 2024 coffee Ethiopia’s economy is highly vulnerable to the harvest: EU importers will need to attest that it direct and indirect impacts of climate change, did not contribute to deforestation in the country. while the country’s geographic variation means Currently, the specifics of demonstrating EUDR that the effects are not uniform. Considering the compliance are still being clarified, but they appear country’s dire experiences with droughts and floods to be following the overall trend in sustainability that have affected 75 million people between 1980 requirements: Firms will be required to provide and 2020, Ethiopia’s population and leadership are buyers with more data on production and sourcing well aware of extreme weather’s detrimental impacts, (for example, water use, geographic locations, which will likely increase in intensity and frequency greenhouse gas emissions, labor rights), and the (World Bank 2024). Recent World Bank estimates role of attestations via internationally recognized expect cumulative economic losses per decade to conformity assessment (testing, inspection, rise from about 11–13 percent of gross domestic certification, and calibration) will gain importance. product currently to approximately 60–80 percent of Complying with the growing number of voluntary average annual gross domestic product in 2030–40.² and mandatory requirements will be especially Although Ethiopia’s large geographic variation may challenging for small and medium enterprises, lead to some degree of diversification at a macro notably those lacking international buyers who can level, climate change will have a significant impact guide them on how to ensure compliance. Overall, on certain sectors and regions. Direct impacts are the this raises the need for Ethiopian firms to strengthen consequences of higher temperatures on key crops, links with international buyers to receive support changing seasonal patterns, and extreme weather with compliance. At the institutional level, there is events, and indirect impacts on production include a growing demand for a close collaboration and include population shifts, heat-related impacts on support between the governments of Ethiopia, workers, supply chain disruptions, and the effects of high-income countries, and development partners lower rainfall on hydropower. For example, floods in to ensure socially just environmental regulations. Djibouti in April 2024 disrupted a major supply route for Ethiopia’s fuel imports and increased gasoline Overall, climate change and green transition risks shortages at gas stations, including in Addis Ababa affect some of Ethiopia’s key sources of export (Italo 2024). However, some pockets of the economy revenues, particularly coffee and aviation, which could benefit from rising temperatures such as crop makes sustainability a macro-critical factor for the yields for sorghum and chickpeas, which are predicted country. This assessment examined only selected to increase, but increased climate variability and the sectors at a high level, but it is clear that the risks complexity of climate change adds a large degree of will likely affect a large share of exports. Coffee uncertainty and risk (World Bank 2024). and aviation alone account for more than half of Ethiopia’s export revenues from goods and services. A growing set of voluntary and mandatory Coffee is sensitive to climate change and is facing sustainability requirements is increasingly regulatory attention, notably because of the EUDR. shaping market access conditions for firms in Aviation, as a major contributor to climate change, Ethiopia. More than half of Ethiopia’s exports of is facing an uncertain and costly decarbonization goods go to high-income countries, particularly in the trajectory with a critical role for sustainable aviation European Union (EU). While voluntary sustainability fuels (SAFs), which is also seeing increased EU requirements have gained importance incrementally regulatory action. Similarly, textiles and garments for international buyers in recent years, sustainability (11 percent of Ethiopia’s exports in 2022)³ and cut viii EXECUTIVE SUMMARY flowers (5 percent in the same year)⁴ are under (from hydropower) as a comparative advantage as pressure to shift to more sustainable business they seek to reduce their global production–related models. Ethiopia’s export goods are not diversified, greenhouse gas (GHG) emissions.⁷ The country’s which increases the country’s exposure to at-risk geographic diversity could add to overall resilience sectors. In addition, the deterioration of Ethiopia’s but would require shifting agricultural production to natural resource base because of unsustainable different areas, a process that will carry adjustment management is likely to amplify exposure to climate costs. Relatedly, the ability to build full vertical value risks.⁵ Thus, the government has taken action on chains from raw materials to finished products had several sustainability issues, including afforestation led textile and garment investors to shift to Ethiopia as part of the Green Legacy Initiative.⁶ before conflict derailed the industry’s growth (Fanuel et al. 2022). Previous investments, such as in zero Ethiopia has key sources of strength to benefit liquid discharge facilities in industrial parks, allow from the green transition, including a high share of marketing the parks as having among the lowest renewable electricity and potential to increase it, water footprints in the world for textile production. geographic diversity, the ability for fully vertically However, as the case study in appendix 3 describes, integrated value chains, and previous investments maintaining these facilities is highly challenging in industrial parks. Despite the concerns this report because of the government’s lack of technical and highlights, many factors are creating opportunities for financial capacities to operate them. Figure S1.1 Ethiopia. International investors will increasingly see summarizes Ethiopia’s green competitiveness the country’s 96 percent share of renewable electricity challenges and opportunities. Figure S1.1. Summary of Green Competitiveness Opportunities and Threats in Ethiopia THREATS OPPORTUNITIES Several sources of potential strength for Ethiopia: Green competitiveness is macro-critical for Ethiopia: The four sectors account for 53% of the Cheap and renewable power likely to be increasingly country’s exports.¹ These sectors face increasing sought by international investors/buyers. sustainability regulations, especially in high- Previous investments in environmental facilities Demand side: income countries where Ethiopia’s has increasingly industrial parks allow positioning IPs positively on Sustainability been exporting to. sustainability dimensions. requirements in The urgency of addressing hese challenges Possibility of vertical integration in key value export markets varies: Immediate impacts are most significant chains reduces emissions from shipping inputs and in the coffee sector, while textiles, garments, and may benefit traceability requirements (e.g., textiles). cut flowers face medium-term impacts, and the Potential for production of sustainable fuels aviation sector is more affected in the long term. which may lower Ethiopia’s dependency on fossil fuel imports. Ethiopia’s high geographic diversity a source of Ethiopia is one of the most vulnerable countries climate resilience. to climate risks. Climate shocks are already the driver of many of Ethiopia’s economic shocks. Despite projected decline in yields for many crops, yields for some agricultural products may increase Supply side: Economic losses due to climate change likely to (e.g., sorghum, chickpea), but with high uncertainty. Climate change increase rapidly 2030 onwards (esp. due to livestock impacts impacts and heat-related productivity losses). Low infrastructure stock a chance to account for climate resilience for new projects from the onset. Indirect effects such as on hydropower: impact varies by climate scenario (e.g., dry/hot: up to 5% Government commitment to Green Legacy and decrease). other green growth and sustainability-related programs. Source: Original figure for this publication. Note a: Relates to exports of goods and services in 2022. ix GREEN COMPETITIVENESS IN ETHIOPIA The high-level sectoral assessment illustrates the (VSSs) are a critical factor for coffee farmers’ points in figure S1.1. differentiation in the international market and thus for higher prices and establishing stronger • Coffee: Coffee production in Ethiopia is links with buyers (Bianco 2020; Voora et al. vulnerable to climate risks and recurrent 2019). The traceability required for compliance extreme weather events (for example, droughts, with regulations such as EUDR also allows for heavy rains, and frosts) have already caused substantial export premiums (Mbakop et al. considerable yield losses (Tadesse, Tesfaye, 2023), and the steps taken toward traceability and Abera 2020). The effects of climate change can reduce current constraints to the broader on coffee will be heterogeneous, with shifts in development of those value chains and enable suitable coffee growing areas, a likely decline the expansion of specialty coffee production in in suitability for some varieties (for example, the country. For instance, improved traceability specialty coffee), and increased yield volatility. through blockchain tokenization of the coffee The growing number of voluntary and mandatory value chain could improve smallholder access to sustainability requirements implemented finance. Similarly, actions required by VSSs and worldwide is also affecting Ethiopian coffee recent mandatory sustainability requirements farmers’ market access conditions and will (for example, sustainable farming practices), continue to do so unless these value chains together with tools such as providing farmers are developed and their sustainability is with more reliable and tailored climate improved. For instance, the complex structure information,⁸ can make coffee production more of Ethiopia’s smallholder farmer-based coffee resilient and partially mitigate the increasing value chains poses challenges for traceability unpredictability of coffee revenues because of and compliance with the recently approved climate change. EUDR. Consequently, EU importers might shift away from Ethiopia to other coffee-exporting • Textiles and garments: Consumer and countries, potentially endangering over 10 regulatory interest in sustainability is strong in percent of the country’s export revenues. the sector, given its large contribution to global However, the country can possibly leverage GHG emissions (6–8 percent of total) and other sustainability requirements to enable growth environmental concerns (for example, water, and improved profitability for coffee farmers. pollution). The loss of African Growth and For instance, recent analytical studies provide Opportunity Act preferences has led to shifting evidence that voluntary sustainability standards some Ethiopian exports from the United States to x EXECUTIVE SUMMARY the European Union, where upcoming regulatory become more salient if a larger share of local changes will require improved environmental value added is to be achieved in Ethiopia (in yarn practices. Although most export-oriented textile and fabric production). and garment firms in Ethiopia are focused on the less environmentally concerning cut-and- • Cut flowers: Given its comparative advantage make segment, sustainability considerations in cut flower production (such as climatic are already affecting the industry, notably conditions that allow year-round production, because of reporting requirements through low labor costs, and competitive air freight self-regulation such as Higg assessments networks), Ethiopia is now the second largest (environmental and social impact self- producer of cut flowers in Africa. The sector assessments for the apparel and footwear generates 5 percent of Ethiopia’s exports and industries). Initially, international investors had has created hundreds of thousands of jobs, been attracted by Ethiopia’s potential to build especially for women. However, environmental upstream value chains to cotton and use cheap sustainability challenges continue to plague the hydroelectricity for energy-intensive segments floriculture industry. At the domestic level, key such as fabric production (Jensen and Whitfield concerns relate to monitoring waste disposal 2022). The environmental footprint of garments and use of pesticides and water. Growing produced in Ethiopia could be among the lowest sustainability concerns stem from the industry in the world, potentially offering a significant heavy reliance on refrigeration and air transport comparative advantage and growth driver for for these perishable goods—some buyers have the sector. However, these benefits have not already announced intentions to transition away materialized so far, and local value addition is from air-transported flowers in favor of locally very low, with foreign direct investment firms grown flowers or flowers transported via more importing more than 90 percent of their inputs. sustainable methods. However, the sector is not For example, links from cotton production to subject to stringent regulation, although this the export-focused garment sector are nascent, could change over the coming years. For example, plagued by value chain inefficiencies, and cotton in February 2024, the European Union accepted growing is already experiencing severe weather- the Floriculture Product Environmental Footprint related impacts that are leading farmers to Category Rules, which provides a common transition to other crops. Moreover, resolving methodology for assessing and communicating ongoing issues in industrial parks related to the environmental performance of flowers and sludge management and water availability will that could guide future regulations for the sector. xi GREEN COMPETITIVENESS IN ETHIOPIA • Aviation: Ethiopian Airlines is one of the for the country. Even though SAF production continent’s prominent success stories and is an economic opportunity for Ethiopia (also contributes approximately 4 percent to Ethiopia’s to reduce dependency on fossil fuel imports), gross domestic product.⁹ However, air transport scaling SAF production requires overcoming is a major source of GHG emissions and will several key challenges, including the functioning need to transform substantially over the next of agricultural value chains with scattered and decades to meet global climate targets. For long- low-productivity smallholder farming, transport haul air travel, industry experts are expecting insufficiencies, and lack of investment in SAFs to have a prominent role in achieving processing facilities and biorefineries. decarbonization, in addition to carbon offsetting and operational efficiency improvements. All four of the selected sectors are affected to However, at a global level, evidence shows that different degrees, but the urgency for action meeting climate targets will also require an varies. Ensuring coffee’s compliance with the EUDR overall reduction in air travel, raising questions is Ethiopia’s most immediate challenge. By contrast, about the long-term growth potential of aviation shifts in demand within the textiles and garments and related industries such as tourism. Moreover, sector, along with opportunities to increase local aviation’s net-zero transition will require value addition sustainably, are medium-term substantial investments, including for scaling priorities for the government. Transformations in SAF production. Ethiopia has the potential to the cut flowers industry are already underway, but produce SAFs locally, which could help comply the timeline remains uncertain, which requires with upcoming biofuel blend-in mandates in monitoring the demand environment carefully. key markets such as the European Union (for Changes in the aviation sector are expected to example, ReFuelEU Aviation). Importantly, SAF unfold over a longer period. Establishing a SAF production could be beneficial for maintaining industry in Ethiopia will require considerable time, the aviation industry’s competitiveness and but the government can still take immediate steps become a source of exports and employment to facilitate the process. xii EXECUTIVE SUMMARY Recommendations Development, Ministry of Industry, Ministry of Water and Energy, Ministry of Agriculture, and This report makes the following overarching relevant sectoral agencies (Environmental recommendations for the government of Ethiopia Protection Authority, Space Science, and to consider to be implemented over the next 24 Geospatial Institute, etc.) should work together months. to ensure that firms are well-equipped to meet evolving sustainability requirements and 1. Establish a coordinating mechanism to contribute to broader environmental goals. The track, analyze and build compliance with goal is to establish a robust framework for data upcoming sustainability regulations and collection and reporting by providing public voluntary buyer commitments that may affect data where needed and supporting firms’ data Ethiopian exports. The Ministry of Trade and collection initiatives in line with international Regional Integration (MoTRI) can coordinate standards. This assessment should be initiated with other institutions such as the Ministry of in three months and operate on an ongoing basis. Agriculture (MoA), the Ministry of Industry (MoI), It should cover several critical areas, including: and the Ethiopian Investment Commission to establish an inter-ministerial task force that • Energy and water consumption: Collect and systematically tracks new regulations, analyzes analyze detailed data on the amount of energy and their expected impact on Ethiopian firms, water used by firms. This includes distinguishing identifies compliance requirements and gaps, between different sources and types of energy and develops a communication plan to ensure and water and evaluating consumption patterns timely dissemination to main private sector and to identify areas for improvement. government stakeholders. This task force can leverage existing databases (for example, World • Land use changes (including deforestation): Trade Organization notifications and Global Trade Monitor and document changes in land use, Alert data) and public-private dialogue initiatives to including conversions from natural habitats to enhance market awareness and build compliance industrial or agricultural purposes. This data capabilities. It should work with the relevant should capture the scale and impact of these government institutions, the private sector, and changes on the environment. development partners to coordinate and develop implementation support plans for compliance with • Greenhouse gas emissions: Accurately measure these regulations, including by hosting workshops and report greenhouse gas (GHG) emissions across and trainings, and developing partnerships. This all relevant sources within a firm’s operations. task force should be established as soon as This includes direct emissions from owned or possible and the mechanism being operational controlled sources and indirect emissions from within three months. purchased energy. 2. Building on the tracking mechanism, it • Geolocation information: Utilize geolocation is essential to conduct a comprehensive data to track and manage environmental impacts evaluation of data needs, assess their geographically. This helps in understanding the availability, and identify any data gaps that spatial implications of a firm’s activities and firms must address to ensure compliance. assessing their environmental footprint. As stated in the report, complying with export market demands will require an increasing • Other environmental metrics: Gather and assess amount of data. The Ministry of Planning and additional relevant environmental metrics, such xiii GREEN COMPETITIVENESS IN ETHIOPIA as waste generation, resource efficiency, and Utilize NQI capabilities to improve traceability pollution levels, to provide a comprehensive view throughout value chains. This will help ensure of a firm’s environmental impact. that products meet quality and safety standards at every stage, from production to end-use. 3. To strengthen Ethiopia’s national quality infrastructure (NQI) and enhance the • Identify and map voluntary sustainability capabilities of firms to adopt standards and standards: Catalog the key voluntary certifications, a multi-faceted approach is sustainability standards and certifications essential. NQI encompasses the public and pertinent to Ethiopian firms (to be done as part private systems that ensure the quality and of the tracking mechanism outlined above). This safety of products and services. This includes will help businesses understand and align with standards development, conformity assessment global sustainability expectations, improving (such as testing, inspection, certification, and their market access and competitiveness. calibration), accreditation, metrology, and market surveillance. Building on the ongoing • Develop a national umbrella framework National Quality Infrastructure Development for compliance standards: This framework Project financed by the World Bank, the MoTRI should streamline adherence to various and relevant NQI institutions should develop international requirements and reduce a comprehensive follow-up program within compliance costs, particularly benefiting the next six months, to address the following small and medium enterprises (SMEs). By recommendations effectively: consolidating standards and certifications, the framework will simplify the compliance • Facilitate market entry for private conformity process and make it more cost-effective. assessment bodies: Promote the establishment and expansion of private conformity assessment • Strengthen the NQI forum and NQI council: bodies to provide comprehensive quality The Forum plays a crucial role in identifying assurance services, including for legal challenges, implementing, and verifying quality requirements (e.g., Environmental Impact and standard agendas. Meanwhile, the Council, Assessment Proclamation). This will enhance as the supreme body, is responsible for steering competition and improve the availability of the quality and standard agendas in alignment testing, inspection, certification, and calibration with the nation’s development strategy. services for industries. In addition, support the access to testing and calibration equipment for 4. The MoI and MoTRI should undertake thorough conformity assessment bodies, including access assessments of sustainable value chains to finance. within priority sectors, particularily taking into account the feasibility of the policy • Support private sector adoption of standards: framework. This initiative follows the high- Offer guidance and support to firms in adopting level assessment outlined in the report and aims relevant standards. This includes providing to provide a deeper understanding of market training, resources, and technical assistance dynamics, conduciveness of current policies to help businesses integrate and comply with and regulations, and identify specific areas for national and international standards. improvement. This recommendation should be initiated within the next three months. The • Enhance traceability along value chains: proposed actions include: xiv EXECUTIVE SUMMARY • Conduct detailed sustainable value chain such assessments in the future. assessments: Perform comprehensive value chain analyses in strategic sectors to identify Sector-Specific Recommendations market and government failures and enabling to be implemented in the next reform needs. This involves examining each six to twenty-four months stage of the value chain issues related to the business environment, access to input and output Textiles and Apparel markets, access to land and infrastructure, access to skills, and access to finance. 1. Develop an integrated strategy for textiles and garments: In line with the findings of the • Assess and promote circular value chains: suggested in-depth value chain assessment, MoI, In support of the Ethiopian Manufacturing the Textile and Garment Industry Research and Industry Policy and complementary to ongoing Development Center (TGiRDC), NQI institutions, engagements with development partners, and the MoA should collaboratively develop an assess market opportunities for Ethiopia related integrated government strategy for the textiles to the use of by-products and waste within value and garments value chain, including cotton. The chains to foster circular economy practices. In strategy should focus particularly on addressing particular, this would include an assessment market and government failures, strengthening of the demand-side opportunities (i.e., beyond market links, and attracting investors in line with the mere technical or supply-side feasibility) Ethiopia’s comparative advantages such as in and consider international and national market cheap renewable power. This should be initiated dynamics related to recycling, reuse, and within six to twelve months and completed reduction of waste, thereby supporting the within 18 months. creation of jobs in sustainable industries. 2. Building on the strategy, the government should • Conduct detailed climate impact assessments carry out the following initiatives to maximize for selected value chains: To understand the Ethiopia’s potential in (sustainable) cotton: direct and indirect effects of climate change on value chains, the government should carefully • Build links between textile mills and farmers: assess the multiple impact channels, including climate shocks (for example, floods, droughts), • Create Partnerships: Establish agreements slow onset changes (for example, temperature between textile mills and farmers to rises, precipitation patterns), and their granular streamline the value chain and secure impact on geographies and sectors (for example, reliable markets. supply chain impacts). This may require bringing • Train Farmers: Provide education on together existing climate data, identifying gaps, sustainable cultivation practices in line with and collecting additional data (for example, firm- international buyer requirements. level resilience). This will require collaborating • Verify Sustainability: Implement systems with development partners, specialized firms, to ensure adherence to sustainability and academia to build the capacity of the standards and support firms in acquiring government and private sectors to carry out required certification. xv GREEN COMPETITIVENESS IN ETHIOPIA • Strengthen cotton grading standards: incorporated into the NQI Forum and NQI Council • Enhance Procedures: Update and enforce agenda. However, at present, establishing an ad- rigorous grading standards. hoc platform is more appropriate. • Include a reward system for good grade cotton production. 3. Pilot traceability solutions by implementing and testing solutions: Conduct pilot projects • Improve climate adaptation strategies: to test and refine traceability solutions that • Rainfed Farms: Improve access to weather can ensure EUDR compliance and enhance data, promote crop rotation and adoption of profitability. ECTA, MoA, and NQI institutions irrigation systems where feasible. should carry out these pilots with a view to • Irrigated Farms: Invest in water storage and scaling successful solutions. management. Coffee 4. Promote sustainable practices: ECTA and MoA should assist small coffee farmers in To ensure Ethiopian stakeholders are well-prepared adopting voluntarty sustainability standards for the EUDR and to enhance the coffee value (VSS) to access higher export premiums and chain’s sustainability and profitability, the following establish stronger market links. Strengthen activities should be undertaken immediately: eco-agricultural systems by investing in quality improvements, including investments 1. Raise awareness of EUDR by informing in harvesting, post-harvesting, and handling stakeholders: The Ethiopian Coffee and Tea practices, and improve cooperative management Authority (ECTA) should organize activities in to produce VSS-compliant premium and collaboration with development partners and specialty coffees. private sector experts to educate all relevant stakeholders about the EUDR and its requirements. 5. Develop alternative export plans by strategizing This includes workshops, seminars, and the for new markets: Given the potential challenge distribution of informational materials. of meeting EUDR requirements in time, ECTA, MoA, and MoTRI should devise a plan to enable 2. Establish a multi-stakeholder platform to firms’ capacity for coffee exports to alternative coordinate EUDR compliance approaches: markets, for example by systematically taking ECTA, in collaboration with MoA, NQI stock of associated market access requirements institutions, development partners, and the and work with firms to meet them. private sector should set up a platform to bring key stakeholders together. The platform 6. Systematically assess climate adaptation should support knowledge sharing on EUDR needs: ECTA to work with development partners compliance, take stock of ongoing activities, and academia to assess climate risks for the coordinate capacity building measures, and sector, including direct and indirect effects, as strengthen a consolidated dialogue with the EU well as climate shocks and slow-onset impacts. on feasibility of compliance and implementation This will include a granular assessment of approaches (e.g., Enveritas approach).¹⁰ In the geographic risks, main vulnerabilities, and set long term, issues such as the EUDR could be of private sector and government responses. xvi EXECUTIVE SUMMARY Cut Flowers should include at a minimum, the development of regulations to restrict the type and level of To enhance the sustainability compliance of the cut pesticides allowed in agriculture, the adoption flowers sector, the government should prioritize of a regulatory framework for integrated pest the development of stronger regulatory and policy management, the adaptation of the general law frameworks for waste and water management and on waste management, and the development chemicals use. These recommendations should be of regulatory measures to reduce water initiated over the next twelve months. In particular, consumption. Based on directives currently the MoA and the Ethiopian Agricultural Authority being prepared by the Ministry of Agriculture, (EAA), in collaboration with EHEPA should focus to: and initiatives led by development partners, adequate laws for biopesticides should also 1. Support the industries’ access to water be implemented. treatment plants: As water use is one of the industries’ most critical sustainability 5. Improve quality compliance: Strengthen dimensions, it is essential to support the industry conformity assessment systems to ensure in reducing, reusing and recycling water. This compliance with domestic and international particular requires access to water treatment sustainability standards and regulations, and plants for which it is also crucial to leverage invest in necessary training, technology, and foreign expertise to assist their construction and certification. In particular, there is a need for maintenance. close collaboration with the Ministry of Trade and Regional Integration (MoTRI) and National 2. Implement awareness and education Quality Infrastructure (NQI) institutions to campaigns to improve waste disposal and ensure the private sector has access to water management: This may include organizing accredited conformity assessment bodies that workshops on best practices for waste disposal are recognized internationally to carry out and water management; creating informational assessments. This approach can help private materials; spreading awareness through social inspection bodies align with EUDR requirements. media, newsletters, and local media; providing Moreover, it is crucial that quality compliance hands-on training sessions for implementing is applied to the entire value chain, for example sustainable practices; and establishing help also to certification of nurseries to enhance desks for guidance and support. access to high-quality seedlings. 3. Support a shift from chemical to organic 6. Build capacities of firms to access higher- fertilizers and pesticides: Promote the use of margin markets: EHPEA and the government organic fertilizers and pesticides in line with should work closely on helping Ethiopian market demand, including by providing capacity floriculture firms adopt sustainable practices building and quality control (e.g., certification), and access higher-margin markets. This and the application of an integrated pest includes, for example, creating and sharing management approach.¹¹ guidelines for sustainable flower cultivation, conducting workshops and provide technical 4. Update regulations: Revise and implement support for implementing sustainable practices, comprehensive regulations for waste disposal, and help firms obtain sustainability certifications pesticide use, and water management. This recognized in the EU and US. xvii GREEN COMPETITIVENESS IN ETHIOPIA Aviation Steering Committee on SAF should coordinate this effort. This activity should be initiated within 1. Conduct an in-depth feasibility study that six to twelve months. expands or updates the Roundtable on Sustainable Biomaterials Road map. The 4. Develop a national action plan on SAF to study should assess the potential raw materials strengthen coordination among different for producing sustainable aviation fuel (i.e., government bodies, the private sector, and feedstock) in the country, considering the academia, and identify regulatory needs to promote various environmental, social, and economic SAF development and actions toward building the trade-offs. The Technical Committee on SAF SAF value chain. The Technical Committee on SAF under leadership from the Steering Committee under leadership from the Steering Committee on on SAF should coordinate this effort. This should SAF should coordinate this effort. This should be be initiated within six months and completed completed within six to twelve months. within 18 months. 5. Develop a SAF regulation that clarifies key 2. Build the technical and policy capacity of definitions associated with SAF development government and private sector stakeholders and improves the enabling environment for SAF engaged in SAF development (for example, production (for example, incentives). The Technical connecting with international experts). The Committee on SAF under leadership from the Technical Committee on SAF under leadership Steering Committee on SAF should coordinate from the Steering Committee on SAF should this effort. This should be initiated within six coordinate this effort. This activity should be months and completed within 18 months. initiated within three months and continue as per capacity building needs. 6. Adopt relevant international standards for the SAF value chain, build capacity for standards 3. Map the players and policies related to the SAF development, and develop certification capacities value chain and potential barriers (for example, in Ethiopia. The Institute of Ethiopian Standards barriers for the private sector to invest in SAF and private certification bodies, together with the production, identify regulations that hinder Technical Committee on SAF, should coordinate the use of waste as feedstock). The Technical on this effort. This should be initiated within six Committee on SAF under leadership from the months and continue as needed. Notes 1. The World Bank team is grateful for the valuable guidance and feedback from the members of a task force the government of Ethiopia set up to support this analytical work. The task force comprises representatives from the Ministry of Trade and Regional Integration, Ministry of Industry, Ministry of Planning and Development (MoPD), Ethiopian Investment Commission, and the Textile and Garment Industry Research and Development Center. Appendix B includes the list of representatives. 2. Estimations do not consider indirect impact channels and magnifying effects of climate-induced changes (for example, increases in conflicts, migration shifts). For more information, see World Bank 2024. 3. Data from the Observatory for Economic Complexity. See https://oec.world/en/profile/country/eth. Please note that export data vary by sources. For example, the World Bank’s World Integrated Trade Solution database records that textile and garment exports make up 6 percent of Ethiopia’s 2021 exports. xviii EXECUTIVE SUMMARY 4. Data from the Observatory for Economic Complexity. See https://oec.world/en/profile/country/eth. Please note that export data vary by sources. 5. For instance, recent data show deforestation rates of almost 92,000 hectares per year from 2000 to 2013 and more than 38,000 hectares per year from 2014 to 2020, caused by urbanization, unsustainable farming methods, and overgrazing, among other factors. 6. The Green Legacy Initiative is a government program launched in 2019, under which 25 billion seedlings were planted in Ethiopia. See https://sdgs.un.org/partnerships/green-legacy-initiative for more information. 7. For more information about Ethiopia’s energy mix, see the International Energy Agency web page https:// www.iea.org/countries/ethiopia/energy-mix. 8. Recent studies suggest that climate information is the most important determinant for coffee growers to take actions for adaptation, even when compared with extension services, level of education, or income from coffee. For more information, see Eshetu et al. 2021.. 9. See Oqubay and Tesfachew 2019. Meanwhile, some sources even put Ethiopian Airlines’ contribution to gross domestic product at 5.7 percent (IATA. n.d. “The air transport sector makes a major contribution to Ethiopia’s economy”, https://www.iata.org/en/iata-repository/publications/economic-reports/ethiopia-- value-of-aviation/#:~:text=In%20total%2C%205.7%20percent%20of,foreign%20tourists%20arriving%20 by%20air.) 10. In February 2024, ECTA, JDE Peet and Enveritas announced an agreement to implement a scheme that aims to make Ethiopia compliant with EUDR at a country wide level through: (i) identifying coffee production areas in the country that are non-complaint with EUDR; (ii) establishing a protocol to treat these areas by cutting coffee trees and reforesting; and (iii) monitoring for non-compliant areas in a recurring manner to ensure continued country-wide compliance, and taking the above measures when necessary. For more information see: https://partners.enveritas.org/press-release-ethiopia-partners- with-enveritas-and-jde-peets-to-preserve-access-to-eu-coffee-markets. The acceptance of this scheme by the EU is still uncertain. 11. IPM is an agricultural pest control approach that uses complementary crop management strategies and practices to help minimize the use of pesticides. References Bianco, Gino B. 2020. “Climate Change Adaptation, Coffee, and Corporate Social Responsibility: Challenges and Opportunities.” International Journal of Corporate Social Responsibility 5 (August): 3. https://doi.org/10.1186/ s40991-020-00048-0. Eshetu, Girma, Tino Johansson, Weyessa Garedew, and Tigist Yisahak. 2021. “Determinants of Smallholder Farmers Adaptation Options to Climate Change in a Coffee-Based Farming System of Southwest Ethiopia.” Climate and Development 13 (4): 318–25. https://doi.org/10.1080/17565529.2020.1772706. Fanuel, Senidu, Matt Butler, and Philip Grinsted. 2022. On the Path to Industrialization: A Review of Industrial Parks in Ethiopia. World Bank Policy Brief. Washington, DC: World Bank. Italo, Aksah. 2024. “Gas Pumps Dry in Addis as Floods Block Vital Import Route.” Fortune News, March 30, 2024. https://addisfortune.news/gas-pumps-dry-in-addis-as-floods-block-vital-import-route/. Jensen, Federico, and Lindsay Whitfield. 2022. “Leveraging Participation in Apparel Global Supply Chains through Green Industrialization Strategies: Implications for Low-Income Countries.” Ecological Economics 194 (April): xix GREEN COMPETITIVENESS IN ETHIOPIA 107331. https://doi.org/10.1016/j.ecolecon.2021.107331. Mbakop, Ludovic, Glenn P. Jenkins, Leonard Leung, and Kamil Sertoglu. 2023. “Traceability, Value, and Trust in the Coffee Market: A Natural Experiment in Ethiopia.” Agriculture 2023 13 (2): 368. https://doi.org/10.3390/ agriculture13020368. Voora, Vivek, Steffany Bermúdez, Johanna Joy Farrell, Cristina Larrea, and Erika Luna. 2023. “Global Market Report: Cotton Prices and Sustainability.” Sustainable Commodities Marketplace Series (January), International Institute for Sustainable Development, Winnipeg. Tadesse, Tesfaye, Bizuayehu Tesfaye, and Grima Abera. 2020. “Coffee Production Constraints and Opportunities at Major Growing Districts of Southern Ethiopia.” Cogent Food and Agriculture 6 (1): 1741982. https://doi.org/10.1 080/23311932.2020.1741982. World Bank. 2024. Ethiopia Country Climate and Development Report. Washington, DC: World Bank Group. UNDP (United Nations Development Programme). 2024. “Can Ethiopia Become a Manufacturing Powerhouse?” Ethiopia Working Paper Series 4, UNDP, New York. xx Abbreviations AGOA African Growth and Opportunity Act CORSIA Carbon Offsetting and Reduction Scheme for International Aviation ECTA Ethiopian Coffee and Tea Authority ETS emissions trading scheme EUDR EU Deforestation Regulation GHG greenhouse gas LCA life cycle assessments MoA Ministry of Agriculture MoI Ministry of Industry MONRE Ministry of Natural Resources and Environment MoTRI Ministry of Trade and Regional Integration NQI National Quality Infrastructure RSB Roundtable on Sustainable Biomaterials SAF sustainable aviation fuel SBTi Science-Based Target Initiatives VSS voluntary sustainability standards All dollar amounts are US dollars unless otherwise indicated. xxi 1 Assessing Green Competitiveness in Ethiopia: Background and Approach 1 1. ASSESSING GREEN COMPETITIVENESS IN ETHIOPIA: BACKGROUND AND APPROACH Introduction European Union. At the same time, shifts to more capital- and knowledge-intensive manufacturing Ethiopia experienced a period of strong economic raises doubts about whether the manufacturing growth and made progress on several human and export-led growth model will continue to drive development indicators, but in recent years, economic development as it did in the past (Rodrik the country’s economic momentum has stalled and Stiglitz 2024). and needs to be revived. Several domestic and international crises have affected Ethiopia severely, Ethiopia’s economy is highly vulnerable to the including the COVID-19 pandemic and its aftermath, direct and indirect impacts of climate change, with supply chain disruptions caused by geopolitical the country’s geographic variation causing these tensions and wars, and a domestic conflict and effects to be uneven. The country is well-aware of humanitarian crisis that led to suspension of the detrimental impacts of extreme weather events, Ethiopia’s duty-free market access to the United given that droughts and floods have affected 75 States under the African Growth and Opportunity million people in Ethiopia between 1980 and 2020, Act. Ethiopia is also facing growing macroeconomic and these events are likely to increase in intensity and imbalances, including high levels of debt and a severe frequency.¹ Recent World Bank estimates project that foreign exchange shortage caused by declining cumulative economic losses per decade will increase or stalling exports. The country’s industrial park from the current 11–13 percent of gross domestic program had been on track to achieve the expected product to approximately 60–80 percent in 2030–40.² economic gains, but the conflict in the country Although Ethiopia’s geographic variation may lead to and loss of duty-free access to the United States some degree of diversification at a macroeconomic disrupted economic development, leading several level, climate change will affect certain sectors international investors to exit the market (Fanuel et and regions significantly. Direct impacts are the al. 2022). See annex 1 for a more detailed overview consequences of higher temperatures on key crops, of the economic context. changing seasonal patterns, and extreme weather events. Indirect impacts on production include the Reviving Ethiopia’s economic momentum effects of lower rainfall on hydropower, population requires considering the changing landscape of shifts, heat-related impacts on workers, and supply global competitiveness, shaped by sustainability chain disruptions. For example, floods in Djibouti imperatives and technological advancements in April 2024 disrupted a major supply route for (Rodrik and Stiglitz 2024). International buyers Ethiopia’s fuel imports and worsened the shortage are increasingly conscious of the environmental and of gasoline at gas stations, including in Addis Ababa social factors of production and use sustainability (Italo 2024). Overall, environmental degradation has standards to pass these requirements on to suppliers. begun to affect productivity across different sectors. Regulators worldwide are passing laws aimed at For example, declining groundwater around Addis reducing the environmental and climate impact Ababa has increased the required depth of wells from of goods and services and ensuring compliance 70 meters to more than 200 meters over the past with social standards. Notable examples include decade. According to expert interviews conducted the EU Deforestation Regulation and supply chain with beverage industry representatives, this due diligence laws that require product traceability groundwater issue is already affecting the beverage across the value chain, among other legislation. industry, among others. Deforestation has already Most of these requirements are from high-income affected honey production substantially and is now countries, and Ethiopia is especially exposed to them, a growing concern for coffee farmers because of because more than half of the country’s exports of the requirements of the upcoming EU Deforestation goods are to high-income countries, especially to the Regulation. However, some pockets of the economy 2 GREEN COMPETITIVENESS IN ETHIOPIA could benefit from rising temperatures such as increasing climate change impacts will be associated crop yields for sorghum and chickpeas, which are with unprecedented shifts in the national and global predicted to increase, but extreme weather events economies. Therefore, this report addresses the add a large degree of uncertainty (World Bank 2024). distinct challenges of and opportunities for being competitive in this redefined landscape while In this context, the Ethiopian government has recognizing that many traditional competitiveness long recognized the need to approach economic drivers are still essential for Ethiopia. Moreover, development and sustainability in an integrated while acknowledging the importance of social way. As one of the countries most vulnerable to aspects for sustainability more broadly, the report climate change, Ethiopia had implemented its Climate does not cover topics such as occupational health Resilience Green Economy Strategy as early as 2011 and safety, inclusion, living wages, and gender rights. and emphasized following a low-carbon and climate- resilient trajectory of economic development (see “Green competitiveness” is the ability of also Abebe [2024]). Strategies include, for example, Ethiopian firms and the country more developing climate-resilient agriculture; reversing broadly to realize economic opportunities the trends of deforestation; expanding renewable related to the green transition and electricity; and applying low-carbon technologies in address environmental and climate transport, industrial sectors, and buildings. In 2023, challenges successfully. Ethiopia also launched its Long-Term Low Emission and Climate-Resilient Development Strategy (2020– This report is an initial approximation of Ethiopia’s 50), through which it aims to bring positive returns to economic competitiveness in relation to green the country in terms of both gross domestic product transition and climate change impacts, highlighting and greenhouse gas mitigation. This report aims to the importance of green competitiveness for the complement and inform these government initiatives, country. Although this report acknowledges that many based on a novel assessment of how the shift toward industries could advance Ethiopia’s green growth sustainability and increasing climate change impacts potential, it is not comprehensive and does not suggest will affect the country’s economic competitiveness which sectors hold the most economic opportunities for (that is, green competitiveness; see Hausmann et al. the country. For example, it does not address renewable [2023] for similar assessments related to the potential energy opportunities, which could be significant, green competitiveness of a country). Annex 1 presents because about 90 percent of Ethiopia’s renewable a more detailed overview of the policy context. energy potential is still unexploited, and about half of the population do not have electricity access.³ Rather, it This assessment defines “green competitiveness” concentrates on four sectors of economic importance as the ability of Ethiopian firms and the country to Ethiopia: textiles and garments, coffee, cut flowers, more broadly to seize economic opportunities and air transport. In each of these sectors, the report related to the green transition and address concentrates on identifying market and government environmental and climate challenges failures that must be addressed to seize green successfully. This terminology acknowledges competitiveness opportunities, providing a framework that traditional competitiveness factors are still of how to think about green competitiveness questions essential to nevigating the green transition, including systematically, and exploring how future World Bank innovation and technology, skilled human capital, engagements can support the Ethiopian government robust infrastructure, economic stability, accessible with in-depth analyses and operations. Through these capital, market size, enabling regulatory frameworks, sectoral analyses, the report shows the importance of competitive tax policies, and social stability. The examining Ethiopia’s green competitiveness and sets term “green competitiveness” emphasizes the the stage for a series of follow-up analytical work on the expectation that the green transition and the topic. The analytical work could include, for example, 3 1. ASSESSING GREEN COMPETITIVENESS IN ETHIOPIA: BACKGROUND AND APPROACH mapping Ethiopia’s legal and institutional frameworks the demand-side changes caused by the green relevant to designing a green industrial policy, and an transition. The supply-side assesses how climate evaluation of existing policies to promote industrial change affects the country more broadly and key value development and environmental benefits; and country- chains in particular. Because of the high complexity level analytics to determine how challenging it is for and uncertainty of these dynamic climate impacts, Ethiopia to comply with existing and forthcoming the assessment is necessarily cursory and should be sustainability standards and regulations. supplemented with deeper analyses and continuous revisions as new information becomes available. The This report builds on the International Finance demand-side analysis assesses which current and Corporation’s previous work on the eco-industrial upcoming sustainability requirements in Ethiopia’s parks framework and other analytical and key export markets (such as the European Union and lending projects in Ethiopia. International Finance the United States) could affect the demand for goods Corporation’s green industrialization project ended and services. The requirements considered include in December 2022 and produced a range of outputs sustainability legislation such as the EU Deforestation to support the implementation of the eco-industrial Regulation and supply chain due diligence laws but parks framework. It includes a guideline, a template also sustainability demands from international for a monitoring and marking framework, an action buyers and investors, including those related to their plan, business cases for green transformation of corporate commitments to environmental protection Ethiopia’s industrial parks, and a training tool that and the net-zero transition. These demand- and elaborates on using these resources. supply-side effects are influenced by the country context and policy framework, including cross- Conceptual Framework cutting enablers and constraints such as the business enabling environment, macro-fiscal situation, access Shifts in Ethiopia’s green competitiveness were to finance, political stability, government capacity, assessed by considering the supply-side impacts infrastructure, firm capabilities and skills, and national of climate change and environmental factors, and quality infrastructure (figure 1.1).⁴ Figure 1.1. Conceptual Framework of Green Competitiveness Focus of this report Green competitiveness opportunities and threats in selected value chains Climate and Sustainability requirements environmental impacts in export markets Supply Demand (a) Direct and indirect climate risks with both rapid or (a) Climate and environmental regulations (e.g., EUDR), and slow-onset impacts, and (b) environmental constraints (b) sustainability standards required by buyers and/or consumers. (e.g., water availability). Examples of impact factors Examples of impact factors • value chain dynamics (e.g., segments, vertical integration) • geographical conditions • access to compliance facilities (e.g., testing labs, effluent plants) • extent and types of climate impacts • access to cheap renewable energy • resilience of firms, people and infrastructure • firm-level adoption of green technologies • economic structure (e.g., industries, locations) • degree of economic diversification Only partially covered in this report: Policy and macro environment Business enabling Climate and Energy policy Macro-fiscal Access Political Skills and environment environmental policy (e.g., fuel subsidies) situation to finance stability firm capabilities Source: Original figure for this publication. 4 GREEN COMPETITIVENESS IN ETHIOPIA The assessment identifies opportunities and in appendix B). Interviewees included industry threats in existing value chains, because economic representatives from the selected value chains (both development tends to advance by building on a those based in Ethiopia and international buyers), country’s current capabilities. This report focuses representatives from the Ethiopian government, and on selected value chains that are currently important subject matter experts from development partners to the Ethiopian economy (see table 1.1). This and consultancies working on these topics in Ethiopia follows the understanding that upgrading the value (see the list of consulted organizations appendix B). chain—or increasing the economic complexity of The report also draws on extensive literature in this production—tends to build on a country’s existing field and analysis of international good practices. capabilities that can be leveraged for other economic activities (Hausmann et al. 2014). By recombining This report uses examples from selected sectors these capabilities to create new, more complex based on their economic importance for Ethiopia products, countries are more likely to succeed in and relevance to environmental and climate industries similar to those in which they have already concerns. A sector lens is applied to identify green succeeded because of shared capabilities. Therefore, competitiveness opportunities and constraints—for examining existing value chains responds to the need example, market and government failures—that are to understand impacts on Ethiopia’s current economy typically sector specific while deriving cross-cutting and is a starting point for economic diversification. considerations for the government to consider. The opportunities explored here mainly relate Based on rationales such as contribution to exports, to shifts to higher-value segments that cater to job creation, economic development trajectory (for sustainability-conscious consumers, for example, example, potential for value chain upgrading, links, garments made from sustainable cotton. However, and spillovers), and relevance for environmental higher-value segments do not always mean higher and climate aspects (for example, vulnerability to margins for producers. climate change impacts, exposure to sustainability regulation in export markets, and contribution to Given the breadth of this report, the assessment degradation of natural ecosystems), four sectors follows a mixed methods approach, emphasizing were selected: coffee, cut flowers, textiles and secondary data analysis, expert interviews, and a garments, and aviation. However, these sectors are review of international good practices. The findings not the only sectors Ethiopia should consider for are derived mainly from analyses of economic and a green transition and are not the priority sectors; climate data and semistructured expert interviews they are four sectors selected to illustrate the trends conducted virtually and in person between May 2023 described in this report. Additional value chain and June 2024 (see the list of consulted stakeholders assessments could be needed for other sectors. 5 1. ASSESSING GREEN COMPETITIVENESS IN ETHIOPIA: BACKGROUND AND APPROACH Table 1.1. Rationale for Sector Selection Importance to Ethiopiaa Sectors Exports Job Economic Environmental and (2021 data) creation development climate aspects trajectory Coffee Very high Very high Low to medium Highly affected by climate (25 percent of (approximately (low degree of change exports) 15 million people diversification employed) opportunities but opportunities to increase local value added) Gold Very high Medium Low Low to medium (not included in (20 percent of (approximately (low degree of (limited relevance for green assessment) exports) 1.2 million people diversification transition, limited impact from employed) opportunities) climate change; however, environmental concerns in mining, for example, water and chemical use) Vegetables Very high Very high Low Highly affected by climate (not included in (16 percent of (low degree of change assessment) exports) diversification opportunities) Textiles and garments High Medium Medium to high Medium to high (8 percent of exports) (possible entry point (increasingly affected by for industrialization) sustainability regulations; cotton affected by climate change) Cotton Negligible Low to medium Low to medium Highly affected (relevance for (highly affected by droughts and downstream textile flooding, exposure to demand and garment shifts toward sustainability, for industry) example, organic cotton) Sesamum seeds High Medium Low Highly affected by climate (not included in (7 percent of exports) (low degree of change assessment) diversification opportunities) Cut flowers High Medium Highly affected (5 percent of exports) Low to medium (requires advanced (strong environmental footprint, logistics with for example, because of air potential spillovers transport) for other industries) Aviation Very high Medium to high Very high High (estimated $1.54 (approximately (substantial links with (increasing sustainability billion contribution 19,000 direct jobs and other industries, for regulations, given the to gross domestic estimated 1.1 million example, cut flowers) greenhouse gas footprint of product, without indirect jobs, for aviation industry) tourism) example, tourism) Sources: Observatory for Economic Complexity; International Coffee Organization 2020; IATA 2020. Note a: Importance is ranked on a scale of very low to very high. Notes 1. World Bank Group, “Ethiopia,” Climate Change Knowledge Portal. 2. Estimations do not consider indirect impact channels and magnifying effects of climate-induced changes (for example, increases in conflicts, migration shifts). For more information, see World Bank 2024. 6 GREEN COMPETITIVENESS IN ETHIOPIA 3. According to recent analytical studies, Ethiopia can potentially generate up to 60,000 megawatts of renewable energy from hydro, geothermal, and wind energy, and an average 5.26 kilowatt-hours per square meter per day of solar energy, of which the 5,300 megawatts currently produced represent less than 10 percent. In effect, renewable electricity makes up less than 3 percent of the country’s overall energy supply, which is predominantly based on traditional biomass, although most of its electricity generation comes from hydro. Ethiopia’s power generation capacity has more than quadrupled and is now more than 5,300 megawatts, with about 91 percent of it from hydrological sources and about 7 percent from alternative renewable sources. For more information, see, for example, Tahiru et al. (2023) . 4. National quality infrastructure comprises the public and private systems required to ensure the quality and safety of products and services, including standards, conformity assessment (testing, inspection, certification, and calibration), accreditation, metrology, and market surveillance. References Abebe, Tesfaye Abate. 2024. “The Efficacy of Climate Change Law in Ethiopia.” International Journal of Arts, Humanities, and Social Sciences 05 (04): 94–106, https://doi.org/10.56734/ijahss.v5n4a6. Fanuel, Senidu, Matt Butler, and Philip Grinsted. 2022. On the Path to Industrialization: A Review of Industrial Parks in Ethiopia. World Bank Policy Brief. Washington, DC: World Bank. Hausmann, Ricardo, César A. Hidalgo, Sebastián Bustos, Michele Coscia, Alexander Simoes, and Muhammed A. Yildirim. 2014. The Atlas of Economic Complexity: Mapping Paths to Prosperity. Cambridge, MA: MIT Press. Hausmann, Ricardo, Tim O’Brien, Andrés Fortunato, Alexia Lochmann, Kishan Shah, Lucila Venturi, Sheyla Enciso- Valdivia, Ekaterina Vashkinskaya, Ketan Ahuja, Bailey Klinger et al. 2023. “Growth through Inclusion in South Africa.” CID Faculty Working Paper 434, Harvard University, Cambridge, MA. IATA (International Air Transport Association). 2020. The Importance of Air Transport to Ethiopia. Montreal: IATA. https://www.iata.org/en/iata-repository/publications/economic-reports/ethiopia--value-of-aviation/. Italo, Aksah. 2024. “Gas Pumps Dry in Addis as Floods Block Vital Import Route.” Fortune News, March 30, 2024. https://addisfortune.news/gas-pumps-dry-in-addis-as-floods-block-vital-import-route/. Rodrik, Dani, and Joseph E. Stiglitz. 2024. “A New Growth Strategy for Developing Nations.” Essay prepared for the International Energy Agency and the Economic Research Institute for ASEAN and East Asia project on the New Global Economic Order. Tahiru, Alhassan W., S. U. Takal, Emmanuel Daanoba Sunkari, and Samuel Dateh Ampofo. 2023. “A Review on Renewable Energy Scenario in Ethiopia.” Iranica Journal of Energy and Environment 14 (4): 372–84. https://doi. org/10.5829/ijee.2023.14.04.07. World Bank. 2024. Ethiopia Country Climate and Development Report. Washington, DC: World Bank Group, 2023. 7 2 Supply-Side Impacts from Climate Change 8 GREEN COMPETITIVENESS IN ETHIOPIA disasters from 1980 to 2020, especially floods and How will a changing climate affect droughts (figure 2.1).² Such events have burdened Ethiopia’s productive sectors and the country’s economy and will continue to do so, comparative advantage? dampening long-term potential growth and adding to macro-stability risks. Climate impacts are estimated Climate shocks already drive many of Ethiopia’s to cause deviations in average annual gross domestic economic shocks. Ethiopia is among the world’s most product and household consumption of more vulnerable countries to climate risks in the world, than 1 percent per occurrence.³ These effects are featuring various climatic zones with high spatial distributed unevenly across the country, producing and temporal variability in precipitation patterns (box inequalities in wealth distribution and employment 2.1), making it susceptible to natural hazards such opportunities and exacerbating vulnerabilities for as droughts and floods.¹ An estimated 75 million disadvantaged communities.⁴ people in Ethiopia have been exposed to natural Figure 2.1. Key Natural Hazard Statistics a. People in Ethiopia affected by floods b. People in Ethiopia affected by droughts 1,400,000 1,400,000 1,200,000 1,200,000 1,000,000 1,000,000 800,000 800,000 600,000 600,000 400,000 400,000 200,000 200,000 - - 1981 1987 1990 1994 1997 2000 2003 2007 2010 2015 2019 1981 1987 1990 1994 1997 2000 2003 2007 2010 2015 2019 Source: World Bank Group, Climate Change Knowledge Portal for Ethiopia, https://climateknowledgeportal.worldbank.org/country/ethiopia. Box 2.1. Spatial and Sectoral Variability of Climate Change Impacts Climate change impacts in Ethiopia tend to be concentrated in specific sectors and regions. Recent assessments indicate that economic losses from climate shocks and climate change vary across the country. Some areas and economic sectors, such as certain crop-producing regions in the highlands, could potentially benefit from climate change impacts, but others are likely to endure a large proportion of the losses. Recent assessments of climate variability and climate change (Demem 2023) and future impact modeling (Suryabhagavan 2017; World Bank 2024) suggest that rural areas and highland climatic zones will be affected disproportionately (figure B2.1.1). 9 2. SUPPLY-SIDE IMPACTS FROM CLIMATE CHANGE Figure B2.1.1. Change in Poverty Rate Relative to Control Group Baseline by Area and Climate Zone a. Wet-warm climate b. Dry-hot climate 2.5 2.5 2.0 2.0 Percentage points Percentage points 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Urban Highland Lowland Highland Lowland National Rural Temperate National Urban Rural Temperate Area Climate zone Area Climate zone 2030 2040 2050 2030 2040 2050 Source: World Bank Group. 2024. Ethiopia Country Climate and Development Report, February 2024. Note: The figure shows the poverty rates ($2.15 in 2017 purchasing power parity) measured as deviations from the baseline scenarios for the wet-warm and dry-hot climate change scenarios. The gradual deterioration of Ethiopia’s natural land degradation on water availability, soil erosion, resource base combined with climate change is and the risk of inland flooding are far-reaching, with exacerbating these risks over time. Mean monthly conservative estimates predicting a reduction of temperatures are expected to increase 1.8 degrees Ethiopia’s gross domestic product of up to 10 percent Celsius by the 2050s and 3.7 degrees Celsius by the by 2045 unless policies are implemented to mitigate end of century (figure 2.2, panel a). Similarly, rainfall ongoing land degradation (Bai et al. 2008). is likely to become increasingly variable between years, seasons, and regions, with extreme weather events such as droughts and floods becoming more common (figure 2.2, panel b). Conservative estimates suggest that the magnitude of economic impacts from climate risks will increase rapidly starting in 2030, with cumulative economic losses per decade rising from the current 11–13 percent to approximately 60–80 percent in 2030–40 (figure 2.3).⁵ These losses are driven mainly by negative impacts on livestock and heat stress that reduces labor productivity (World Bank 2024). Poverty is expected to rise in this scenario, especially in rural areas and most climate-vulnerable regions in Ethiopia, such as the highland climatic zone. Furthermore, the deterioration of Ethiopia’s natural resource base because of unsustainable management is likely to amplify exposure to climate risks.⁶ The impacts of 10 GREEN COMPETITIVENESS IN ETHIOPIA Figure 2.2. Projected temperature and precipitation scenarios for Ethiopia, 1995 to 2014 a. Projected daily maximum Projected temperature Maximum of Daily Ethiopia Max-Temperature b. Projected precipitation Ethiopia, Projected Precipitation percent Percent Change change Ethiopia; (Ref. Period: 1995-2014), Multi-Model Ensemble Ethiopia; (Ref. Period: 1995-2014), Multi-Model Ensemble 42 42 250 250 40 40 200 200 38 38 150 150 36 36 100 100 34 34 32 32 5050 30 30 0 0 1960 1960 1980 1980 2000 2000 2020 2020 2040 2040 2060 2060 2080 2080 2100 2100 1960 1960 1980 1980 2000 2000 2020 2020 2040 2040 2060 2060 2080 2080 2100 2100 Hist. Ref. Per., 1950-2014 Hist. Ref. Per., 1950-2014 SSP2-4.5 SSP1-2.6 SSP1-2.6 SSP3-7.0 SSP2-4.5 Hist. Ref. Per., 1950-2014 Hist. Ref. Per., 1950-2014 SSP2-4.5 SSP1-2.6 SSP1-2.6 SSP3-7.0 SSP2-4.5 SSP3-7.0 SSP5-8.5 SSP5-8.5 SSP3-7.0 SSP5-8.5 SSP5-8.5 Source: World Bank Climate Knowledge Portal. Note: SSPs refer to shared socioeconomic pathways which are scenarios used in climate modeling to explore how different societal trends could influence future GHG emissions and climate change impacts. SSP5-8.5 is the most pessimistic scenario (a world driven by fossil-fueled economic growth with minimal climate action, leading to severe global warming, potentially over 4°C by 2100) whereas SSP1-2.6 is more optimistic (a sustainable, green-focused world with strong climate action, aiming to limit global warming to around 1.5°C by 2100). Figure 2.3. Cumulative Economic Losses for the Ethiopian Economy by Climate Impact Channel a. Dry-hot climate b. Wet-warm climate 100 100 80 80 60 60 40 40 20 20 0 0 -20 -20 CG REF CG REF CG REF CG REF CG REF CG REF % of % of average % of average % of % of average % of average 2022 GDP GDP in 2030s in 2040s 2022 GDP GDP in 2030s in 2040s Crop yield Heat stress Urban flooding Crop yield Heat stress Urban flooding Inland flooding Roads & bridges Hydro Inland flooding Roads & bridges Hydro Livestock Health Livestock Health Source: World Bank 2024, 67. Note: CG = constrained growth scenario (structural reforms are delayed indefinitely); GDP = gross domestic product; REF = structural reform scenario (macroeconomic, exchange rate and structural distortions are addressed to allow structural transformation). Climate change impacts on businesses and value markets. For example, extreme weather events such as chains can be both direct and indirect and have rapid- floods, droughts, or wildfires can damage transportation onset and slow-onset impacts (table 2; see World infrastructure, causing delays, halting the movement Bank [forthcoming] for more details). Direct risks of goods and materials, and affecting employee and involve physical damage and disruptions to business customer access, all of which contribute to production operations caused by climate-related events. Indirect delays, shortages, and increased costs. Climate change risks arise from disruptions to infrastructure, services, can also affect supplier productivity, leading to input financial markets, supply chains, labor, and product shortages or price increases, and contribute to worker 11 2. SUPPLY-SIDE IMPACTS FROM CLIMATE CHANGE displacement, disrupting supply chains even more. fragmented land. In recent years, 22 million Ethiopians Additionally, regulatory and policy uncertainties interact became food insecure, and another 11.8 million lost with these risks, affecting firms’ ability to adapt. Climate their livelihoods because of droughts that caused crop impacts can be categorized by their onset period: rapid- failures, depleted grazing lands, and had an adverse onset impacts from sudden extreme events such as impact on agricultural productivity and the livelihoods floods and storms cause immediate damage and of pastoral communities (World Bank 2024). Similarly, disruptions, and slow-onset impacts from gradual floods have displaced hundreds of thousands and changes such as sea-level rise and desertification allow affected many others through the loss of croplands, firms more time to adapt. Distinguishing between these death of livestock, water pollution, and destruction of types of impacts is crucial for determining effective irrigation and other infrastructure (OCHA 2022). These approaches to address them. challenges are most likely to affect poor farmers, who have more difficulty recovering from climate Although climate shocks affect the performance shocks.⁷ However, recent assessments indicate that of Ethiopia’s agriculture sector severely, climate the magnitude of these impacts varies significantly by change could benefit the yields of certain crops, product and region. For example, barley and teff output though with significant uncertainty. Agriculture are likely to be negatively affected by climate change tends to be the most vulnerable economic sector in up to 6.6 and 5.5 percent respectively because of to climate impacts, especially in countries such as climate change by 2060, while yields of other crops, Ethiopia, where most of the rural population consists such as chickpea and sorghum are forecasted to of livestock herders and smallholder farmers increase by up .8 and 2.9 percent respectively (see practicing low-input and low-output farming on table 2.2; World Bank 2024). Table 2.1. Impacts of Climate Change on Businesses and Supply Chains Risks Rapid-onset impacts Slow-onset impacts Direct risks, including Physical damage to assets and injury to Lower labor productivity resulting from • Physical damage workers resulting from floods, storms, or rising temperatures • Reduced labor productivity other weather events Indirect risks, including Infrastructure damage, labor shortages Limited long-term availability or rising • Labor supply disruption and influxes, supply or demand disruptions prices of inputs resulting from changing • Migration from impacts on suppliers or customers; climate • Infrastructure risks and rapid changes in market prices • Unanticipated price increases resulting from floods, storms, or other • Input supply disruption weather events • Demand decline • Financial risks (increased insurance premiums or capital costs) Source: Adapted from World Bank, forthcoming. Table 2.2. Crop Yields under Different Climate Scenarios in Ethiopia Crop Climate effect (Dry/Hot mean) Climate effect (Wet/Warm mean) Teff -5.5% -2.8% Maize -1.5% +1.3% Sorghum +2.9% +3.1% Wheat -1% +3.8% Barley -6.6% +2.4% Chickpea +5.8% +4% Source: World Bank 2024, 48. 12 GREEN COMPETITIVENESS IN ETHIOPIA Stressors unrelated to temperature also infrastructure, which will also constrain Ethiopia’s exacerbate climate risks, threatening to constrain ability to supply energy and water and is likely to structural transformation in the country even worsen with rising temperatures and more days more. The current state of climate change will of extreme heat, mostly in northern and eastern likely hamper the development of the industry Ethiopia. Similarly, road and bridge disruptions and manufacturing sectors and hinder economic are expected to become more frequent and costly diversification into sectors such as mining and if climate resilience is not incorporated into the tourism. The mining sector is susceptible to climate country’s transport asset management system.⁹ shocks (for example, vulnerabilities in water Floods, landslides, and higher temperatures will supply and worker productivity), while tourism damage these structures, leading to costly repairs faces impacts from biodiversity loss and extreme and supply chain disruptions. The negative impact weather events (Wassie 2020). Additionally, the of flooding and other extreme weather events on widespread lack of infrastructure that is resilient connectivity and digital communications (such as to climate shocks exacerbates these challenges. fiber-optic cuts and cell tower damage), along with For instance, hydropower, which accounts for more potential damage to urban infrastructure, will also than 96 percent of Ethiopia’s power supply, is at affect these industries directly and have ripple risk because of changes in rainfall and evaporation effects on other essential sectors such as education. patterns that threaten groundwater levels and In Ethiopia, inadequate infrastructure preparedness thus electricity generation.⁸ Climate shocks often has often resulted in unfavorable learning conditions damage nonresilient electricity and irrigation and school closures because of climate shocks. Notes 1. World Bank Group, “Ethiopia,” Climate Change Knowledge Portal. 2. World Bank Group, “Ethiopia,” Climate Change Knowledge Portal. 3. World Bank 2024. 4. World Bank Group, “Ethiopia,” Climate Change Knowledge Portal. 5. Estimations do not consider indirect impact channels and magnifying effects of climate-induced changes (for example, increases in conflicts, migration shifts). For more information, see World Bank 2024. 6. For instance, recent data show deforestation rates of almost 92,000 hectares per year from 2000 to 2013 and more than 38,000 hectares per year from 2014 to 2020 because of urbanization, unsustainable farming methods, and overgrazing, among other factors. 7. World Bank Group, “Ethiopia,” Climate Change Knowledge Portal, accessed on 11 December 2023, https:// climateknowledgeportal.worldbank.org/country/ethiopia/vulnerability 8. Climate change is projected to increase hydropower generation by 13 to 22 percent in wet-warm seasons and decrease generation in dry-hot seasons by up to 5 percent (World Bank 2024). 9. Climate change–driven additional maintenance costs for roads and bridges will amount to more than $700 million in 2041–50 alone (World Bank 2024). 13 2. SUPPLY-SIDE IMPACTS FROM CLIMATE CHANGE References Bai, Z. G., D. Dent, L. Olsson, and M. E. Schaepman. 2008. Global Assessment of Land Degradation and Improvement: Identification by Remote Sensing. Wageningen, The Netherlands: International Soil Reference and Information Centre. Demem, Mulat Shibabaw. 2023. “Impact and Adaptation of Climate Variability and Change on Smallholders and Agriculture in Ethiopia: A Review.” Heliyon 9, (8): e18972. https://doi.org/10.1016/j.heliyon.2023.e18972. OCHA (United Nations Office for the Coordination of Humanitarian Affairs). 2022. Ethiopia Gambella Region Flood Update. New York: OCHA. Suryabhagavan, K. V. 2017. “GIS-Based Climate Variability and Drought Characterization in Ethiopia over Three Decades.” Weather and Climate Extremes 15 (March): 11–23. https://doi.org/10.1016/j.wace.2016.11.005 World Bank. Forthcoming. Guiding Climate Action in Private and Financial Sector: A Framework for Policy Makers. Washington, DC: World Bank. World Bank. 2024. Ethiopia Country Climate and Development Report. Washington, DC: World Bank Group. 14 3 Demand for Sustainability 15 3. DEMAND FOR SUSTAINABILITY How will climate change affect trade investments in new ways of working and heightening access in Ethiopia’s key markets and market and regulatory awareness. change how buyers of key exports make sourcing decisions? Besides government-led initiatives, an increasingly complex system of self-regulation and more New green legislation in key export markets and demanding business practices in global value evolving business practices of major companies chains are helping shape market access for will reshape market access requirements for Ethiopian exporters. Large stock market–listed Ethiopian exporters in various ways. Policy makers and consumer-facing companies in sectors such as and exporters need to understand the challenges coffee, garments, or chemicals almost universally and opportunities these trends will create. The have public targets for reducing GHG emissions and overall businesses will need to demonstrate these for other environmental issues. Various approaches practices with more robust and credible data and such as audit and inspection regimes, voluntary reporting. Carbon-emitting sectors will bear most of sustainable standards (for example, the Better this cost, and reporting requirements will likely be Cotton Initiative), and product life cycle assessments more challenging for smaller firms. Manufacturers in (LCAs; evaluations of a product’s environmental Ethiopia will also benefit from some of these global impact throughout its life cycle) are used to report trends, such as those demonstrably producing on progress toward these commitments. Such goods from clean hydropower. Similarly, exporters approaches can be effective in driving improved of agricultural goods such as coffee and cotton could practices, but they also carry costs (often borne by benefit if they can show they are using climate- suppliers) and can create hurdles for companies sensitive growing and processing technologies, such seeking to break into overseas markets. as water conservation and regenerative agriculture. These legislative and private sector–led initiatives Policy makers globally are beginning to enact green will open new export opportunities but also create polices in response to voter concerns about climate new requirements for exporters to maintain existing change and global commitments to greenhouse gas market access. Ethiopia’s cheap on-grid renewable (GHG) emission reductions, and these policies have power is a major asset for companies seeking to implications for trading relationships. Two examples reduce their GHG emissions in energy-intensive are land-use changes and carbon border adjustment industries (Mihretu and Llobet 2017). This and other mechanisms that place duties on imports of carbon- endowments may become an increasing source intensive products or polices aimed at deforestation. of comparative advantage in the future. However, The European Union has taken the global lead on exporters will face increased costs in meeting the such policies with trade-affecting legislation under new requirements highlighted in the next sections, the umbrella of its Circular Economy Action Plan. which include a significant step change in data and Countries such as Canada, China, and the United reporting needs on topics such as GHG emissions States and others are expected to follow, though and geospatial data linked to production or growing with varying levels of ambition and pace. Although locations, water use, waste management practices, some of this legislation has already passed in and more. Firms will not bear these costs equally. the European Union and elsewhere, much is still Small businesses will potentially struggle with the under negotiation, creating additional uncertainty inherent costs, and firms without buyer relationships and flux for importers and exporters and requiring could struggle to overcome information gaps. 16 GREEN COMPETITIVENESS IN ETHIOPIA Sustainability Legislation per the legislation – including businesses outside in Export Markets the European Union. Such commitments will become increasingly important to ensure that sustainability Upcoming domestic and trade-related legislation requirements do not exclude firms in Ethiopia from in key markets in coming years will increasingly international market access. affect the competitiveness of Ethiopian exports. The European Union has made the most progress, The European Union implementing a series of policy and legislative changes that will change the requirements for The upcoming EU legislation will affect countries prospective exporters dramatically. Changes will exporting products into Europe directly and indirectly include effective duty tariffs on carbon-intensive and will have a profound impact on firm behaviors products, extensive new data requirements on the that will extend beyond those exporting directly to environmental footprint of production practices, the European Union. Several buyers and brands and new reporting obligations for companies have indicated that they will align with European sourcing from overseas on how they track and legislation for all global operations (BOF and McKinsey manage environmental risks. China, the United & Company 2023), given the cost and complexity of States, and other major export markets have not adopting different production practices and data moved as quickly as the European Union, but their collection methods across multiple jurisdictions. Such high-level net-zero commitments and signals alignment will likely extend to products produced for from policy makers suggest they are heading in a the United States or other markets, with the effect similar direction. Significantly, senior managers of of making the initiatives de facto market access international companies report that because of the requirements for a larger share of global trade. size of the European market, they will align their global practices with EU requirements, which could The EU legislative agenda is comprehensive encourage a push for higher standards in business (see appendix 1), but several initiatives are practices in some sectors. most relevant to Ethiopian exporters. The EU Deforestation Regulation (becoming effective in The recent increase of sustainability legislation December 2024) will require firms seeking to sell in export markets raises the importance of goods in the European market to provide detailed international efforts to ensure that the green documentation, including geolocation data, to transition is socially just. To respond to the growing prove that their products did not originate from use of sustainability regulations, Ethiopian firms land deforested after 2020 and were produced in could strengthen links with international buyers to compliance with local laws. Exports covered by the receive technical support with compliance. At the regulations—coffee, cattle and meat products, soya, institutional level, there is also a growing demand oil palm, wood, and rubber—make up nearly 50 for a close collaboration and support between percent of Ethiopia’s exports to the European Union development partners and the governments of and almost 9 percent of the country’s total export Ethiopia and high-income countries, to ensure revenues. Similarly, the ReFuelEU Aviation initiative socially just environmental regulations. For example, will enforce an increasing share of sustainable the European Union included in the Corporate aviation fuels use for aircraft using European Sustainability Due Diligence Directive several airports, thus affecting Ethiopian Airlines and the provisions outlining the possibility of providing cost of transportation for other industries that support to help companies fulfil their obligations as depend on air freight to reach the European markets. 17 3. DEMAND FOR SUSTAINABILITY United States impacts for fashion retailers and manufacturers operating in the state. The act would require firms Developments affecting market access to the to disclose the annual volume of materials produced United States are also underway, though they are and percentages of recycled materials used, and not as extensive as those in the European Union. to publish baseline and reduction targets for The proposed Foreign Pollution Fee Act introduces energy consumption, GHG emissions, water usage, charges on carbon-intensive imports similar to the and chemical management. California’s Climate EU carbon border adjustment mechanism and would Corporate Data Accountability Act will require apply to 15 broad categories of products, including businesses with more than $1 billion in annual cement, plastics, and petrochemicals. Although revenue operating in the state to report all Scope 1, Ethiopia does not currently export any of these 2, and 3 GHG emissions by 2027. products to the United States, the draft contains significant discretionary powers, which could lead Rest of the World to expanding the act’s coverage in the future. Other countries are considering some type of Additional federal legislation, both enacted and carbon border adjustment measure, including under consideration, could also affect exporting Canada (now in a consultation process). The countries. The US Federal Trade Commission plans United Kingdom is also considering the results of a to update its Green Guides (aimed at marketers that consultation exercise that concluded in 2023. Japan’s promote products as environmentally friendly or Green Growth Strategy from 2020 also suggests a “green”) to reflect changes in consumers’ perceptions carbon border adjustment. Although many of these of environmental marketing claims. The update could initiatives could initially focus on a small number tighten rules on green claims and specify which of sectors in which Ethiopia has minimal exposure, data sources are acceptable for supporting such a clear trend suggests that more sectors could be claims. The Inflation Reduction Act will also have included over time. GHG emissions resulting from implications for trade in certain sectors, although its land-use changes for agricultural commodities, impact is not yet well understood. However, it signals such as expanding the land used for coffee or cotton, a trend toward increasingly strategic trade policy on might also be included in carbon border adjustment green issues (Brenton et al. 2023). calculations (CCSI 2021). China has committed to peaking carbon emissions before 2030 and becoming In parallel with EU member state legislation in carbon neutral by 2060 and has increased its use Europe, individual US states such as California, of environmental and social governance reporting Massachusetts, and New York are drafting (Chan 2022). However, it has not yet mandated additional environmental laws to bolster federal the level of reporting required by recent EU or US activities. For example, the New York State Fashion legislation (World Bank Group 2022). Sustainability and Social Accountability Act (known as the Fashion Act) currently under debate will require The environmental provisions of the African improved supply chain mapping requirements and Continental Free Trade Area, a free trade agreement compulsory disclosure of environmental and social negotiated in 2018, are not expected to affect 18 GREEN COMPETITIVENESS IN ETHIOPIA Ethiopia’s competitive position or market access Sustainability Demands from significantly. Once fully enacted, the agreement aims International Buyers and Investors to create a single market for goods and services for more than 1.3 billion people across the continent Climate change and environmental pressures and is projected to lift up to 30 million people out of are changing demand patterns and how global poverty (World Bank 2020). Although the agreement businesses operate, with significant implications requires signatories to implement national policies, for countries such as Ethiopia. Government such as promoting green energy or environmental regulation, staff retention, and pressure from safeguards, such policies must not discriminate consumers and nongovernmental organizations have against businesses based on their country of origin encouraged firms operating in global value chains (UNCTAD 2021). Provisions also include commitments to adopt more stringent social and environmental to avoid lowering environmental standards to attract standards for their suppliers. This process gained foreign investment. Some analysts have noted that, momentum in the 2010s when more firms adopted unlike some other regional trade agreements, the sustainability goals through public commitments African Continental Free Trade Area does not include and participation in multistakeholder initiatives a dedicated protocol on the environment and could do addressing issues such as GHG emissions and water more to remove access barriers for environmental use (Whitfield et al. 2020). This shift can create new goods (van der Ven and Signé 2021). challenges for suppliers and exporters, such as in reporting and management practices, but it also Including environmental provisions in recent offers opportunities such as the ability to market regional trade agreements and increasing the goods as being produced using green energy or use of voluntary sustainability standards (VSSs) circular business models. to harmonize standards show how trade rules are evolving. Recent research by the Organisation for International businesses are designing, monitoring, Economic Co-operation and Development shows a and communicating their environmental significant increase in the number of environmental commitments in various ways, particularly aligning provisions in recent trade agreements: the share with issue- or industry-based approaches. Most of trade agreements featuring specific provisions consumer-facing and stock market–listed companies’ is up from less than 50 percent in 2000 to nearly websites now feature a prominent sustainability 90 percent by 2021 (OECD 2023). These provisions section listing several firm-specific targets and reference international commitments, provide business practices (for example, Nescafé, H&M, and exceptions for specific environmental priorities (such IKEA). Sustainability targets typically include GHG as biodiversity), and emphasize the importance of emissions and might include targets on water, waste, upholding environmental laws. Recent international biodiversity, or circular business models, depending trade agreements have also encouraged greater on the type of product. The trend toward alignment alignment of environmental regulations between is likely to accelerate in coming years as legislation developed and developing countries. Examples in the European Union and elsewhere sets a higher include Eco Mark Africa in East Africa (a certification standard for comparability and rigor in how firms system recognizing sustainability standards for communicate with consumers and regulators. goods and services in Africa), international standards for organic goods, and the recognition of national Companies and industries that commit to sustainable laws in bilateral trade deals, such as the Republic business practices and establish company targets of Korea’s Act on the Sustainable Use of Timbers create an informal system of self-regulation in (Bermúdez and Sarmiento 2023). addition to government regulations. For example, 19 3. DEMAND FOR SUSTAINABILITY they can align with thematic multistakeholder by 2030, in line with the Paris Agreement’s goal of initiatives such as Science-Based Targets or use limiting global temperature rises to 1.5 degrees VSSs or industry-based approaches such as the Celsius. These commitments cover a company’s Higg toolkits in the garment sector. Although many own emissions and those associated with its energy of these industry-led initiatives require adherence consumption (Scope 1 and 2) and also emissions to national laws as a minimum standards, they also from its suppliers (Scope 3). introduce an additional layer of rules and norms by which buyers and suppliers will operate. These As of January 2024, SBTi has validated the targets of approaches create incentives for market actors but more than 4,000 businesses, including some of the also impose significant data requirements, which world’s largest corporations. These firms represent exporting countries need to equip businesses to meet. more than one-third of the global economy by market capitalization and more than 69 percent of the FTSE Beyond narrow sustainability performance, 100 and 38 percent of all US Fortune Global 500 international buyers are likely to increasingly companies (SBTi 2023). Companies sourcing products demand place-based information to reduce their from Ethiopia, including Nestlé, The Children’s Place, exposure to climate risks along the value chain. and PVH Corp., have adopted SBTi and use it to Even with successful GHG emission reductions, the validate their climate change reporting. As a result, existing levels of GHG in the atmosphere will result in an increasing number of buyers and international more frequent and intense climate impacts. The 2022 businesses will require their Ethiopian suppliers to floods in Pakistan that caused more than $30 billion report their GHG emissions in a robust and credible in damage and economic losses have highlighted the manner. Ethiopia’s heavy reliance on green energy for widespread climate impacts that could affect countries manufacturing and potentially logistics has already and sectors. Interviews with international buyers provided a comparative advantage, attracting buyers indicate that brands have begun mapping such climate such as PVH Corp., and this trend is expected to risks. Although the development of place-based risk continue (Mihretu and Llobet 2017). models (for example, identifying the location of farms and factories) is in its early stages, buyers are expected Voluntary Sustainability Standards to increasingly require this information to map such risks. Currently, many buyers are using broader risk VSSs are becoming a common approach used by mitigation methods not related to climate change buyers to ensure minimum social and environmental specifically, for example, diversifying their risks by practices, particularly in agricultural value chains. limiting the share of sourcing from any one location, These industry-led initiatives typically involve a set which increase data demands from international of agreed social, economic, and environmental buyers and influence their sourcing decisions. requirements, with suppliers’ compliance verified through self-assessment and audits. Once verified, Science-Based Targets Initiative the VSS body issues a certificate of compliance, allowing the supplier or buyer to market products The Science Based Targets initiative (SBTi) is one under a sustainability label. This certification and approach helping businesses make consistent verification architecture is often supported by public commitments to reducing GHG emissions. training and other capacity-building efforts aimed at SBTi is a collaboration between the United Nations improving suppliers understanding of the standards Global Compact, the World Resources Institute, and enhancing their productivity. and the World Wide Fund for Nature. The initiative provides sector-specific guidance to help companies Use of VSS has risen steadily since the early 1990s, develop plans and set targets to halve GHG emissions with many having obtained high levels of consumer 20 GREEN COMPETITIVENESS IN ETHIOPIA recognition. By 2022, nearly half of all internationally limited to a segment of the value chain such as traded coffee was VSS-compliant under approaches cotton growing and ginning. LCAs are data-intensive such as Rainforest Alliance or Fairtrade (FAO n.d.). In exercises that require raw data and reliable localized the cotton sector, about 30 percent of internationally analysis on issues such as soil health or the GHG traded produce has been certified under one of emissions associated with on-grid power generation several approaches (Textile Exchange 2023), and that will increasingly be required on key value chains close to one-fifth of cotton-growing land by area is operating in Ethiopia. certified (ITC 2022). Two of the biggest certification approaches—the Better Cotton Initiative and Cotton Environmental Management Systems Made in Africa—have been operational in Ethiopia, Certifications though conflict and insecurity have disrupted operations more recently. Businesses are increasingly using ISO 14001, another ISO-certified standard, to improve and The overall evidence on the impacts of VSSs on demonstrate the quality of their environmental social and environmental issues is mostly positive management systems. An ISO 14001 certification but not uncontested, with much depending on the is a widely recognized standard of an organization’s type of VSS and the local context. A broad set of environmental systems and practices. The certificate developmental objectives of many VSSs programs is obtained after an assessment by an approved include the multidimensional sustainability and independent verification body and can be outcomes (for example, reduced GHG emissions) shared with potential clients to show competence and productivity improvements, market links, price in tracking and managing environmental risks. The improvements, and consumer recognition, which certifications are used widely in European and East complicate a definitive analysis. A meta-analysis of Asian firms, and some large companies (such as studies with robust research approaches (such as automotive manufacturers Ford, Honda, Toyota, and use of control groups) found 111 positive impacts, BMW, and General Motors) insist that all suppliers 118 neutral, and 22 negative when examining gain certification as a part of supply chain integrity environmental components of VSSs (UNCTAD 2023). strategies. Currently, fewer than 30 Ethiopian firms are recorded as certified on ISO’s central database. Product Life Cycle Assessments Relative to the size of the economy, this ratio is about five times higher in Kenya and 40 times higher in LCAs are comprehensive evaluations of the Vietnam (ISO n.d.). environmental impact associated with all stages of a product’s life, and they have become widely Multistakeholder and Sectoral Initiatives adopted tools for identifying GHG and other environmental impact data. Firms use LCAs to The Higg Facility Environmental Module is an appraise and communicate environmental impact, environmental assessment tool designed for particularly for GHG emissions often required for the garment and footwear industries to evaluate SBTi reporting or for corporate disclosures of and improve the environmental performance of nonfinancial data. The LCA approach is set out under manufacturing facilities. Developed by Cascale, a not- the International Organization for Standardization for-profit industry body, the Higg assessment captures (ISO) 14044:2006 standard, with requirements for data on energy use and GHG emissions, water use, defining the chosen methodology and peer reviewing waste and wastewater, chemical management, the approach and results. A full LCA would cover and overall environmental management systems. raw material extraction through manufacturing, Managers collect factory data, and an independent distribution, and use to disposal or recycling, but body then verifies it, which allows creating a single if defined clearly as such, the approach can be report that can be shared with multiple buyers, 21 3. DEMAND FOR SUSTAINABILITY reducing the need for duplicative audit processes. such as PVH Corporation and Lidl have required Higg assessments from Ethiopian suppliers for several Several manufacturers in Ethiopia serving years (Jensen and Whitfield 2022). Suppliers report international buyers already use the Higg the benefits of using a single approach for many assessments. Manufacturers progress through buyers but have experienced challenges in collating three stages: level 1 starts with investments in data on issues such as power usage (for example, data collection systems, level 2 is benchmarking metering different sections of factories), air quality, and target setting, and level 3 is identifiable and pooled industrial park–level facilities, such as improvements in environmental impact. Buyers waste management systems. Box 3.1. Case Study: Lessons from Wastewater Treatment Plants and Sludge Disposal In Ethiopia, the management of industrial waste has faced significant challenges, particularly regarding its treatment and disposal. According to a study by Tamiru, Dagnachew, and Tenalem (2005), between 90 and 96 percent of industrial waste in the country was discharged untreated into water bodies and open spaces. This statistic underscores a critical environmental and public health issue. Ethiopia implemented several initiatives to manage industrial wastewater over the past two decades as it invested in light manufacturing. Public industrial parks now have internal wastewater treatment plants, though they are often designed inadequately and operated irregularly. Treatment plants in both government-run industrial parks and privately run sites have revealed lessons and policy challenges related to pricing and safe disposal of waste by-products, known as sludge. Table B3.1.1 shows that all industrial parks have central treatment plants that use various technologies. Four of these parks have zero liquid discharge systems,a which treat recyclable waste without discharging it into the environment. However, these systems are more expensive to operate and produce greater amounts of sludge (Mihretu and Llobet 2017). The other treatment plants use advanced conventional technologies.b Table B3.1.1. Wastewater Treatment Plants in Ethiopia’s Government-Owned Industrial Parks Capacity of WWTPs No. Industrial Park Domestic (m³/d) Industrial (m³/d) Technology used 1 Bole Lemi-I n.a. 1,500 Conventional 2 Bole Lemi-II 3,000 14,000 Advanced conventional 3 Hawassa 3,000 8,000 ZLD 4 Adama 3,000 8,000 ZLD 5 Dire Dawa 2,000 4,000 ZLD 6 Kilinto 1,000 13,000 ZLD 7 Kombolcha 2,000 1,500 Advanced conventional 8 Mekele 2,500 3,000 Advanced conventional 9 Jimma 2,000 1,000 Advanced conventional 10 Bahir Dar 1,000 1,000 Advanced conventional 11 Debre Birhan 1,000 1,000 Advanced conventional Source: Industrial Park Development Corporation. Note: m³ = cubic meter; WWTP = wastewater treatment plant; ZLD = zero liquid discharge. 22 GREEN COMPETITIVENESS IN ETHIOPIA Operating the treatment plants has several challenges. For instance, in the Hawassa industrial park, Arvind Envisol estimated the cost of waste treatment at $1.01 per cubic meter of water processed.c However, the Industrial Parks Development Corporation board of directors decided to charge industrial park tenants $0.80 per cubic meter, subsidizing about $0.21 per cubic meter. Appendix A provides more details. The initial plan for pricing water use and filtration in the parks followed a cost-recovery model, with additional fees from resource-intensive methods such as zero liquid discharge technology passed on to manufacturers and ultimately buyers and consumers. But according to the Industrial Parks Development Corporation, the actual operational cost had risen from $1.01 per cubic meter estimated initially to $4.12 by 2023 because of factors such as higher costs of chemical inputs and spare parts. Another factor contributing to higher costs was that park tenants’ agreements lacked an adjustment for the polluting load of water processed through the system, which did not create an incentive for users to reduce burdens on the treatment plants. Safe disposal of waste material from the treatment plants poses another significant challenge. In countries such as Bangladesh and India, advanced regulatory approaches, sanitary disposal sites, and commercial off-takers facilitate the safe disposal and reuse of sludge in industrial applications and construction materials (IFC 2021). In 2021, the Ethiopian Standards Agency updated guidance and standards for safe waste disposal with clarity on storage and transportation issues. The high moisture content of sludge has been another problem that has hindered its use in the Addis Ababa waste-to-energy plant and for direction application as raw material in the construction industry. Although costly, investments in solar drying facilities have helped address this issue in the Bole Lemi park on the outskirts of Addis Ababa. Pilot projects exploring the use of sludge as an input for brick and tile making could eventually yield scalable solutions and enhance the industrial parks’ environmental credentials. Source: Authors. a. Zero liquid discharge is a waste treatment process that ensures that industrial wastewater will not be discharged into the environment. Treated waste is recycled and used for different purposes, including industrial use, toilets, and watering greenery. b. Advanced conventional waste treatment plant that treats wastewater to the level that does not harm the environment and discharged to the environment. c. Arvind Envisol is the company responsible for the wastewater treatment plant construction and maintenance. 23 3. DEMAND FOR SUSTAINABILITY References Bermúdez, Steffany, and Florencia Sarmiento. 2023. South–South Trade and Voluntary Sustainability Standards: Challenges and Opportunities. Winnipeg: International Institute for Sustainable Development. BOF (the Business of Fashion) and McKinsey & Company. 2023. The State of Fashion 2024. London and New York: BOF and McKinsey & Company. Brenton, Paul, Vicky Chemutai, Maryla Maliszewska, and Iryna Sikora. 2023. Trade and Climate Change: Policy Considerations for Developing Countries. Washington, D.C.: World Bank, 2023. CCSI (Columbia Center on Sustainable Investment). 2021. “Event Highlights: Carbon Border Adjustments in the EU, the US, and Beyond.” Background sheet, CCSI, New York. Chan, Helen. 2022. “China Moves to Standardize Fragmented ESG Reporting Landscape.” Thomson Reuters, October 6, 2022. https://www.thomsonreuters.com/en-us/posts/news-and-media/china-esg-reporting/ FAO (Food and Agriculture Organization). n.d. “Markets and Trade: Coffee.” https://www.fao.org/markets-and-trade/ commodities/coffee/en/#:~:text=Coffee%20is%20one%20of%20the,consuming%20and%20importing%20 markets%20globally ISO (International Organization for Standardization). n.d. “The ISO Survey.” https://www.iso.org/the-iso-survey.html. ITC (International Trade Centre). 2022. The State of Sustainable Markets 2021: Statistics and Emerging Trends. Geneva: ITC. Jensen, Federico, and Lindsay Whitfield. 2022. “Leveraging Participation in Apparel Global Supply Chains through Green Industrialization Strategies: Implications for Low-Income Countries.” Ecological Economics 194 (April): 107331. https://doi.org/10.1016/j.ecolecon.2021.107331. Mihretu, Mamo, and Gabriela Llobet. 2017. Looking beyond the Horizon: A Case Study of PVH’s Commitment to Ethiopia’s Hawassa Industrial Park. Washington, DC: World Bank Group. OECD (Organisation for Economic Co-operation and Development). 2023. OECD work on Regional Trade Agreements and the environment. Paris: OECD. SBTi (Science-Based Target Initiatives). 2023. SBTi Monitoring Report 2022: Looking Back at 2022 and Moving Forward to 2023 and Beyond. n.p.: SBTi. Textile Exchange. 2023. Materials Markets Report. https://textileexchange.org/app/uploads/2023/11/Materials- Market-Report-2023.pdf. Tamiru, Alemayehu, Legesse Dagnachew, and Ayenew Tenalem. 2005. Hydrology, Water Quality and the Degree of Groundwater Vulnerability to Pollution in Addis Ababa, Ethiopia. Addis Ababa, Ethiopia: United Nations Environment Programme; United Nations Educational, Scientific, and Cultural Organization; United Nations Educational, Scientific and Cultural Organization; and United Nations Economic Commission for Africa. UNCTAD (United Nations Conference on Trade and Development). 2021. Implications of the African Continental Free Trade Area for Trade and Biodiversity: Policy and Regulatory Recommendations. Geneva: UNCTAD. UNCTAD (United Nations Conference on Trade and Development). 2023. Voluntary Sustainability Standards in International Trade. Geneva: UNCTAD. van der Ven, Colette, and Landry Signé. 2021. “Greening the AfCFTA: It Is Not Too Late.” Africa Growth Initiative Policy Brief, September 2021, Brookings Institution, Washington, DC. 24 GREEN COMPETITIVENESS IN ETHIOPIA Wassie, Simachew Bantigegn. 2020. “Natural Resource Degradation Tendencies in Ethiopia: A Review.” Environmental Systems Research 9 (November): 33. https://doi.org/10.1186/s40068-020-00194-1. Whitfield, Lindsay, Cornelia Staritz, and Mike Morris. “Global Value Chains, Industrial Policy and Economic Upgrading in Ethiopia’s Apparel Sector.” Development and Change 51, no. 4 (2020): 1018–43. World Bank. 2020. The African Continental Free Trade Area: Economic and Distributional Effects. Washington, DC: World Bank. World Bank Group. 2022. China Country Climate and Development Report. Washington, DC: World Bank Group. World Bank. 2024. Ethiopia Country Climate and Development Report. Washington, DC: World Bank Group. 25 4 Sectoral Analysis 26 GREEN COMPETITIVENESS IN ETHIOPIA An analysis of four export-oriented value chains— The following sections explore key trends in these coffee, aviation, cut flowers, and the cotton- sectors in greater detail. textiles-ready-made garments value chain—yields lessons on how climate change direct impacts and Textiles and Apparel the actions of consumers, buyers, and regulators will affect Ethiopia’s competitiveness. Despite Summary significant heterogeneity in sector organization, firm size, product sophistication, and value chain Weather-related shocks on the supply side, such links, all four sectors will face direct and indirect as droughts and floods, have already hit cotton effects from climate change and sustainability production in recent years and highlight the need demands. Compliance with new EU legislation will for investing in resilience (including drought- shape market access to Europe significantly for resistant seed varieties) and improved value chain coffee and cut flowers. Changing weather patterns links. Existing challenges of water supply in some will affect cut flowers, coffee, and cotton growing industrial parks underline the need for approaches directly. These sectors will also need to increase that maintain access to critical utilities while reporting on greenhouse gas (GHG) emissions, ensuring equitable access for communities and water use, fertilizers, waste, and land conversions. other stakeholders.¹ On the demand side, Ethiopia’s green on-grid power has already attracted investors to export-oriented garment manufacturing, and investments in zero liquid discharge could also be a source of increasing value to reputation-conscious investors. An anticipated increase in demand for sustainable cotton is an opportunity for Ethiopia to invest in globally recognized certification practices and supply chain links. Table 4.1 summarizes the strengths, weaknesses, opportunities, and threats in Ethiopia’s textile and garment sector. Table 4.1. Textile and Garments Strengths, Weaknesses, Opportunities, and Threats Strengths Weaknesses Low labor costs ($26 per month versus $63 in Bangladesh, Low labor productivity and high worker turnover $111 in Pakistan, $135 in Kenya, and $151 in Vietnam) Cheap renewable power (but the cut-make process is less energy- Conflict and African Growth and Opportunity Act suspension intensive, with only 9 percent of production-related emissions) Geographic proximity to EU market (maritime transport Foreign exchange shortages a constraint for capital-intensive instead of air transport, shorter lead time) segments such as fabric production Industrial parks with environmentally focused facilities (for High logistics costs example, zero liquid discharge, wastewater treatment plants) Firms in industrial parks linked to international buyers and Low share of certified sustainable cotton (for example, only 0.1 thus often aware of or compliant with sustainability standards percent is organic certified cotton), not enough for one fabric mill Value chain issues in cotton (for example, farm-to-mill links, grading standards implementation): low quality, mainly for local market 27 4. SECTORAL ANALYSIS Opportunities Threats International focus on sustainability impact of the sector Cotton production erratic and already affected by climate makes Ethiopia’s potential for (fabric) production with impacts (especially rainfed cotton) but varied geographic effects clean energy attractive to international buyers (for example, advantage over Bangladesh) Potential for vertical integration from cotton to garments Some shift to European Union because of African Growth and (global trend toward shorter, traceable value chains) Opportunity Act suspension, thus higher sustainability demands (and smaller, faster orders) Sixty-five percent of cotton lint production from rainfed farms Downward trend in cotton cultivation areas, but government (use 1 percent of the water irrigated cotton farming uses) plans to expand production (1 million hectares by 2032); risk of land conversion–related issues (for example, emissions) Unclear impact of circular economy trends (for example, possible lack of scale for textile recycling, reduced demand) Source: Authors. Background on Garment and leading merchandise export within five years. Textiles Value Chain The garment industry’s successful growth followed Before COVID-19, employment and exports in a government strategy to attract international Ethiopia’s garment and textiles sector had been buyers and manufacturing companies. Over the growing at approximately 50 percent a year, last decade, the government built more than a attributable largely to duty-free exports to the dozen industrial parks around the country tailored United States under the African Growth and to the requirements of global textiles and garment Opportunity Act (AGOA). Leading much of this companies, including modern building standards, growth was recent foreign direct investment from dedicated power connectivity and water supply, and traditional garment producing countries such as costly environmentally focused infrastructure such India, China, and Sri Lanka that had set up operations as zero liquid discharge and advanced wastewater in government-run industrial parks built across the processing facilities (Jensen and Whitfield 2022). country between 2015 and 2020. In addition to this In addition to physical infrastructure, business government program, international investors were environment reforms included introducing one- induced to shift production to Ethiopia because the stop shop facilities and policies designed to ease country’s labor costs are among the lowest in the countrywide foreign exchange challenges (Mihretu garment sector, despite major concerns about high and Llobet 2017). labor turnover rates and low productivity (UNDP 2023). In 2019, monthly wages in Ethiopia’s garment Investments in the industrial parks and export- industry were $26.00, compared with $55.00 in Sri oriented garment sector focused primarily on Lanka, $63.00 in Bangladesh, $111.00 in Pakistan, the cut-and-sew end of the value chain, with $136.00 in Kenya, and $151.00 in Vietnam (Barrett only mixed success in creating backward links. and Baumann-Pauly 2019). Net exports peaked in International buyers, such and PVH Corp. and H&M, 2020 at about $160 million when employment in were drawn to Ethiopia by the potential for full the export-oriented industry reached an estimated horizontal integration (from cotton growing to ready- 100,000 workers.² Before the COVID-19 shocks, made garments), but this has mostly not materialized conflict, and AGOA suspension, these trends were yet (Jensen and Whitfield 2022). Only a few modern on track to make garment and textiles Ethiopia’s fabric mills are dedicated to the export sector, but 28 GREEN COMPETITIVENESS IN ETHIOPIA many manufacturers’ production targets the less ginning. The country has grown cotton for more demanding local market. Garment exporters still than a millennium, and the sector has historical import most fabric, which has mitigated the gains in and cultural significance. Rainfed cotton farmers foreign exchange earnings and technology transfer represent about 65 percent of lint production while creating risks that the sector remains prone predominately in the northern highlands (Addis, to relocation, for example if circumstances change Kachi, and Wang 2021). The rest of the production in the county. About 21 stand-alone cotton ginning takes place in irrigated farms in areas such as the mills and eight spinning mills are upstream in the Awash and Omo Valley, with greater use of wage value chain, and they use mostly dated technology labor (map 4.1). Although yields have generally (IFC 2021). A large spinning mill from China in Dire trended upward, the area under cultivation has Dawa industrial park is an exception—set up to shown considerable volatility (figure 4.1). The capitalize on cheap power costs, it currently uses decrease has been driven by fluctuating growing only imported cotton that is then re-exported as conditions (including both drought and floods in yarn to markets in China and elsewhere, versus recent years) and market forces that have often acting as a link between Ethiopia’s cotton and the brought lower returns on cotton farming than on nascent garment manufacturing in the industrial crops such as sorghum, wheat, and sugar (Balcha parks (Getachew 2019). et al. 2022). Total domestic consumption of cotton was almost 60,000 tons in 2021, with only 2,700 Ethiopia has a long history of cotton growing (both tons exported and about 15 percent of local needs smallholder and commercial-scale farms) and met by imported cotton (Enawgaw and Gelaw 2024). Map 4.1. Cotton Production Areas in Ethiopia Figure 4.1. Cotton Production 160 70 140 60 120 50 100 Area ‘000 ha 40 80 ‘000 MT 30 60 20 40 20 10 0 0 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2012/13 2014/15 2016/17 2018/19 2020/21 Source: US Department of Agriculture Foreign Agricultural Service, “Country Summary: Ethiopia Cotton Area, Yield, and Production,” accessed on 30 November 2023, https://ipad.fas. Year of production usda.gov/countrysummary/ Area (000ha) Production (000 metric tonnes) Default.aspx?id=ET&crop=Cotton. Note: SNNP = Southern Nations, Nationalities, and Peoples’ Region. Source: Kedisso et al. 2023. 29 4. SECTORAL ANALYSIS The Ethiopian government has ambitious plans regulations requirements. for expanding cotton production to meet the growing textiles and garment industry’s needs, Global Garment Industry Trends and but reaching scale has been difficult. Despite Implications for Ethiopia’s Competitiveness the downward trend in land area under cotton cultivation, an estimated 3 million hectares of land Trends toward shortening and consolidating are suitable for cotton production—an area nearly supply chains accelerated during the global equal to that in use in Pakistan, the world’s seventh garment industry’s post-COVID-19 recovery largest global producer (Kedisso et al. 2023). period. Increased competition within the sector, Ethiopia’s 15-year National Cotton Development consumer demand for more designs per season per Strategy aims to boost cotton production to 1.1 year, and shorter lead times between design and million tons and increase the area of land on which it products reaching stores have prompted changes is grown to 1 million hectares by 2032 (Cotton Made in manufacturing countries. Buyers have sought in Africa 2023). Achieving these ambitious targets ways to achieve quicker speed-to-market times, will require efforts on both the supply and demand which require greater flexibility and adaptability sides. Constraints include access to improved seed from manufacturers, especially in sourcing fabrics varieties, fertilizers, improved training on issues and trims on short notice. The push for faster such as integrated pest management practices, market entry has increased the demand for vertical and capital linked to investments in land cultivation production locations, where fabric construction and (Kedisso et al. 2023). garment assembly occur in the same place (BOF and McKinsey & Company 2023), and it has placed The overlapping shocks of COVID-19, internal a premium on manufacturing locations with shorter conflict, and suspension of AGOA trade privileges transportation and logistics times than in traditional have stalled growth and cast a shadow of sourcing locations such as China and Bangladesh. uncertainty over the garment and textiles Interviews with buyers revealed that the increased sector. The COVID-19 pandemic created supply cost and complexity of dispersed supply chains chain disruptions for imported inputs and then has also encouraged some international buyers to a significant drop in orders when many garment try to use fewer immediate suppliers, expecting companies were newly established. Although these companies to have a diversified international the impact on employment and production were footprint. Before the loss of AGOA, these trends and temporary, this was swiftly followed by the outbreak the competitive costs for labor and power were of serious conflict in northern Ethiopia in late 2020. among the drivers of high levels of foreign direct As a direct result, manufacturing in affected areas investment in Ethiopia’s industrial parks (Fanuel closed, and jobs were lost. Then in 2022, the United et al. 2022). States suspended duty-free access under AGOA because of human rights violations (Fanuel et al. Reducing the garment sector’s climate change 2022). Despite efforts to repurpose capacity toward impact is already affecting buyers’ sourcing domestic sales and other markets, several factories decisions and production practices, and this trend closed, jobs were lost, and image-conscious is expected to accelerate. The global industry is international brands suffered a significant estimated to contribute to 5–10 percent of global reputation blow. As of August 2024, whether AGOA GHG emissions, making it a target of regulatory and access will be reinstated and what the long-term consumer pressure, especially in the EU and US impact on the sector might be are still unclear (ILO markets (European Parliament 2020). More than 75 2023). An indirect consequence of pivoting away percent of emissions in garment construction are from the United States is a greater reliance on the from manufacturing processes such as ginning, European Union and its upcoming environmental spinning, and weaving and from finished garment 30 GREEN COMPETITIVENESS IN ETHIOPIA cut-and-sew facilities (mostly from power use), The Science-Based Targets Network has labeled cotton with the remaining 25 percent from raw material a high-impact commodity for water use and water production—for example, growing cotton (Chen et al. pollution, requiring enhanced reporting from companies 2023). Most large global garment companies have with significant cotton sourcing in their supply chains. voluntary GHG emission-reduction targets (upcoming The reporting requirements are a greater concern for legislation in the European Union and elsewhere is irrigated farming in regions such as the Omo Valley than expected to accelerate these efforts), which is forcing for rain-fed smallholder agriculture. Harmful levels countries to consider how to change practices within of excess nutrients or pesticides in water discharge existing supply chains and find sourcing locations is another area of concern and requires detailed, where they can manufacture and ship goods with data-intensive reporting in voluntary sustainability lower emissions. standards (VSSs), such as the Better Cotton Initiative. Water use can be high in fabric making, especially in Besides GHG emissions, the industry’s environmental dyeing processes, and thus buyers and manufacturers footprint includes considerable impacts associated are increasingly required to report on water discharge with water use, chemical use, land conversation, and chemicals content through initiatives such as Zero and waste generation (figure 4.2). Water is especially Discharge Hazardous Chemicals by the Roadmap to relevant because it is scarce in many parts of Ethiopia Zero Programme, which publishes a manufacturing (and expected to become scarcer with climate change). restricted substance list. Even though manufacturing Figure 4.2. Environmental Impact of the Global Garment and Textiles Sector Value Chain Raw material Raw material Material Finished product Retail and extraction (Tier 4) processing production assembly distribution Consumer use End of life Grow/make fibers (Tier 3) (Tier 2) Make (Tier 1) (Tier 0) Spinning yarn fabric incl. dyeing Cut and stew Logistics 24% of 15% of 52% of 9% of production- Moderate emissions Substantial Emissions from product-related product-related product-related related emissions from transport and emissions from landfill disposal GHG (80% from buildings washing, drying and incineration emissions emissions emissions emissions electricity) and disposal High water use to Moderate water use High water use for Lower water use irrigate crops like for processes like High water use fabric dyeing and compared to Negligible Negligible cotton (depending spinning and wet from laundry Water use finishing processes other steps on location) processing Extensive use Extensive use of Release of Leaching of Extensive use of of chemicals for chemicals like dyes Use of some glues/ microfibers and chemicals fertilizers and Negligible processes like and bleaches solvents in assembly chemicals into accumulated on Chemical pesticides bleaching, dyeing, etc. wastewater textiles Land use for cotton Land use for and cultivation and Negligible Negligible Negligible Negligible Negligible landfill siting Land use oil extraction Localized water Water pollution Chemicals pollution impacts impacts from Limited solid Generation of Microfiber pollution Significant solid (see above) from chemical wastewater waste generation packaging waste from laundry waste generation Waste discharges discharges Source: Original figure for this publication based on data from SBTI & WRI, 2019 and Planet Tracker, 2020. Note: Estimates are for global numbers and would be expected to be different for the specific context of production in Ethiopia, which would be influenced heavily by the use of renewable power in manufacturing stages. GHG = greenhouse gas. 31 4. SECTORAL ANALYSIS facilities have a limited spatial footprint, buyers are also being processed and then exported to be are increasingly tracking a significant increase in turned into yarn and thread for overseas garment land use conversions for growing cotton in Ethiopia manufacturers.³ As the Ethiopian garment industry (per government plans) because of the impact on reaches scale, value chain solutions should be able biodiversity and GHG emissions reporting. to link these operations to manufacturers and buyers to meet the growing demand for sustainable fabrics. Growing buyer demand for cotton certified to New technologies are also emerging for the next sustainable standards is an opportunity for generation of synthetic fibers, and Ethiopia’s green Ethiopian growers. Of the top 10 global apparel power could attract those manufacturers (Whitfield companies by revenue, more than half already have et al. 2020). Making fiber from natural products time-bound targets to shift to more “sustainable” such as bamboo is also an area of interest (but even fabrics, and most have set the target date at 2025 though bamboo uses less water, the chemicals used (Whitfield 2022). Definitions of “sustainable’ cotton” in current processing technologies are a concern). vary but typically include recycled products and those certified by VSSs initiatives (such as Cotton Rising global temperatures could also affect the Made in Africa and the Better Cotton Initiative) or as competitiveness of Ethiopia’s garment sector, organic (UNCTAD 2023). Upcoming European Union mainly related to cotton farming and water legislation is likely to clarify these definitions and availability for manufacturing processes. Cotton is encourage brands to adopt the endorsed approaches. grown in diverse geographical area across Ethiopia, Currently, VSSs are not used widely in Ethiopia (for and climate change will bring different challenges instance, organic certified cotton represents only to different regions: water availability, changing soil 0.1 percent of total production), but according to the conditions, extreme weather events such as floods International Institute for Sustainable Development, and droughts, and how pests and diseases affect Ethiopia is one of the five least developed cotton- crops (Solidaridad 2023). Many of these challenges producing countries with the greatest opportunity to have already occurred, such as precipitation- expand VSS use (Voora et al. 2023). Pilot approaches induced landslides (around the Choke Mountains to expand the use of VSSs that brought cotton in Amhara) and flooding in Afar (Solidaridad and growers, textiles and garment manufacturers, and Aid by Trade Foundation 2021). Investments in European buyers together began in 2020 but were adaptation strategies need to be tailored to specific paused, because conflict impeded training for cotton contexts. For example, rainfed farmers may need farmers. Approaches that combine commercially better access to metrological data and forecasts to based value chain links, training in sustainable adapt crop rotation patterns, and irrigated farms practices, and the verification processes of these may need to invest in improved storage facilities and VSSs, provide a means of overcoming coordination water stewardship approaches to shared community and sequencing challenges, which can deter farmers resources (Solidaridad 2023). from investing in certification processes. The changing climate will also have an impact on The growing demand for sustainable materials will downstream manufacturing sections of the value also include circular solutions and new materials chain, such as textile mills and garment factories. that could prove viable in Ethiopia. Technologies Rising temperatures in the southeast could put for recycling fabric waste and used garments have strains on sites such as Dire Dawa, which already not yet been implemented on a large scale but are experiences high heat in the peak of summer. Higher attracting growing interest. A factory in Adama is humidity requires special precautions in transporting already mechanically recycling the waste produced and storing cotton to maintain its quality before in garment factories into new yarn. Pellets from milling (for example, damp cotton leads to mold recycled polyethylene terephthalate water bottles growth and cotton fiber degradation). Changing 32 GREEN COMPETITIVENESS IN ETHIOPIA rainfall patterns will also have an impact. Sites with will also improve full life cycle comparisons. Water closed-loop zero liquid discharge facilities take less use in Ethiopia could also be lower. Industrial parks, water from surrounding water catchments, which such as Hawassa and Adama, with closed-loop zero could add an extra level of resilience. Water-intensive liquid discharge facilities, recycle water and thus use processes such as fabric dyeing and laundry facilities a fraction of what would be used with conventional could challenge other sites. Other extreme weather approaches. Cotton Made in Africa estimates that events such as flooding or increased dust level could rain-fed cotton growing in Africa (which is done in require physical infrastructure upgrades where Ethiopia’s highland regions) uses less than 1 percent relevant. Although infrastructure upgrades will be of the water of global averages per kilogram of important, appropriate governance mechanisms are cotton produced.⁵ These attributes will be a valuable needed to ensure that all stakeholders affected by part of sourcing strategies and a considerable water stresses are included in decisions about how comparative advantage to Ethiopian growers and to allocate increasingly scarce resources equitably. manufacturers as garment brands face more Changing weather patterns will likely create pressure to demonstrate reduced environmental unforeseen challenges for the sector, but Ethiopia’s footprints throughout their supply chains. relatively modern and customized industrial parks Figure 4.3. Renewable Energy as Share of will likely be a considerable asset compared with On-Grid Power traditional garment-exporting locations, where much economic infrastructure is several decades old. Ethiopia 100 The low environmental footprint of garments Sri Lanka 51.2 produced in Ethiopia could be a comparative Vietnam 42.8 advantage and growth driver for the sector. Full vertical integration (from cotton to finished garments) Turkey 35.4 would cut GHG emissions from transporting fabric and raw materials to manufacturing locations China 28.6 considerably. Additionally, Ethiopia has one of India 19.2 the highest shares of renewable on-grid power generation in the world at close to 100 percent,⁴ Bangladesh 1.6 compared with less than 30 percent in China and less than 5 percent in Bangladesh (figure 4.3). Shorter 0 20 40 60 80 100 shipping distances to Europe and the United States Source: International Renewable Energy Agency data for 2021. 33 4. SECTORAL ANALYSIS Box 4.1. Vietnam’s Strategies for Green and Climate-Smart Industrial Transition To support the green and climate-smart transition of its industries, the government of Vietnam has developed policies to address competitiveness risks from stricter sustainability and climate policies in export markets. For example, the country’s import and export strategy emphasizes the need to develop a green, sustainable, and circular production system and eco- friendly products for export.a It requires “developing preservation technology to increase added value of processed agricultural products and promoting the implementation and application of traceability systems for exported agricultural and aquatic products.”b Under the Law on Energy Efficiency and Conservation, the Ministry of Industry and Trade has set energy-saving targets for energy-intensive sectors, including textile, and established mechanisms to monitor greenhouse gas emissions from carbon-intensive firms. The Ministry of Natural Resources and Environment (MONRE) has also enacted the Extended Producer Responsibility regulations through the Law on Environmental Protection 2020, effective in 2022. Under this law, manufacturers and importers are accountable for the entire life cycle of their products and must fulfill their waste treatment and recycling responsibilities. The law introduced a market-based mechanism to collect fees for different product categories, contributing to the Vietnam Environmental Fund that supports product recycling. MONRE and the Ministry of Finance are also developing carbon pricing mechanisms (emission trading programs), which will require industry sectors (such as textiles and electronics manufacturing and agriculture and crop production) to conduct greenhouse gas inventory analyses.c The government is also promoting decarbonization, resilience, and resource circularity in industry sectors through eco-industrial parks). Approximately 400 industrial parks across Vietnam host significant industrial activities, including 12 percent of garment manufacturing and 47 percent of electronics production.d Environmental impacts can be reduced collectively through interventions at the industrial park level. For instance, World Bank (forthcoming) found that installing wastewater reuse systems in all existing industrial parks could cut industrial water consumption by one-sixth of the total annual industrial water consumption in the country. With support from the World Bank Group and the United Nations Industrial Development Organization, the Ministry of Planning and Investment enacted regulations that define, guide, and promote eco- industrial parks with specific environmental performance indicators and targets. For example, Decree 35 (2022) requires industrial parks to improve resource efficiency and cleaner production by 20 percent and industrial wastewater reuse by 5 percent annually.e Although some areas need improvement, the regulation underscores the urgency and necessity of green and climate- smart transitions in the operations of public and private industrial parks. Leading industrial park operators in Vietnam are already examining the financial and economic feasibility of various resource efficiency and circular economy solutions in the industrial agglomeration areas, including captive renewable energy investments such as rooftop solar and wind. Vietnam’s experience highlights the need for stronger links among policies, infrastructure investments, and governance systems and implementing effective monitoring systems. Policies such as Decree 35 that aim to promote eco-industrial park development could strengthen links with other broader policy reforms, notably in energy and water ( carbon pricing, power sector reform, 34 GREEN COMPETITIVENESS IN ETHIOPIA energy master plan), innovation, and environmental management. Establishing a comprehensive, integrated national monitoring, reporting, and verification system and database is essential to track the performance of firms, sectors, value chains, and industrial agglomerations. Currently, various laws and regulations cover monitoring greenhouse gas emissions, wastewater generation, and air pollution in industrial parks and industrial firms. Under the Ministry of Industry and Trade regulation, 2,961 enterprises are in the category of “key energy users,” and 81 percent of those are industrial firms, most of which are located in industrial parks. Currently, different ministries and entities—including the Ministry of Planning and Investment, MONRE, Ministry of Industry and Trade, and Vietnam Electricity operate separate monitoring, reporting, and verification systems at different levels (for example, the firm, municipality, and industrial parks levels), which are not integrated and translated into collective policy actions. The park management entity should implement a mechanism to monitor inputs and outputs, such as energy, water, chemicals, and raw materials. Improved coordination is needed to integrate these monitoring systems with existing and planned greenhouse gas and water accounting systems. Source: World Bank, forthcoming. Notes: a. Decision 493/QD-TTg 2022 on approval of the goods import and export strategy toward 2030. b. Decision 493/QD-TTg 2022, Article 4. c. Decree 06/2022/ND-CP on mitigation of greenhouse gas emissions and protection of ozone layer. d. For instance, as of 2016, industrial parks account for 31 percent of textile manufacturing firms, 51 percent of leather and footwear producers, and 49 percent of electronics manufacturing firms when measured in terms of the number of firms. In terms of revenue, industrial parks account for more than 83 percent of the revenues from these sectors on average. This trend remains relatively constant, though as of 2022, 12 percent of apparel manufacturing firms and 47 percent of electronics manufacturing firms operate in industrial parks (see World Bank, forthcoming). e. The Ministry of Planning and Investment adopted Decree 82 in 2018 and Decree 35 in 2022. Recommendations for within six to twelve months and completed Textiles and Apparel within 18 months. 1. Develop an integrated strategy for textiles 2. Building on the strategy, the government should and garments: In line with the findings of the carry out the following initiatives to maximize suggested in-depth value chain assessment, MoI, Ethiopia’s potential in (sustainable) cotton: the Textile and Garment Industry Research and Development Center (TGiRDC), NQI institutions, • Build links between textile mills and farmers: and the MoA should collaboratively develop an • Create Partnerships: Establish agreements integrated government strategy for the textiles between textile mills and farmers to and garments value chain, including cotton. The streamline the value chain and secure strategy should focus particularly on addressing reliable markets. market and government failures, strengthening • Train Farmers: Provide education on market links, and attracting investors in line with sustainable cultivation practices in line with Ethiopia’s comparative advantages such as in international buyer requirements. cheap renewable power. This should be initiated • Verify Sustainability: Implement systems 35 4. SECTORAL ANALYSIS to ensure adherence to sustainability industry (Adugna 2021), and as shown in figure standards and support firms in acquiring 4.4, coffee exports are Ethiopia’s primary source of required certification. foreign exchange earnings (Abebe and Abebe 2023). • Strengthen cotton grading standards: About 25 percent of Ethiopia’s population depends • Enhance Procedures: Update and enforce on the sector directly or indirectly: about 95 percent rigorous grading standards. of the country’s coffee is produced by smallholder farmers (Worako et al. 2008); and as figure 4.5 shows, • Improve climate adaptation strategies: a significant number of primary coffee collectors, • Rainfed Farms: Improve access to weather coffee producers, large farm plantations, processing data, promote crop rotation and adoption of industries, cooperative unions, and exporters are irrigation systems where feasible. involved in the coffee value chain (Tefera 2023). In • Irrigated Farms: Invest in water storage and addition, byproducts of coffee have the potential to be management. used for further value addition in circular economy business models (see Box 4.2). Coffee is thus an Coffee important cash crop, and the coffee industry plays a vital role in the Ethiopian population’s socioeconomic Coffee is the backbone of the Ethiopian economy. conditions (Kuma et al. 2019). Ethiopian coffee has historically been an important source of coffee genetic resources for the world Figure 4.4. Ethiopia Exports by Product, 2021 coffee industry, because it is the only center of origin US$4.4 Billion of Arabica coffee, which accounts for 58 percent 100% of the world coffee production (ICO 2021). Genetic 26.4% reserves of coffee in the country are thus extremely diverse (Davis et al. 2018; MoARD 2008), with the 19.7% semi-domestication of local and regionally specific 15.6% Arabica coffee resulting in a wide and complex range 9.6% of flavor profiles, including nine types of single-origin 8.3% specialty coffees (Bebeka, Harar, Illubabor, Jimma, 5.3% 3.7% 3.4% Limu, Nekemte, Sidamo, Tepi, and Yirgacheffe), which 8.0% are recognized internationally with their respective 2022 property rights. Ethiopia has become the fifth largest Coffee Oils seeds, oleaginous fruits, grains, straw & fodder coffee producer in the world and the largest in Animal Products Gold and other Precious Metals Textiles Transportation Africa by leveraging this unique selling point (Gizaw, Edible vegetables, roots, & tubers Abafita, and Merra 2022). As such, approximately Cut Flowers Other 10 percent of agricultural output and 5 percent of Source: Data from the Observatory of Economic Complexity the country’s gross domestic product are from the (https://oec.world/). 36 GREEN COMPETITIVENESS IN ETHIOPIA Figure 4.5. Coffee Value Chain Foreign Importers (50% of production consumed outside Ethiopia) Unions Exporters Central Auction/Ethiopia commodity Exchange (ECX) Private Hullers Cooperative Wet Mills Private Wet Mills (10% of smallholder volume) (20% of smallholder volume) Collectors (70% of smallholder volume) Large Plantations Smallholder Farms (5% of production) (95% of production) Source: Adapted from Ventocilla et al. 2020, changes based on consultations with public and private sector stakeholders. Box 4.2. Circular Economy Opportunities: Spent Coffee Husk Valorization Valorization of spent coffee husks could have a major environmental impact because represent a considerable proportion of the biomass products from the coffee value chain. Currently, coffee husks—which are produced in equal amounts to coffee beans—are mostly burned in fields or dumped in rivers, contributing significantly to air and water pollution. In this context, converting coffee husks to fuel briquettes is a promising opportunity in Ethiopia that can provide an affordable and clean alternative to charcoal for domestic heating and cooking, reducing waste while serving households, hotels, and businesses. Ethiopia currently has several initiatives in this area. Local initiatives such as a partnership between the Horn of Africa Regional Environment Center and Network and Oromia Coffee Farmers Cooperatives have piloted successful charcoal briquette production factories with efficient carbonizers that have a total production capacity of 1.2 tons per hour and convert up to 70 percent of the husks into char without greenhouse gas emissions. A renewable energy start-up firm, Husky Energies and Technology, established a commercial- scale plant processing 2 tons of coffee husks into briquettes daily. Additionally, some youth and women’s collectives have begun organizing into business enterprises to produce and distribute briquettes locally. Sources: Gebreeyessus 2022; Solomon 2022; Horn of Africa Regional Environmental Center, https://hoarec.org/2023/04/04/ briquette-charcoal-production/. 37 4. SECTORAL ANALYSIS However, Ethiopian coffee producers’ revenues Additionally, demand-side mandatory sustainability tend to be lower than those of producers from other requirements place Ethiopian coffee revenues at countries, given the low levels of value addition risk, given the particularities of the country’s coffee and issues with harvesting, post-harvesting, and value chain. Ethiopia risks losing a large proportion handling processes. Despite substantial changes of its coffee exports to the European Union (over 10 to the Ethiopian coffee sector’s upstream segment percent of total exports in 2022) because of difficulties in recent years, including the increasing adoption in implementing the EUDR. The regulation requires of improved production, harvest, and post-harvest European firms that import regulated commodities practices (Minten et al. 2019), most farmers still such as coffee, cocoa, and palm oil and derived use inadequate and traditional harvesting, post- products to ensure that they do not originate from harvesting, and handling methods, including in deforested land or contribute to forest degradation. collection, dry and wet processing, storage, and In countries such as Ethiopia, such assurance will transportation. More specifically, many coffee farmers be difficult to accomplish because mapping supply in Ethiopia affect quality by through their use of chains to the plot where raw materials were grown several practices. First, they allow picking unripe and would involve tracing the production of millions of overripe coffees together to earn cash from the crops smallholder farmers in remote regions. Although earlier and avoid an additional round of harvesting. the rules of the Ethiopian Commodity Exchange have Second, they use dry processing to remove the outer been adjusted since 2017 to abolish the practice layers of the coffee (Seneshaw and Minten 2023), and of blending (which had eliminated the traceability then they dry the coffee on the ground. Third, when of most coffee production in the country), most using wet processing, they process red cherries with smallholder coffee production can be traced only skin issues during pulping, leading to the inclusion to the initial washing station (Mbakop at al. 2023). of impurities and moisture during ground drying. In this context, development partners have already Fourth, dried coffee is stored in locations where it can begun efforts to improve traceability (for example, lose moisture and absorb undesirable odors (Besah, the German Agency for International Cooperation’s Kitaw, and Dejene 2013). Consequently, despite the Digital Integration of Agricultural Supply Chains country’s favorable conditions for coffee production Alliance project, which is part of a global project (for example, genotypes, climatic conditions, soil called the Initiative for Sustainable Agricultural traits), productivity of coffee in Ethiopia is generally low (Minten et al. 2019; Tadesse, Tesfaye, and Abera 2020). The lack of value addition of coffee produced in the country, also limits the revenues and profitability of firms in the sector. For instance, less than 1 percent of Ethiopia’s exported coffee is roasted coffee. The country’s coffee exports also consist largely of sun-dried green beans, with only a small share of washed coffee (IFC 2019). Because of these factors and despite the fact that Ethiopian Arabica varieties tend to have a significant premium in international markets because of their smoother and sweeter taste, Ethiopian coffee is often unable to earn a reasonable price (Besah, Kitaw, and Dejene 2013). Thus, Ethiopian coffee smallholders are in a poverty trap in which low yields and financial returns lead to lower investments and still lower productivity and profitability (Minten et al. 2018). 38 GREEN COMPETITIVENESS IN ETHIOPIA Supply Chains, aims to harmonize digital tools in purchases from small coffee farmers in Ethiopia and agriculture for traceability, among other objectives.). in Africa more generally (see Angel and Kurniawati Additionally, some European importers have [2023], for example). Furthermore, ECTA and the developed alternative solutions to EUDR compliance, International Coffee Organization have prepared an to which the Ethiopian Coffee and Tea Authority action plan to implement EUDR and start raising (ECTA) has agreed.⁶ However, EU acceptance of this awareness with exporters, coffee processers, and solution remains uncertain, according to private and producers and plan to continue support to regions public stakeholders who were involved in developing and smallholder farmers, but concrete actions for the solution. Although some steps have been taken EUDR compliance have not yet been implemented. toward acceptance, the ability of Ethiopian coffee In this context, Ethiopia could prepare for compliance farmers to comply with EUDR is still unclear, and by drawing on lessons from other countries’ recent European coffee importers have begun scaling back EUDR-related efforts (box 4.3). Box 4.3. Peru’s EU Deforestation Regulation Compliance Journey Peru’s exports of commodities affected by the EU Deforestation Regulation (EUDR) include coffee, cocoa, wood, and palm oil, all of which comprise about 12 percent of total shipments to the European Union. A World Bank team worked with the government to craft a road map to ensure adherence to the EUDR, identifying key compliance gaps in the country’s supply chains. The experience offers four lessons for other countries. Coordination among relevant stakeholders is essential. The EUDR’s extensive scope requires collaboration across governmental ministries overseeing the environment, agriculture, and foreign trade, and partnering with local governments, whose important role is providing information and assistance to small producers, is also crucial.a Private sector involvement is critical in devising solutions and sharing responsibility for compliance, because exporters will have to provide much of the required data on geolocation, traceability, and compliance with domestic laws. International cooperation is also essential, with international organizations facilitating dialogue between national and international stakeholders in addition to sharing best practices and lessons learned from other regions. Act with urgency and pragmatism. The December 2024 EUDR deadline is approaching. Thus, immediate action is needed to ensure that as large a proportion of affected exports as possible meet EUDR standards, which involves identifying key firms with significant EU export shipments, mapping their value chains, and supporting their compliance efforts. Leveraging existing initiatives on traceability, geolocation, and deforestation-free chains will be necessary, including digital platforms from international organizations or private actors. Producers that are unable to meet EUDR requirements in the short term could need help finding alternative markets. With urgent activities pushed forward, medium-term actions should aim to integrate more producers and exporters into the supply chain, help them adapt to new market conditions, and address structural issues affecting their competitiveness and sustainability. This approach can convert the EUDR into a new opportunity to boost export competitiveness by upgrading the environmental standards of exported products. 39 4. SECTORAL ANALYSIS Cultivate trust with EU importers. EU companies importing goods covered by the EUDR are responsible for demonstrating compliance with the regulation. Governments and exporters in producing countries must ensure that the data and documentation they provide comply with EU importers’ requirements, standards, and risk tolerance levels. These data must be submitted to EU authorities to prove compliance and must be robust, verifiable, and consistent to gain the trust of EU importers. Engaging with EU importers early to understand their data and verification needs is critical. Additionally, EU importers can be valuable allies to producing countries by, for instance, communicating to EU authorities the challenges these countries face in complying with the EUDR. Establish effective communication channels. Compliance of a particular shipment with the EUDR will be determined based on data and documentation from different sources, which can vary in quality and reliability, allowing for significant discretionary approval by EU authorities. In this context, it is crucial for trade ministries of exporting countries to agree with their EU counterparts on procedures for resolving such problems quickly. Periodic consultations under free trade agreements with the European Union could provide opportunities to resolve these issues, but it is advisable to discuss and expedite the adoption of specific protocols to resolve EUDR compliance issues. Source: World Bank staff working with the government of Peru on EUDR compliance. Note a: The private sector—especially in fragmented production chains with many small producers—requires swift and practical support from both international buyers and governments to geolocate production areas, implement traceability systems, and verify observance of local laws. Besides complying with international regulations adopting more sustainable farming practices,⁷ can such as the EUDR, Ethiopian coffee farmers have make coffee producing more resilient, especially untapped potential for growth and improved when combined with other tools such as providing profitability by making their farming practices farmers with reliable, tailored climate information more sustainable. Recent studies indicate that that is actionable at the farm level.⁸ These benefits are overseas buyers are willing to pay substantial already evident in certified Ethiopian coffee production export premium prices for traceable coffee (Mbakop systems. Empirical studies suggest that in addition to at al. 2023), which allows farmers who implement positive environmental outcomes (see, for example, sustainable farming practices to maintain access to Vanderhaegen et al. [2018]), VSSs improve pricing the European market and improve their profitability. for smallholder coffee (see, for example, Kodama The demand for sustainability certification programs, [2009]), and provide more sustainable market access such as Organic and Fairtrade and VSSs, has grown (see, for example, Winter et al. [2020]). However, in recent years because consumers are increasingly certification has not always improved smallholder aware of the environmental degradation caused by performance in areas such as liquidity and profitability smallholder coffee production (ITC 2011). Adopting see, for example, Woubie et al. [2015]), for example, VSSs can differentiate Ethiopian coffee farmers in because most of the price premium is captured at the international market (Voora et al. 2019), allowing the cooperative level. Recent studies also suggest them to obtain higher prices and premiums and that the market for VSS-compliant coffee is growing establishing stronger links to buyers (Bianco 2020). faster than the overall coffee market,⁹ suggesting an Furthermore, actions required by VSSs, such as increasing market share for VSS-compliant coffee. 40 GREEN COMPETITIVENESS IN ETHIOPIA The production of specialty coffee also are at risk of becoming unsuitable because has potential for income improvement and of climate change. Estimates vary, but some environmental conservation. Specialty coffee studies predict area losses between 39–59 commands much higher prices than standard percent over the medium to long term (Moat et market prices or those including VSS premiums, al. 2017), which would mostly affect the more with a market system driven by independent pricing climate-sensitive Arabica variety prevalent in structures that are not linked directly to the volatility Ethiopia (Davis et al. 2012). However, evidence of the commodity coffee market. However, the shows that Ethiopia’s higher altitudes could supply of VSS-compliant coffee currently exceeds become suitable for growing coffee, potentially its demand (Bermúdez, Voora, and Larrea 2022), resulting in a net gain in suitable coffee areas.¹¹ leaving some farmers unable to receive premiums This shift suggests that relocating farmers will that would cover the costs of maintaining their be an important climate adaptation strategy. certification (ITC 2020). Recent case studies indicate that participating in the specialty coffee market can • Heterogenous impact, for example, on specialty increase income for Ethiopian smallholder farmers coffee: Evidence increasingly suggests that by up to 120 percent (Schuit et al. 2021). However, climate change impacts on coffee production will achieving this potential requires optimal operating be uneven. For example, a recent study found that efficiency, including considerable improvements in although coffee-growing areas could increase harvesting, post-harvesting, and handling methods on a net basis, five out of six assessed specialty and adequate cooperative management, among coffee–growing areas decline significantly in others. If achieved, the coffee sector is also likely suitability (Chemura et al. 2021). Thus, many to improve its sustainability, because a lack of Ethiopian farmers might need to transition to profitability forces smallholder coffee producers to alternative varieties that do not command the abandon eco-agricultural systems (such as shade high premiums of specialty coffee, and Ethiopia or forest coffee farming, which often contribute might not have a comparative advantage in to environmental preservation (Hylander et al. international markets in these varieties. 2013), thus ensuring environmental degradation (Schuit et al. 2021). The government of Ethiopia has • Increased yield volatility: Beyond rising already taken steps on this front,¹⁰ but consultations average mean temperatures, climate change is with private sector stakeholders in the Ethiopian expected to cause greater volatility in annual coffee value chain revealed that the proportion of temperatures and precipitation patterns. production categorized as specialty coffee that is Studies show that Ethiopian coffee production VSS-compliant is still small. has already suffered from recurrent extreme weather events (for example, droughts, heavy Ethiopia’s vulnerability to climate risks presents rains, and frosts) that led to considerable yield both opportunities and threats for the country’s losses caused by flower abortion and reduced coffee sector. Although climate change impacts are fruit quality, among others (Tadesse, Tesfaye, expected worldwide, and the impacts to global coffee and Abera 2020). However, flooding appears to production are well established, research suggests be less of a risk because it typically does not that Ethiopia could be one of the more severely affect Ethiopia’s coffee-growing areas. Because affected countries (Bilen at al. 2022). Existing of increased weather variability, Ethiopian coffee literature identifies three key avenues for this impact: farmers are estimated to have a 28–31 percent higher chance of experiencing a 25 percent • Shift in suitable coffee growing areas: Large annual yield drop over 202–40 (McKinsey Global portions of Ethiopia’s coffee-growing areas Institute 2020). 41 4. SECTORAL ANALYSIS To strengthen Ethiopian farmers’ climate resilience, 2. Establish a multi-stakeholder platform to more research and data are needed on different coordinate EUDR compliance approaches: adaptation strategies, given heterogeneous climate ECTA, in collaboration with MoA, NQI impacts in the country. Because approximately institutions, development partners, and the 95 percent of Ethiopia’s coffee production is from private sector should set up a platform to smallholder farmers with low levels of investment bring key stakeholders together. The platform (Amamo 2014), the sector’s resilience to climate should support knowledge sharing on EUDR variability is low. Climate adaptation for coffee compliance, take stock of ongoing activities, farmers will include diverse responses tailored to coordinate capacity building measures, and specific geographic locations, types of farmers, and strengthen a consolidated dialogue with the EU coffee varieties. Relocating farms to higher altitudes on feasibility of compliance and implementation will require targeted support to farmers. In some approaches (e.g., Enveritas approach).¹² areas, planting shade trees can help reduce heat exposure for coffee grown in semi-forest and forest 3. Pilot traceability solutions by implementing and areas. Some areas will likely require investments testing solutions: Conduct pilot projects to test in irrigation measures and improved seed varieties. and refine traceability solutions that can ensure However, the current lack of updated and efficient EUDR compliance and enhance profitability. ECTA, recommendations on key diversification practices MoA, and NQI institutions should carry out these (such as intercropping), insufficient research on pilots with a view to scaling successful solutions. climate-resilient best practices, and the absence of a comprehensive climate information system in the 4. Promote sustainable practices: ECTA and country discourages investments, as smallholders MoA should assist small coffee farmers in factor in uncertainty in their resource allocation adopting voluntarty sustainability standards (Barrett et al. 2007). Consequently, only a small (VSS) to access higher export premiums and proportion of Ethiopian smallholders have adopted establish stronger market links. Strengthen sustainable practices in coffee farming, such as eco-agricultural systems by investing in pruning and soil erosion control (Kudama, Wana, quality improvements, including investments and Dangia 2021). in harvesting, post-harvesting, and handling practices, and improve cooperative management Recommendations for Coffee to produce VSS-compliant premium and specialty coffees. To ensure Ethiopian stakeholders are well-prepared for the EUDR and to enhance the coffee value chain’s 5. Develop alternative export plans by strategizing sustainability and profitability, the following activities for new markets: Given the potential challenge should be undertaken immediately: of meeting EUDR requirements in time, ECTA, MoA, and MoTRI should devise a plan to enable 1. Raise awareness of EUDR by informing firms’ capacity for coffee exports to alternative stakeholders: The Ethiopian Coffee and Tea markets, for example by systematically taking Authority (ECTA) should organize activities in stock of associated market access requirements collaboration with development partners and and work with firms to meet them. private sector experts to educate all relevant stakeholders about the EUDR and its requirements. 6. Systematically assess climate adaptation This includes workshops, seminars, and the needs: ECTA to work with development partners distribution of informational materials. and academia to assess climate risks for the 42 GREEN COMPETITIVENESS IN ETHIOPIA sector, including direct and indirect effects, as Major foreign firms invested heavily, introduced well as climate shocks and slow-onset impacts. productivity-boosting technology (Schaefer and This will include a granular assessment of Abebe 2015), and spearheaded the development geographic risks, main vulnerabilities, and set of floriculture in the country,¹⁴ but domestic firms of private sector and government responses. diversified into the industry mostly because of government incentives and despite lacking technical Cut Flowers capacity (Goldstein 2020). These firms have generally lacked a commitment to build their capabilities and Despite significant growth in recent decades, the understand customer preferences.¹⁵ Unsurprisingly, Ethiopian cut flower sector struggles to increase the profitability of floriculture in Ethiopia is declining: its share of the global floriculture market. Although some firms in the sector are going out of business, Ethiopia’s high altitude, vast arable land, and and exports have stalled or decreased in recent favorable climate provide ideal conditions for flower years (Worku, Debela, and Mudde 2023). production, the industry benefited from international development cooperation and from targeted Environmental sustainability challenges persist industrial policy from the Ethiopian government,¹³ in the floriculture industry. Although Ethiopia has which created incentives for domestic and foreign developed policies and regulations to improve the investment in the sector in recent decades (Diriba and cut flower industry’s environmental sustainability Karzanova 2020; Melese 2019). As a result, Ethiopia (such as the Code of Practice for Environmental and has become the second largest flower producer in Social Performance in Flower Farms [regulation Africa, exporting more than 80 million stems to 40 207/2011], the Environmental Impact Assessment countries (Worku, Debela, and Mudde 2023); creating Proclamation, and the Pesticide Registration and hundreds of thousands of jobs, especially for women Control Proclamation), significant gaps remain in (Geleta et al. 2021); and generating several billion the sector’s regulatory framework. Additionally, US dollars in export earnings. Cut flower firms commitment to enforce existing regulations contribute significantly to the Ethiopian economy, and policies is still lacking, mainly regarding local communities, and women’s empowerment. monitoring waste disposal and pesticides and However, the Ethiopian floriculture sector still water use.¹⁶ Ethiopia’s investment law also fails lags other top cut flower–producing and exporting to require flower-producing companies to take countries (figure 4.6), partly because of how most precautions outlined in the International Finance domestic cut flower firms entered the sector. Corporation’s Environmental Impact Assessment Figure 4.6. Cut Flower Exports: Ethiopia versus key cut flower exporters, 2000–21 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2022 Ethiopia Kenya Ecuador Colombia Netherlands Source: Data from the Observatory of Economic Complexity (https://oec.world/). Note: Data sources diverge significantly with respect to cut flower export trends. 43 4. SECTORAL ANALYSIS for the issuance of investment provisions flower cultivation in Ethiopia reported to be three (Gudeta 2012). Furthermore, the industry has times higher than in Colombia (Belay 2014). This not fully implemented mandatory and voluntary excessive water use contributes to the reduction international standards such as the EHPEA Code of Ethiopia’s groundwater table and overall of Practice (Mengistie 2020), and international water availability (Gudeta 2012). regulations for cut flowers are less stringent than those for other (edible) agricultural products • Intensive use of chemicals, including often (Toumi et al. 2016). However, some mandatory outdated and hazardous pesticides, along with sustainability requirements that will affect the inadequate disposal and waste management. Ethiopian floriculture industry have begun to take Such chemical-related issues cause significant effect, such as the regulation on biopesticides environmental pollution (Mebrat et al. 2022), adopted in August 2022.¹⁷ Even so, most floriculture with impacts such as elevated levels of firms fail to meet minimum requirements, as phosphate, nitrate, and ammonia in the water shown in the latest assessment by the country’s supply (Mengistie, Mol, and Oosterveer 2017); Environment, Forest, and Climate Change increased soil pH (Tsegaye 2015); and decreased Commission’s Directorate of Legal Compliance soil fertility and organic matter content (Tilahun Control and Monitoring of Development Institutions 2013), among others. (EFCCC 2018). These shortcomings lead to a range of environmental sustainability issues: • GHG emissions (for example, carbon dioxide, nitrous oxide, and methane). The emissions • Poor water management and conservation result from the disposal and burning of rejected practices, with average water consumption for cut flower wastes, stems, and leaves. Box 4.4. Circular Economy Opportunities: Biofertilizers Waste from the cut flower industry can be valorized as biofertilizers, which could have positive impacts in agricultural productivity. Fertilizer consumption is still low in Ethiopia relative to the global average: less than 40 percent of the country’s 18 million smallholder farmers currently use fertilizer, and an increasing population and growing demand for food supply suggest an increased demand for fertilizers (Hailemichael 2023). Given this expectation, and considering that Ethiopia is already importing $1.3 billion in fertilizers, soil conditioners and pesticides,a the biofertilizer production could present substantial opportunities. It can also have positive environmental and economic impacts. Organic fertilizer could be produced by composting agro-wastes from commercial flower farms and other agricultural sectors in Ethiopia, and decentralized community- level compost hubs could provide rural employment and income-generation opportunities. Furthermore, biofertilizer production has advantages over inorganic fertilizers (for example, they contribute to an improved soil structure and improved aeration and water retention), and it is economically feasible, given the fertilizer price increases in the country (Abay et al. 2024). Source: Authors. Note a. “Ethiopia Imports by Category (database),”Trading Economics, accessed October 20, 2023, https://tradingeconomics. com/ethiopia/imports-by-category. 44 GREEN COMPETITIVENESS IN ETHIOPIA Greening the Ethiopian floriculture sector could away from Dutch markets and exporting directly to improve the industry’s sustainability and drive other markets (for example, the United States, other growth in the intensive margin. Ethiopia has a strong EU countries). competitive advantage in the flower industry (Worku, Debela, and Mudde 2023). However, wholesalers in Recommendations for Cut Flowers the Netherlands currently continue to import the most Ethiopian flowers through the Dutch auction To enhance the sustainability compliance of the cut Floraholland, which lacks mandatory social and flowers sector, the government should prioritize environmental certification programs (Tamiru and Leta the development of stronger regulatory and policy 2017). In this context, Ethiopian cut flower firms are frameworks for waste and water management and mostly disregarding voluntary standards (for example, chemicals use. These recommendations should be Fairtrade; Milieu Programma Sierteelt [Environmental initiated over the next twelve months. In particular, Program for Ornamental Horticulture] MPS- A, B, the MoA and the Ethiopian Agricultural Authority and C; MPS-SQ [socially qualified]) currently (Mebrat (EAA), in collaboration with EHEPA should focus to: et al. 2022). However, recent assessments have determined that greening the cut flower value chain in 1. Support the industries’ access to water treatment Ethiopia could open new (higher-margin) sales for the plants: As water use is one of the industries’ most country’s floriculture firms (see, for example, DCED critical sustainability dimensions, it is essential 2012), because consumers are increasingly aware to support the industry in reducing, reusing and of the environmental issues of flower cultivation and recycling water. This particular requires access are willing to pay more for sustainable products. For to water treatment plants for which it is also instance, according to a recent study by Mississippi crucial to leverage foreign expertise to assist their State University and Texas State University, 50 percent construction and maintenance. of consumers indicated a willingness to pay 10 percent or more for attributes linked to sustainability 2. Implement awareness and education (Etheredge, DelPrince, and Waliczek 2023). European campaigns to improve waste disposal and consumer trends are similar and more accentuated. water management: This may include organizing For example, in the German market, about 20 workshops on best practices for waste disposal percent of total consumers consider sustainability and water management; creating informational their primary determinant of choice (Altmann and materials; spreading awareness through social Löbke 2017). Sustainable practices could thus provide media, newsletters, and local media; providing Ethiopian firms with an edge when following the lead hands-on training sessions for implementing of regional peers (for example, Kenya) in diversifying sustainable practices; and establishing help desks for guidance and support. 3. Support a shift from chemical to organic fertilizers and pesticides: Promote the use of organic fertilizers and pesticides in line with market demand, including by providing capacity building and quality control (e.g., certification), and the application of an integrated pest management approach.¹⁸ Recent assessments have determined that greening the cut flower value chain in 4. Update regulations: Revise and implement Ethiopia could open new (higher-margin) comprehensive regulations for waste disposal, sales for the country’s floriculture firms pesticide use, and water management. This 45 4. SECTORAL ANALYSIS should include at a minimum, the development and access higher-margin markets. This of regulations to restrict the type and level of includes, for example, creating and sharing pesticides allowed in agriculture, the adoption guidelines for sustainable flower cultivation, of a regulatory framework for integrated pest conducting workshops and provide technical management, the adaptation of the general law support for implementing sustainable practices, on waste management, and the development and help firms obtain sustainability certifications of regulatory measures to reduce water recognized in the EU and US. consumption. Based on directives currently being prepared by the Ministry of Agriculture, Aviation and initiatives led by development partners,¹⁹ adequate laws for biopesticides should also be Ethiopia’s aviation industry, centering on implemented. Ethiopian Airlines, plays a pivotal role in the country’s economy, contributing significantly to 5. Improve quality compliance: Strengthen its gross domestic product through direct and conformity assessment systems to ensure indirect impacts. Founded in 1945, the fully state- compliance with domestic and international owned enterprise is often heralded as an African sustainability standards and regulations, and success story, because it is the continent’s largest invest in necessary training, technology, and and most profitable airline. Ethiopian Airlines certification. In particular, there is a need for has become Ethiopia’s largest source of export close collaboration with the Ministry of Trade earnings, accounting for approximately 4 percent and Regional Integration (MoTRI) and National of gross domestic product, and it has created about Quality Infrastructure (NQI) institutions to 50,000 jobs, of which 17,000 are airline employees ensure the private sector has access to (Oqubay and Tesfachew 2019). Analysts typically cite accredited conformity assessment bodies that three factors behind the airline’s success (Al-Kwifi, are recognized internationally to carry out Frankwick, and Ahmed 2020; Meichsner, O’Connell, assessments. Moreover, it is crucial that quality and Warnock-Smith 2018). First, strong support from compliance is applied to the entire value chain, a disciplined state allows the airline to operate with for example also to certification of nurseries to a large degree of commercial independence. Second, enhance access to high-quality seedlings. an emphasis on developing technological capabilities allows the company to maintain, repair, and overhaul 6. Build capacities of firms to access higher- the latest aircraft, train its staff (for example, pilots margin markets: EHPEA and the government and engineers), and operate complex cargo services. should work closely on helping Ethiopian Third, the airline has built strategic alliances across floriculture firms adopt sustainable practices the African continent and globally. 46 GREEN COMPETITIVENESS IN ETHIOPIA Ethiopian Airlines is a strong enabler for other data in Ethiopia could be skewed because of the sectors in the country, notably for tourism and large Ethiopian diaspora traveling on foreign cut flowers. Ethiopia’s transport service exports passports and many transit passengers who accounted for $3.3 billion in 2018, surpassing the stay only a few nights in Addis Ababa, given country’s entire merchandise goods exports in that its role as a major airline hub (CBI 2018). Still, year ($2.25 billion). A comprehensive assessment of tourism contributes significantly to Ethiopia’s Ethiopian Airlines’ economic contribution of would economy with revenues of approximately $2 also need to factor in the substantial expenditures billion in 2023,²² mainly from hotels (46 percent), on imported capital equipment (for example, aircraft), package holidays (37 percent), and vacation maintenance, and aviation fuels. Such a net benefit rentals (17 percent).²³ Given tourism’s economic analysis is not feasible in this report, but clearly potentials, the government considers it as an Ethiopian Airlines has additional indirect benefits industry with growth potential and has launched to the economy. A large share of Ethiopia’s export several programs to support it. The success of goods is transported via aircraft, demonstrating Ethiopian Airlines could be an important enabler the sector’s importance and compensating for to maximize this potential. the country’s constraints as a landlocked country (Hausmann et al. 2022). As figure 4.7 shows, more • The cut flower industry is a prime example of a than 50 percent of Ethiopia’s exports to the EU substantial spillover from the airline industry. market and 40 percent of exports to the US market The floriculture industry is another crucial source were shipped via aircraft.²⁰ The aviation industry of export earnings and one of Ethiopia’s most labor- is especially critical for Ethiopia’s tourism and cut intensive export products. Cut flowers, especially flower sectors. roses, are time-sensitive products that require rapid and careful handling to maintain freshness • Ethiopia’s tourism industry depends highly on and quality upon arrival at their destinations. air travel, with nearly 100 percent of tourists Ethiopia’s competitiveness in the floriculture arriving by plane. However, with about 500,000 industry thus depends on geographic conditions tourist arrivals in 2021, the number of tourists and agricultural practices and importantly on an remains moderate. After tourism arrivals peaked advanced logistics infrastructure, because many in 2017 at more than 900,000, the subsequent flowers are often shipped the same day they are years saw a downturn, notably because of harvested. Cut flowers represent approximately political instability and conflict and the global two-thirds of Ethiopian air cargo to the European COVID-19 pandemic.²¹ Moreover, tourism arrivals Union (figure 4.8). Figure 4.7. Ethiopia’s Exports to the European Union Figure 4.8. Ethiopian Air Freight to the European Union 400 60% 250 350 50% 200 300 40% EUR MM US$ MM 250 150 200 30% 150 100 20% 100 10% 50 50 0 0% 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Other Products Vegetables Apparel Air Exports to EU Air Exports to US Other Plants Cut Flowers Air Exports to EU (% of Exp. to EU) Source: Goldstein 2020. Air Exports to US (% of Exp. to US) Note: The estimate excludes turbojets and other aircraft machinery Source: Hausmann et al. 2022. related to Ethiopian Airlines operations. 47 4. SECTORAL ANALYSIS Given its significant contribution to climate change, be lower because of approaching physical limits or the global aviation industry is set to transform diminishing marginal benefits (Gössling and Humpe substantially in the coming decades, which could 2024). Demand growth has historically outpaced have major implications for Ethiopia’s economy. reductions in GHG emissions because of efficiency Although achieving Ethiopia’s climate goals does not gains. Beyond technological improvements, further necessarily depend on decarbonizing the aviation increases in fuel efficiency could relate to fleet industry, changes in the industry will affect the composition, aircraft layouts (such as the share of country substantially. Global aviation accounts for premium seats), and load factors. With an average more than 2.5 percent of CO₂ emissions, making it fleet age of only seven years, Ethiopian Airlines a major contributor to climate change. Notably, only has a competitive advantage in fuel savings and about 1 percent of the global population is responsible lower emissions. However, there is scope for for half of the aviation industry’s CO₂ (Gössling and efficiency gains in air traffic management systems Humpe 2020). The industry’s contribution to climate and ground transportation at airports operated by change goes beyond its CO₂ emissions, because Ethiopian Airlines. aircraft also contribute to global warming through nitrogen oxides and water vapor (contrails). Recent “Alternative fuels” refers to the shift from fossil research suggests that these non-CO₂ components fuels to alternative energy sources. The three contribute to climate change at least as much as main options are electrification (battery-operated CO₂ components do (European Commission 2020), aircraft), hydrogen-powered aircraft (typically using with some studies indicating that they have three fuel cells), and sustainable aviation fuels (SAFs). times the rate of the industry’s CO₂ emissions (Lee Although battery-operated aircraft can be feasible et al. 2021). Therefore, the aviation industry must for short-haul flights, experts doubt that long-haul undergo large-scale transformation to achieve global flights will be battery-operated at a meaningful scale, climate goals, which will have major implications for given the substantial weight of batteries (Crownhart competitiveness. 2022; Wittmer and Adrian Müller 2021). Hydrogen- powered aircraft would require a complete redesign Because of the significant challenges in of aircraft, which besides the question of technical decarbonizing the sector, aviation is considered maturity implies a need to replace the entire global a hard-to-abate industry with a highly uncertain aviation fleet over the coming decades (Schwägerl pathway to net zero by mid-century. Aircraft depend 2024). Given the commercial lifespan of planes (30– on energy-dense liquid fuels such as fossil-based 40 years) and limited production capacity to build kerosene, which currently lacks commercially that many aircraft quickly, replacing the entire global competitive substitutes. The decarbonization aviation fleet with hydrogen-powered aircraft seems pathway for aviation will require simultaneous unlikely as a main decarbonization strategy. With an efforts across four dimensions, each with important average fleet age of seven years, Ethiopian Airlines limitations and substantial implications for Ethiopia: planes can be expected to remain in service for at improving fuel efficiency, switching to alternative least another 20–30 years, which leaves SAFs as the fuels, carbon removal (including carbon offsets), and most viable option, and that includes fuels derived reducing demand (Gössling and Humpe 2024). from biomass or so-called e-fuels (green hydrogen blended with carbon from biomass or carbon Fuel efficiency is determined by the individual capture). SAFs can be blended with conventional aircraft, operational efficiency (for example, air jet fuel to varying degrees and therefore does not traffic management), and the capacity utilization of require overhauling all aircraft and only partial flights (Dray et al. 2022). Between 1980 and 2019, replacement of airport infrastructure. However, the annual efficiency gains were approximately 2.5 feasibility of transitioning to SAFs depends on factors percent,²⁴ but future improvements are expected to such as functionality for airplane engines, scalability, 48 GREEN COMPETITIVENESS IN ETHIOPIA speed of scaling production, costs, infrastructure industry, assuming a commitment to meeting climate demands, and life cycle emissions of production. In mitigation targets. 2023, only 0.2 percent of purchased jet fuel was SAF, and it was two to five times more expensive than The transition to a net-zero airline industry will be conventional jet fuel (IATA 2020; Malina et al. 2022; costly, potentially driving low-profit airlines out of Schwägerl 2024). the market, with uncertainty about the extent of government support worldwide. Many academic Carbon removal will remain essential for assessments expect the aviation net-zero transition decarbonizing aviation because the transition to to lead to higher ticket costs and require airlines SAF takes time, and planes continue contributing to make substantial investments. One recent study non-CO₂ emissions to the greenhouse effect. Given contrasts the high transition costs with the industry’s the substantial limitations in scaling SAF, reducing low profitability and finds that over the next 30 years, jet fuel combustion emissions to zero soon enough the global aviation industry will face estimated fuel to align with global net-zero commitments is unlikely. transition costs between $0.5 and $2.1 trillion. By Therefore, carbon removal through high-integrity comparison, total global aviation profits from 1978 carbon offsetting—especially reforestation and to 2022 were only $82 billion. This means that future potentially limited carbon capture—will play a role annual investment needs could be 900 to 3,700 in aviation, especially in the short term (for example, percent higher than past annual profits (Gössling to meet the requirements of the Carbon Offsetting and Humpe 2024). Although transitioning the and Reduction Scheme for International Aviation global aviation industry to net-zero is theoretically [CORSIA]). However, addressing the unavoidable possible, it will likely require major industry non-CO₂ effects will require carbon removal at a structure changes and substantial investments. A currently unknown and unfeasible scale (Gössling key factor in the industry’s competitiveness will be and Humpe 2024). the level of government investment in research and development, transformation of airport ecosystems, Demand reduction is assumed to be part of the net- and airlines themselves, many of which are already zero transition for aviation, given the socioeconomic state owned. and technological limitations of efficiency gains, large-scale SAF deployment, and carbon removal (Gössling and Humpe 2024). Although aircraft manufacturers’ growth projections might be more optimistic, academic modeling suggests that future demand growth might need to slow to meet climate targets (Becken and Carmignani 2020). The push for demand reduction is coming primarily from mature aviation markets in high-income countries, which also carry a higher historical responsibility for climate change. However, this potential demand reduction will affect Ethiopia because of the airline’s exposure to these markets. Given that most African Although transitioning the global aviation and developing countries currently have a low base in industry to net-zero is theoretically air traffic, and considering that air transport demand possible, it will likely require major is highly sensitive to income, demand from these industry structure changes and markets is likely to increase. How this might impact substantial investments. Ethiopian Airlines’ revenue outlook is unclear, but the increase in demand will affect the global aviation 49 4. SECTORAL ANALYSIS Ethiopian Airlines is already affected by emissions stabilize CO₂ emissions at 2020 levels by requiring trading schemes (ETSs), such as the European airlines to offset their emissions growth by Union’s, which will become more stringent in purchasing carbon credits. CORSIA is currently in its the coming years. Several ETSs exist globally, voluntary first phase (2024–26) with 126 countries particularly in Europe. Under the EU ETS, Ethiopian participating (IATA 2024). Some countries are Airlines must monitor and report the carbon exempt, including least developed countries, small emissions from its flights within and between island developing states, and landlocked developing European Economic Area countries. Following the countries (map 4.2). Ethiopia is currently exempted, cap-and-trade approach of the EU ETS, the airline and so Ethiopian Airlines currently pays only for must surrender enough carbon allowances to cover CORSIA offsets for flights between two participating these emissions, with each allowance representing countries. Under CORSIA, annual emissions reports one ton of CO₂ (the average price in 2023 was about must undergo third-party verification by bodies €86 per ton). Currently, about 85 percent of these accredited under ISO 14065:2020 (General Principles allowances are allocated for free, but this practice and Requirements for Bodies Validating and Verifying will be phased out by 2026. After that, all allowances Environmental Information). will need to be purchased on the open market, except for a 20-million SAF allowance until 2030. The In addition to carbon trading and offset programs, requirement to buy auctioned ETS allowances will regulators such as the European Union are increase costs significantly and raise the incentives requiring a phased transition to SAF, making to reduce emissions, particularly through using SAFs. SAF use a competitiveness factor for market access. The European Union, as part of its Green Carbon-offsetting programs are also affecting New Deal, has passed the draft ReFuelEU Aviation Ethiopian Airlines, and such programs will legislation that will require aviation fuel suppliers become more demanding in the next decade. at EU airports to blend 5 percent SAF by 2030 The International Civil Aviation Organization has and increase it to 70 percent by 2050 (European established the Carbon Offsetting and Reduction Commission 2023). The legislation includes a Scheme for International Aviation (CORSIA) to restriction on flights departing from EU airports Map 4.3. Countries Participating in CORSIA CORSIA participating States in 2023 States that will join CORSIA from 2027 States that are exempted under CORSIA Source: IATA 2024. Note: CORSIA = Carbon Offsetting and Reduction Scheme for International Aviation. 50 GREEN COMPETITIVENESS IN ETHIOPIA using traditional kerosene and requires them to job creation, and rural development. Biofuels refuel only with the amount necessary for the flight production is in its infancy in the country, which (to avoid “tankering,” which is intentionally carrying currently has no biorefineries and only three blending extra fuel to avoid having to refuel with SAF). The facilities and two ethanol distilleries (RSB 2021). As SAF blending mandate is regulated by the EU’s feedstock for local SAF production, RSB identified Renewable Energy Directive 2018/2001/EU, which agricultural residues, castor, Ethiopian mustard was revised in 2018 (Renewable Energy Directive (brassica carinata), Jatropha curcas, sugarcane, II) that states the sustainable fuel sources eligible and water hyacinth as having the greatest potential to meet the target of 14 percent renewable energy (RSB 2021). However, each comes with advantages consumption in the transport sector by 2030. SAF and disadvantages related to competition with blending can use biofuels, recycled carbon fuels, and food production, vulnerability to climate shocks, e-fuels but not from food and feed crops to uphold impacts on biodiversity and water and soil quality, sustainability goals and reduce the competition and scalability. Because the oil-to-fuel process via between SAF and food production. Therefore, SAF hydroprocessed esters and fatty acids technologies produced in Ethiopia needs to comply with RED II is currently the only commercially feasible pathway, criteria to be competitive in the EU market (RSB RSB recommends prioritizing castor and Ethiopian 2021). The immediate consequence of the ReFuelEU mustard exploration (see box 4.5 for more about Aviation legislation is an increase in fuel prices as the the advantages and disadvantages). Given that the mandates for SAF come into effect, which will affect impact of climate change on crop yields is uneven all airlines. However, it will affect Ethiopian Airlines (for example, barley and teff yields are expected to disproportionately because its fuel expenses account decline, but maize and sorghum are likely to increase; for 40 to 47 percent of its operating costs. World Bank 2024), more research would be needed to understand the potential for Ethiopian mustard and Ethiopia’s potential for growing biofuels is castor under climate change scenarios. Moreover, promising, but the available land for growing the feasibility of SAF production is a complex issue without competing with food production has not and many feedstock options have not yet been been measured yet. Ethiopia is among the countries assessed in Ethiopia. with the highest biofuel potential in Africa (Fischer et al. 2019). The government estimated that 23.2 Figure 4.9. Ethiopia’s Fuel Imports Relative to Total Imports million hectares of “marginal land” (not competing directly with food production) could be used for 18 17% 18% Fuel share of total imports (percent) biofuel feedstock production (RSB 2021). However, 16 16% 12% 14 14% Imports ($, billions) marginal land has not yet been defined clearly, and 11% 12 12% thus the number is contested. 10 7% 10% 8 7% 8% In 2021, the Roundtable on Sustainable Biomaterials 6 6% (RSB) assessed the potential for developing SAF in 4 4% Ethiopia and identified actions for the government 2 2% (RSB 2021). The report emphasizes that Ethiopia - 0% 2018 2019 2020 2021 2022 has an opportunity to reduce its dependency on fuel Import of mineral fuels Total imports imports, which accounted for 7 to 17 percent of total Fuel share of imports (right-hand scale) imports over the past five years (figure 4.9). Moreover, Source: Based on data from Trade Map (database), International as an agrarian society, feedstock production can Trade Centre, Geneva (accessed November 25, 2023), https:// contribute to Ethiopia’s socioeconomic development, www.trademap.org/Index.aspx. 51 4. SECTORAL ANALYSIS Box 4.5. Advantages and Disadvantages of Castor and Ethiopian Mustard for SAF Production Castor • Advantages: non-edible; high oil content (up to 60 percent); scalable as suited for mechanization; relatively low water requirements; seedcake can be used for biochar production • Disadvantages: conflict with arable land for food production; yield potential varies; invasive plant with risks for biodiversity; medium drought tolerance; requires fertilizers because it exhausts the soil quickly; oilseed currently exported for other uses Ethiopian mustard • Advantages: non-edible; high oil content (up to 47 percent); efficient convertibility into fuel; heat and drought tolerant; disease resistant; residue can be used for fodder; suitable for crop rotation with food crops • Disadvantages: best grown on fertile and well-drained soil; could compete against wheat; low yield in Ethiopia Source: Adapted from RSB (2021). Major challenges for SAF production in Ethiopia storage facilities and efficient loading and unloading are the functioning of agricultural value chains systems. With no biorefineries and only three with scattered smallholder farming, transport fuel-blending facilities in the country, substantial insufficiencies, and lack of investment in facilities investment is needed in SAF production facilities, such as biorefineries. The government has requiring close collaboration among investors, launched initiatives to support the biofuel industry, financial institutions, and project developers to but the country faces several major challenges. identify and develop bankable projects. Stakeholders The feedstock for biofuels is typically grown by interviewed for this assessment highlighted the need smallholder farmers scattered across the country. for the Ethiopian Investment Commission to adjust Agricultural productivity is low in Ethiopia, and only 0.5 investment licensing requirements to better support percent of agricultural land is irrigated.²⁵ In addition, SAF initiatives (for example, determining whether the value chain links among farmers, input suppliers, hydrogen is categorized as a fuel or a chemical). and agricultural markets are underdeveloped and contribute to a high rate of post-harvest losses. Interest is also growing in producing e-SAF, Although the RSB road map provided a first overview given Ethiopia’s comparative advantage in cheap of feedstock options, detailed feasibility studies and renewable electricity. This synthetic fuel is are needed to compare feedstock alternatives and produced by splitting water into hydrogen and associated production technologies; and to assess oxygen using electrolysis powered by renewable their technical, economic, and environmental energy sources and then combining it with carbon viability. Another challenge is the lack of rural dioxide. The “green” hydrogen is then combined with roads and transport vehicles, which contributes to carbon dioxide captured from the air or industrial inefficient value chains from farms to downstream sources to create a synthetic fuel. Producing e-SAF operations. Railway networks could offer advantages is energy intensive, and thus Ethiopia’s cheap for transporting SAF across the country, given the power is a comparative advantage. However, project associated efficiency and sustainability gains. bankability is a major challenge because of the high However, SAF logistics will require upgrading fuel costs of financing, which reduces the country’s price 52 GREEN COMPETITIVENESS IN ETHIOPIA competitiveness. Although SAF production from trade-offs. The Technical Committee on SAF biogenic feedstock is labor-intensive, especially under leadership from the Steering Committee for farm-related jobs, e SAF production is capital on SAF should coordinate this effort. This should intensive and creates only a small number of jobs. be initiated within six months and completed within 18 months. Advancing biofuel production in Ethiopia will require strong coordination and coherent policy at the federal 2. Build the technical and policy capacity of level and raising policy makers’ awareness. Ethiopia government and private sector stakeholders could focus on producing the feedstock and engaging engaged in SAF development (for example, in primary processing initially (for example, crashing connecting with international experts). The the oils) and exporting to large refineries abroad before Technical Committee on SAF under leadership establishing a domestic refinery. Currently, Ethiopia’s from the Steering Committee on SAF should biofuel development is fragmented and limited, with coordinate this effort. This activity should be various offices and nongovernmental organizations initiated within three months and continue as working independently across different regions. Major per capacity building needs. challenges include the lack of government attention, a national plan, and a clear national SAF policy direction 3. Map the players and policies related to the SAF to inspire biofuel development. A national SAF policy value chain and potential barriers (for example, is essential to specify the roles and responsibilities barriers for the private sector to invest in SAF of government bodies, establish a robust regulatory production, identify regulations that hinder framework, and create effective incentive the use of waste as feedstock). The Technical mechanisms. An implementable national action plan Committee on SAF under leadership from the should include a list of actions that demonstrate Steering Committee on SAF should coordinate the active involvement of stakeholders at different this effort. This activity should be initiated within levels. Strong cooperation among stakeholders six to twelve months. across different sectors, various levels of government, and nongovernmental organizations is crucial for 4. Develop a national action plan on SAF to successful biofuel initiatives. Moreover, creating strengthen coordination among different national-level ownership of biofuel development and government bodies, the private sector, and establishing adequate monitoring and evaluation academia, and identify regulatory needs to systems to respond to feedback and improve policies promote SAF development and actions toward are also necessary for better performance. building the SAF value chain. The Technical Committee on SAF under leadership from the Recommendations for Aviation Steering Committee on SAF should coordinate this effort. This should be completed within six This section offers policy recommendations for the to twelve months. government of Ethiopia to consider. 5. Develop a SAF regulation that clarifies key 1. Conduct an in-depth feasibility study that definitions associated with SAF development expands or updates the Roundtable on and improves the enabling environment for SAF Sustainable Biomaterials Road map. The production (for example, incentives). The Technical study should assess the potential raw materials Committee on SAF under leadership from the for producing sustainable aviation fuel (i.e., Steering Committee on SAF should coordinate feedstock) in the country, considering the this effort. This should be initiated within six various environmental, social, and economic months and completed within 18 months. 53 4. SECTORAL ANALYSIS 6. Adopt relevant international standards for the and private certification bodies, together with the SAF value chain, build capacity for standards Technical Committee on SAF, should coordinate development, and develop certification capacities on this effort. This should be initiated within six in Ethiopia. The Institute of Ethiopian Standards months and continue as needed. Notes 1. For example, the water supply at the Hawassa industrial park did not comply with water quality standards, while industrial water supply is reportedly unreliable in Adama and Dire Dawa (see Fanuel et al. 2022). 2. Based on 67,000 workers in Industrial Parks Development Corporation parks (Fanuel et al. 2022) 3. However, lack of waste volume could be a bottleneck for Ethiopia, as a non-published feasibility study for setting up a textile waste recycling plant in Ethiopia has shown. The international apparel brand that conducted the study found that the volume of textile waste required within a day is equivalent to the amount discarded in Ethiopia within a month. 4. Figures vary slightly by institution, from 96 percent by the International Energy Agency, 98 percent by the World Bank, and close to 100 percent by the International Renewable Energy Agency. 5. Cotton Made in Africa estimates that cotton grown under its rain-fed approach uses on average just 2 liters per kilogram of cotton grown, compared with 1,563 for global averages. See “Impacts,” Cotton Grown in Africa, accessed 30 November 2023, https://cottonmadeinafrica.org/en/impacts/. 6. For more information, see the February 9, 2024, Enveritas press release at https://partners.enveritas.org/ press-release-ethiopia-partners-with-enveritas-and-jde-peets-to-preserve-access-to-eu-coffee-markets. 7. Intercropping, for example, can create environments that are more suitable to growing good-quality Arabica coffee while diversifying crop revenue and sequestering carbon. For more information, see Ahmed et al. (2021). 8. Recent studies suggest that climate information is the most important determinant for coffee growers to take actions for adaptation, even when compared to extension services, level of education, or income from coffee. For more information, see Eshetu et al. 2021. 9. VSS-compliant coffee grew at a CGR of 13 percent to 19 percent between 2008 and 2019 (see ITC 2022), while the global coffee market is estimated to expand at a CAGR of at least 4.28 percent between 2021 and 2026 (data are from Coffee Market Size and Share Analysis: Growth, Trends, COVID-19 Impact, and Forecasts (2022–27) (database), Mordor Intelligence, Hyderabad, India (accessed month, day, year), https:// www.mordorintelligence.com/industry-reports/coffee-market. 10. For instance, the Ministry of Planning and Development, together with the United Nations Development Programme, is implementing a project supported by the Global Environment Facility (Preventing Forest loss, Promoting Restoration, and Integrating Sustainability into Ethiopia’s Coffee Value Chains and Food Systems ) in major coffee-producing regions. The project aims to address deforestation, encourage forest restoration, and incorporate sustainability into the nation’s coffee value chains and food systems. 11. Kew Royal Botanic Gardens, Environment & Coffee Forest Forum (ECFF). Coffee farming and climate change in Ethiopia. 2017. 12. In February 2024, ECTA, JDE Peet and Enveritas announced an agreement to implement a scheme that aims to make Ethiopia compliant with EUDR at a country wide level through: (i) identifying coffee production areas in the country that are non-complaint with EUDR; (ii) establishing a protocol to treat these areas by cutting coffee trees and reforesting; and (iii) monitoring for non-compliant areas in a recurring manner to ensure continued country-wide compliance, and taking the above measures when 54 GREEN COMPETITIVENESS IN ETHIOPIA necessary. For more information see: https://partners.enveritas.org/press-release-ethiopia-partners- with-enveritas-and-jde-peets-to-preserve-access-to-eu-coffee-markets. The acceptance of this scheme by the EU is still uncertain. 13. Targeted policies included allocation of land in water-abundant areas, tax and tariff breaks, soft loans, and infrastructure investment, among others. For more information, see Oqubay 2015. 14. Ethiopia produced 9 percent of global cut flower exports in 2015 in comparison to less than 1 percent in 2005. 15. For instance, very few actively upgraded flower varieties used environmentally sustainable inputs or ensured continuous improvement of post-harvest technologies and processes. Firms also had difficulty developing the expertise necessary for accessing markets strategically in the floriculture sector. For more information, see IFC (2020). 16. For instance, the government of Ethiopia made an interim arrangement allowing cut flower firms to import unregistered pesticides despite registration procedures requirements under the Pesticide Registration and Control Proclamation. For more information see Kassa 2017; Mebrat et al. 2022 17. For more information, see the European Commission web page for this initiative at https://ec.europa. eu/info/law/better-regulation/have-your-say/initiatives/12595-Biopesticides-approval-criteria-for- microbial-active-substances_en. 18. IPM is an agricultural pest control approach that uses complementary crop management strategies and practices to help minimize the use of pesticides. 19. See for instance https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12595- Biopesticides-approval-criteria-for-microbial-active-substances_en. 20. Additionally, the local economy and people benefit because payments for flights and shipping can be made in Ethiopian birr instead of US dollars, thus preserving the limited foreign exchange supply in the country. 21. Data are from “Tourism in Ethiopia,” WorldData.info, last modified July 2024, https://www.worlddata. info/africa/ethiopia/tourism.php. 22. 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CONCLUSION AND POLICY RECOMMENDATIONS Green competitiveness is a macro-critical agenda heavy for smaller firms, whose costs of for Ethiopia. Although the four sectors analyzed are compliance, equipment upgrades, and capacity affected to varying degrees and at different times, building can represent a significant portion of climate change and an increase in sustainability revenues. Additionally, the market structure regulations pose short- and medium-term risks to in selected value chains also complicate a substantial share of Ethiopia’s export earnings compliance with sustainability regulations amid already severe macroeconomic challenges. for small firms (for example, the difficulty of Specifically, the analysis shows the following: establishing clear traceability in smallholder coffee production to meet EUDR requirements). • The awareness levels of evolving market access requirements and readiness to comply • Gathering highly specific data on issues with them vary. Sustainability standards and such as energy consumption, geospatial regulations that govern access to key markets information, water use, waste management are evolving rapidly and are becoming more in parks and municipalities, and supplier demanding. Therefore, knowledge gaps are networks can be challenging. As sustainability inevitable for firms and government bodies. requirements become more data intensive, These gaps are more prevalent in some firms face significant difficulties in collecting economic sectors than in others. For instance, disaggregated data and managing it in garment manufacturing, complying with professionally. These demands apply to many environmental standards is easier for existing different environmental dimensions—such as suppliers in global value chains because their water and energy use, waste, and geospatial international buyers provide guidance on data on deforestation —and are especially compliance. However, most coffee farmers relevant for greenhouse gas (GHG) emissions, have little awareness of EUDR and the capacity for which suppliers must capture their Scope to ensure compliance with it, and the feasibility 1–3 emissions accurately. For Ethiopia to of proposed solutions for compliance by market itself as carbon competitive, it will need stakeholders with more awareness of the reliable power to reduce its reliance on backup regulation is uncertain. generators, which undermine the comparative advantage of renewable electricity. Moreover, • Compliance with voluntary sustainability disaggregated GHG accounting is required standards and environmental regulations can because current GHG emission estimates often be costly and complex, especially for smaller rely on parameters from industrial countries, firms in select value chains. Stakeholders such as the proportion of renewable energy consulted for this report highlighted the or specific agricultural techniques. Therefore, increasing fixed costs of compliance related to tailored approaches suited to Ethiopia’s context certification and audits, which is complicated are needed, because they will typically result in by the international fragmentation of standards lower emission figures for production. Currently, and certificates, which often requires suppliers environmental data in Ethiopia are fragmented to meet varying buyer-specific requirements, across various local and federal government increasing their dependency on buyers. Beyond authorities and private sector entities. the direct costs of certifications, firms face rising costs associated with capacity building • Ethiopia’s value chain inefficiencies and equipment upgrades. For example, the are particularly challenging for green consultancy support needed to prepare for ISO competitiveness. International buyers are 14001 certification is often more expensive than increasingly seeking transparent and controllable the certification itself. This burden is especially 64 GREEN COMPETITIVENESS IN ETHIOPIA value chains, which could increase incentives for plans for compliance with these regulations, stronger vertical integration. However, links and including by hosting workshops and trainings, local value added are low in many of Ethiopia’s and developing partnerships. This task force value chains. For example, in textiles and garments, should be established as soon as possible more than 90 percent of inputs are imported, and the mechanism being operational within though potential exists for backward links, which three months. market and government failures throughout the value chain (such as a lack of cotton grading 2. Building on the tracking mechanism, it standards and farm-to-mill links) have hampered. is essential to conduct a comprehensive Though not a focus of this assessment, evidence evaluation of data needs, assess their increasingly shows that downstream waste availability, and identify any data gaps that management systems (for example, less waste to firms must address to ensure compliance. landfills) will be a key competitive advantage in the As stated in the report, complying with export circular economy. Therefore, conducting additional market demands will require an increasing in-depth value chain assessments will be crucial amont of data. The Ministry of Planning and to improve market functioning and identify ways Development, Ministry of Industry, and relevant to increase circularity. sectoral agencies should work together to ensure that firms are well-equipped to meet evolving This report makes the following overarching sustainability requirements and contribute to recommendations for the government of Ethiopia to broader environmental goals. The goal is to consider to be implemented over the next 24 months. establish a robust framework for data collection and reporting by providing public data where 1. Establish a coordinating mechanism to needed and supporting firms’ data collection track, analyze and build compliance with initiatives in line with international standards. upcoming sustainability regulations and This assessment should be initiated in three voluntary buyer commitments that may affect months and operate on an ongoing basis. It Ethiopian exports. The Ministry of Trade and should cover several critical areas, including: Regional Integration (MoTRI) can coordinate with other institutions such as the Ministry of • Energy and water consumption: Collect and Agriculture (MoA), the Ministry of Industry (MoI), analyze detailed data on the amount of energy and and the Ethiopian Investment Commission to water used by firms. This includes distinguishing establish a inter-ministerial task force that between different sources and types of energy systematically tracks new regulations, analyzes and water and evaluating consumption patterns their expected impact on Ethiopian firms, to identify areas for improvement. identifies compliance requirements and gaps, and develops a communication plan to ensure • Land use changes (including deforestation): timely dissemination to main private sector and Monitor and document changes in land use, government stakeholders. This task force can including conversions from natural habitats to leverage existing databases (for example, World industrial or agricultural purposes. This data Trade Organization notifications and Global should capture the scale and impact of these Trade Alert data) and public-private dialogue changes on the environment. initiatives to enhance market awareness and build compliance capabilities. It should work • Greenhouse gas emissions: Accurately with the relevant government institutions, the measure and report greenhouse gas (GHG) private sector, and development partners to emissions across all relevant sources within a coordinate and develop implementation support firm’s operations. This includes direct emissions 65 5. CONCLUSION AND POLICY RECOMMENDATIONS from owned or controlled sources and indirect • Support private sector adoption of standards: emissions from purchased energy. Offer guidance and support to firms in adopting relevant standards. This includes providing • Geolocation information: Utilize geolocation training, resources, and technical assistance data to track and manage environmental impacts to help businesses integrate and comply with geographically. This helps in understanding the national and international standards. spatial implications of a firm’s activities and assessing their environmental footprint. • Enhance traceability along value chains: Utilize NQI capabilities to improve traceability • Other environmental metrics: Gather and assess throughout value chains. This will help ensure additional relevant environmental metrics, such that products meet quality and safety standards as waste generation, resource efficiency, and at every stage, from production to end-use. pollution levels, to provide a comprehensive view of a firm’s environmental impact. • Identify and map voluntary sustainability standards: Catalog the key voluntary 3. To strengthen Ethiopia’s national quality sustainability standards and certifications infrastructure (NQI) and enhance the capabilities pertinent to Ethiopian firms (to be done as part of firms to adopt standards and certifications, of the tracking mechanism outlined above). This a multi-faceted approach is essential. NQI will help businesses understand and align with encompasses the public and private systems global sustainability expectations, improving that ensure the quality and safety of products and their market access and competitiveness. services. This includes standards development, conformity assessment (such as testing, inspection, • Develop a national umbrella framework for certification, and calibration), accreditation, compliance standards: This framework should metrology, and market surveillance. Building streamline adherence to various international on the ongoing National Quality Infrastructure requirements and reduce compliance costs, Development Project financed by the World Bank, particularly benefiting small and medium the MoTRI and relevant NQI institutions should enterprises (SMEs). By consolidating standards develop a comprehensive follow-up program and certifications, the framework will simplify within the next six months, to address the following the compliance process and make it more cost- recommendations effectively: effective. • Facilitate market entry for private conformity 4. The MoI and MoTRI should undertake thorough assessment bodies: Promote the establishment assessments of sustainable value chains and expansion of private conformity assessment within priority sectors, particularily taking bodies to provide comprehensive quality into account the feasibility of the policy assurance services, including for legal framework. This initiative follows the high- requirements (e.g., Environmental Impact level assessment outlined in the report and aims Assessment Proclamation). This will enhance to provide a deeper understanding of market competition and improve the availability of dynamics, conduciveness of current policies testing, inspection, certification, and calibration and regulations, and identify specific areas for services for industries. In addition, support the improvement. This recommendation should access to testing and calibration equipment for be initiated within the next three months. The conformity assessment bodies, including access proposed actions include: to finance. 66 GREEN COMPETITIVENESS IN ETHIOPIA • Conduct detailed sustainable value chain slow onset changes (for example, temperature assessments: Perform comprehensive value rises, precipitation patterns), and their granular chain analyses in strategic sectors to identify impact on geographies and sectors (for example, market and government failures, and enabling supply chain impacts). This may require bringing reform needs. This involves examining each together existing climate data, identifying gaps, stage of the value chain issues related to the and collecting additional data (for example, firm- business environment, access to input and output level resilience). This will require collaborating markets, access to land and infrastructure, with development partners, specialized firms, access to skills, and access to finance. and academia to build the capacity of the government and private sectors to carry out • Assess and promote circular value chains: such assessments in the future. In support of the Ethiopian Manufacturing Industry Policy and complementary to ongoing engagements with development partners, assess market opportunities for Ethiopia related to the use of by-products and waste within value chains to foster circular economy practices. In particular, this would include an assessment of the demand-side opportunities (i.e., beyond the mere technical or supply-side feasibility) and consider international and national market dynamics related to recycling, reuse, and reduction of waste, thereby supporting the creation of jobs in sustainable industries. • Conduct detailed climate impact assessments for selected value chains: To understand the direct and indirect effects of climate change on The government should carefully assess value chains, the government should carefully the multiple impact channels, including assess the multiple impact channels, including climate shocks (for example, floods, climate shocks (for example, floods, droughts), droughts), slow onset changes 67 Annex 1A Country Context and Policy Framework Economic Context structural transformation. Currently, structural transformation in the country remains incipient Ethiopia has achieved substantial progress along despite various steps like Ethiopia’s Industrial its developmental path in recent decades. Growth Development Strategy. Importantly, Ethiopia’s state- in the country accelerated considerably in the early led economic model which has hindered productivity 2000s after 30 years of stagnation, making Ethiopia gains and economic transformation is increasingly one of the fastest growing nations in the world, with unsustainable given the country’s severe decline in yearly economic growth averaging 9.6 percent in public finances. In effect, the manufacturing sector 2004-2022.¹ As a consequence, Ethiopia’s economy is is still unable to achieve scale and significance now the largest in East Africa at $127 billion in 2022, while the service sector is characterized by mixed and output per capita increased more than eight- and stalling productivity.⁴ fold during that period.² Poverty headcount ratios have thus declined in the last two decades (that is,, Ethiopia’s state-led economic growth model is also from 39 percent in 2004 to 24 percent in 2015) with increasingly under financial stress with high rates about 12 million people moving out of poverty.³ The of external borrowing and further fiscal challenges. country has also seen improvements across various Primarily driven by a promotion of high public investment other socio-economic dimensions in recent decades under the country’s two Growth and Transformation (for example, primary school enrollment quadrupled, Plans, the model has been largely financed by external access to clean water doubled), although it remains borrowing in a context with low domestic savings rates, ranked among the bottom 21 of the 174 countries in weak domestic resource mobilization, and exacerbated the Human Capital Index. fiscal challenges. It has thus needed to be enabled by a range of heterodox policies (for example, financial However, Ethiopia’s structural transformation repression that directed the bulk of credit to public appears to be stalling. While Ethiopia’s economy infrastructure, overvaluation of the exchange rate, has been remarkably resilient in light of severe monetary financing of the deficit), causing serious domestic and international headwinds, economic and growing macroeconomic imbalances which have momentum has been lost. Competitiveness and led to declining or stalling exports and increasingly productivity of the Ethiopian economy have lagged severe foreign exchange shortages (box 1A.1), among in recent years with increases in the country’s other issues. However, the introduction of a floating capital to labor ratio being almost the sole driver foreign exchange rate on 29 July 2024 demonstrates of minimal labor productivity gains, and total factor the government’s commitment to undertaking major productivity contributing negatively to growth. macroeconomic reforms. While it is too soon to fully This suggests that Ethiopia’s current economic assess the impact of this reform, it is expected to model has led to distortions on the allocation of substantially benefit export-oriented sectors. Still, factors of production and the behavior of economic due to various macroeconomic challenges Ethiopia’s actors, which likely reduce aggregate productivity, economy has dithered, with the country’s high growth limit private sector development, and constrain rates declining to an average of 5.7 percent in 2020- 68 GREEN COMPETITIVENESS IN ETHIOPIA 2022. Ethiopia’s ability to generate quality jobs for was evidenced by the recent downgrading of the its existing labor force and the 2-3 million young country’s external debt by rating agencies after people that enter the labor market each year⁵ also Ethiopia’s nonpayment in December 2023.⁷ seem increasingly lackluster, and inequality appears poised to continue rising between rural and urban The country’s foreign exchange shortages are areas.⁶ Furthermore, Ethiopia is currently at high also critical as the country imports key products, risk of debt distress with limited access to external particularly machinery and mechanical appliances, resources making it more challenging to comply mineral fuels, cereals and vehicles – but the foreign with upcoming debt repayment obligations, and exchange rate reform may affect this. Figure 1A.1 further borrowing being heavily constrained. This shows Ethiopia’s average import basket over the Box 1A.1. Ethiopia’s Concentrated and Stalling Exports Ethiopian exports remain highly concentrated and their growth in recent decades has been insufficient to finance the country’s balance of payment needs. While few products have been successfully added to Ethiopia’s goods export basket (for example, textiles) and exports of services have experienced healthy growth driven by the airlines industry, the country’s exports concentration index has increased over time, with the number of new products exported declining over the years, and the Herfindahl Hirschman Index of most types of exports increasing in the recent decade.⁸ Exports thus remain skewed toward a small number of agricultural commodities, with backward links remaining limited. By and large, these products including coffee, cut flowers, and textiles, among others, are also those in which Ethiopia has a revealed relative comparative advantage.⁹ While Ethiopia is more diversified in terms of its destination markets for exports than many of its peers, more than 50 percent of its exports are also concentrated in three markets (B1A.1.1). In this context, and in conjunction with an overvaluation of the Birr and other factors (for example, export bans for major cereals, suspension of Ethiopia’s duty-free market access under the African Growth and Opportunity Act since January 2022) exports as a proportion of gross domestic product have declined in the last decade to one of the lowest levels among its peers, leading to current account deficits and foreign exchange constraints (B1A.1.2). Figure B1A.1.1. Exports of Goods and Figure B1A.1.2. Exports of Goods and Services by Destination Services 0.0 18 25.6% -1.0 16 Current billion US$ -2.0 14 12 % of GDP 17.1% -3.0 10 -4.0 13.2% 8 -5.0 6 6.3% 6.3% -6.0 4 4.1% 3.5% -7.0 2 23.9% -8.0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Europe United States Somalia Japan United Arab Emirates Saudi Arabia China Exports of goods and services Other Current account balance Source: Data from the Observatory of Economic Complexity Source: Data from World Bank World Development Indicators. (https://oec.world/). Note: GDP = gross domestic product. 69 ANNEX 1A. COUNTRY CONTEXT AND POLICY FRAMEWORK years 2019 to 2022. Ethiopia had an average trade Electricity prices are among the cheapest in the deficit of $12.5 billion over that period with many world. Figure 1A.2 shows that Ethiopia’s electricity essential goods being imported from abroad. The prices are much lower than prices in comparator second most important import category are mineral countries. With average industrial electricity prices fuels and mineral oils (11 percent of imports) which at $23 per megawatt hour in Ethiopia is considerably contributed to the government’s announcement of cheaper than South Africa ($49 per megawatt intending to ban the import of internal combustion hour), Kenya (51), Vietnam (77) or Bangladesh (90). engine cars. While Ethiopia imports advanced Moreover, except for Kenya - which generates 89 technologies like machinery, vehicles and equipment, percent of its electricity from renewable sources it is also highly dependent on goods like cereals (8 - Ethiopia’s close to 100 percent of renewables is percent of imports), fats and oils (7 percent), fertilizers far exceeding other countries which range between (5 percent), and sugar (3 percent). The country’s 44 percent (Vietnam) and 1 percent (Bangladesh). trade deficit and severe foreign exchange shortages With more and more international buyers looking may provide an economic case to strengthen the not only at electricity prices but also the share of production of biofuels, bio-fertilizers and reduce renewables, Ethiopia is well-positioned to provide post-harvest losses in agricultural value chains. a competitive environment. Figure 1A.1. Ethiopia’s Average Import Basket, 2019–22 Machinery and Electrical Fertilisers, Iron and mechanical appliances machinery and 5% steel, 5% (incl. nuclear reactors, boilers), 12% Vehicles, 8% equipment, 7% Plastics Pharmaceutical and products, 5% Mineral fuels, mineral articles oils and products of their Fats and oils, thereof, Other, 26% distillation, 11% Cereals, 8% 7% 5% Sugar, 3% Source: Based on data from Trade Map (database), International Trade Centre, Geneva (accessed November 29, 2023), https://www.trademap. org/Index.aspx. Note: Percentages do not add up to 100 percent because of rounding. Figure 1A.2. Industrial Electricity Prices and Share of Renewables across Countries, 2021 and 2022 140 100% 133 100% 89% 124 electricity mix (percent) Share of renewables in 120 80% Electricity price 100 90 95 ($ per MWh) 80 77 60% 60 49 51 44% 25% 42% 40% 40 22% 23 1% 20% 20 0 0% Ethiopia South Africa Kenya Vietnam Bangladesh India Pakistan Turkey Electricity prices in 2022, left-hand axis Share of renewables (in 2021), right-hand axis Sources: Data from the Renewable Energy Progress Tracker by the International Energy Agency 2023; and Climatescope 2023 (database), BloombergNEF, New York (accessed November 29, 2023), https://www.global-climatescope.org/tools/geography-comparison/. Note: MWh = megawatt hour. 70 GREEN COMPETITIVENESS IN ETHIOPIA While electricity is generated predominantly from energy supply as hydropower. Oil is used primarily in hydro power (96 percent), Ethiopia’s energy needs transport and imported from abroad. The country’s overall are dependent on biofuels – traditional dependence on oil imports and the foreign exchange biomass – (88 percent) and a significant share of shortages led the government of Ethiopia to announce oil imports. Ethiopia is typically heralded for its very a planned import ban on internal combustion engine high share of electricity from renewable sources, cars (nonelectric vehicles) in March 2024.¹¹ notably hydroelectric power (figure 1A.3, panel b). Meanwhile, hydroelectric power only represented Over the years, Ethiopia’s use of petroleum fossil only less than 3 percent of the country’s overall fuel subsidies has increased significantly, driven by energy supply – which is predominantly provided various economic pressures. As figure 1A.4 shows, from traditional biomass (figure 1A.3, panel a). This fossil fuel subsidies in Ethiopia amounted to $4 billion imbalance notably stems from Ethiopia’s low degree in 2022 – sharp increase over the long-term trend of electrification with less than half of the population which was particularly due to petroleum subsidies. having access to electricity and thus relying on The global rise in fuel prices, exacerbated by the war biofuels for cooking and heating.¹⁰ Meanwhile, oil between Russia and Ukraine and related sanctions represents approximately 9 percent in the country’s by Western countries, has severely affected Ethiopia, energy mix – accounting for about three times the leading to higher costs for importing petroleum Figure 1A.3. Sources of Energy Supply and Electricity Generation in Ethiopia a. Energy supply in Ethiopia, by source b. Electricity generation in Ethiopia, by source 2,000,000 18,000 1,800,000 Electricity generation (GWh) 16,000 Energy supply (terajoules) 1,600,000 14,000 1,400,000 12,000 1,200,000 1,000,000 10,000 800,000 8,000 600,000 6,000 400,000 4,000 200,000 2,000 0 - 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Biofuels and waste Coal Hydro Oil Wind, solar, etc. Geothermal Oil Solar PV Wind Hydro Source: Data from the International Energy Agency ( https://www.iea.org/countries/ethiopia, accessed on November 25, 2023). Figure 1A.4. Fossil Fuel Subsidies in Ethiopia, by Fuel Type 5 $, billions (nominal) 4 3 2 1 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Coal End-use electricity Natural gas Petroleum Source: Data from the Fossil fuel subsidy tracker (based on Organisation for Economic Co-operation and Development, International Energy Agency, and International Monetary Fund), https://fossilfuelsubsidytracker.org/, accessed on November 23, 2023. 71 ANNEX 1A. COUNTRY CONTEXT AND POLICY FRAMEWORK products. In response to these challenges, the generators (panel a) and captive renewable energy Ethiopian government has maintained substantial sources (panel b) by firms in Ethiopia relative to other subsidies to shield consumers from the full brunt of countries for which FAT survey data are available. these price hikes, covering a significant portion of the This shows that firms in Ethiopia have the smallest cost difference between global market prices and local likelihood to have adopted captive renewable retail prices. However, these subsidies have further energy sources among these comparator countries. contributed to straining Ethiopia’s fiscal resources. Meanwhile, firms have a medium-high probability to have adopted fossil fuel powered generators. Unsurprisingly, according to recent World Bank data on firm-level adoption of green technologies, Among the set of comparator countries, Ethiopian firms in Ethiopia have a low level of adoption of firms have among the lowest levels of adoption captive renewable energy sources and a medium- of green management practices such as high likelihood of generators. In 2022, the World environmental certifications. As figure 1A.6 shows, Bank conducted a firm-level adoption of technology firms in Ethiopia have a very low level of adoption of (FAT) survey of a representative random sample of a range of green management practices. Less than 1,476 firms in four of Ethiopia’s regions, focusing 1 percent of firms adopted international standards on firms with five or more employees across eight for environmental management systems (ISO 14001) sectors (agriculture, food processing, wearing apparel or energy management systems (ISO 50001). A and leather, wholesale and retail, land transport, third party is auditing only about 8 percent of firms accommodation, other manufacturing, and other for compliance with environmental regulatory services).¹² The FAT survey assesses a range of requirements, and only about 2 percent conduct general-purpose technologies (for example, electricity, formal evaluations of suppliers’ or contractors’ internet), as well as technologies that relate to general environmental compliance. Lastly, few if any firms business functions and sector-specific ones. For the in Ethiopia engage in carbon trading or monitor their purpose of this report, the findings related to the CO₂ emissions. Overall, this points to a low level of subset of green technologies are presented. Figure awareness by firms and limited incentives for firms 1A.5 shows the estimated probability of adoption of to adopt these green management practices. Figure 1A.5. Firms’ Use of Generators and Captive Renewable Energy Sources a. Use of generator b. Use of renewable energy sources 17.2 80 20 Estimated probability (%) 63.1 Estimated probability (%) 60 48.9 15 10.5 44.3 42.6 27.9 32.1 40 28.4 10 6.6 28.0 20.6 24.8 19.9 14.2 18.2 14.0 4.0 20 11.7 5 3.4 10.1 1.5 0.9 0.8 0.7 0 0 BGD GHA KHM IND ETH CHL GEO KEN SEN BFA KOR VNM IDN HRV BRA POL BRA KHM HRV IND CHL IDN GEO BGD ETH Source: Data from the World Bank Firm-Level Adoption of Technology (FAT) survey (not available online). Note: Country abbreviations are International Organization for Standardization country codes. 72 GREEN COMPETITIVENESS IN ETHIOPIA Figure 1A.6. Firm-Level Adoption of Green Management Practices across Countries a. ISO 14001 b. ISO 50001 c. Audited by third party 38.0 40 40 40 Estimated probability (%) Estimated probability (%) Estimated probability (%) 31.731.0 30.5 25.4 30 20.4 30 23.6 30 19.3 17.1 20 20 13.9 20 8.1 9.2 8.0 7.9 8.0 7.2 8.1 6.0 10 10 10 5.8 3.2 0.8 0.8 1.6 0.1 0.1 0 0 0 IND HRV CHL IDN BRA GEO BGD ETH KHM CHL IND IDN HRV BRA BGD ETH KHM BRA CHL IND HRV IDN ETH BGD KHM d. Evaluates contractors e. Carbon trading e. Monitors CO₂/CO emissions 40 34.5 40 40 Estimated probability (%) Estimated probability (%) Estimated probability (%) 25.1 26.9 30 17.8 30 30 17.7 16.8 20 20 20 11.8 11.0 9.6 10.4 7.7 5.9 6.4 10 4.7 2.3 10 10 5.0 3.8 3.0 2.7 2.2 1.6 0.6 0.0 0.0 0 0 0 CHL IND BRA KHM KRV IDN BGD ETH GEO CHL IDN IND BRA HRV BGD ETH HRV BRA IND IDN CHL BGD KHM ETH Source: Data from the World Bank Firm-Level Adoption of Technology (FAT) survey (not available online). Note: Country abbreviations are International Organization for Standardization country codes. HVAC = heating, ventilation, and air conditioning; VAV = variable air volume. Similarly, adoption of energy efficient technologies Ethiopia. Fostering resilience to the aforementioned is low in Ethiopia. As figure 1A.7 shows, about 18 challenges, requires not only enacting policies that percent of firms have equipment that is certified mitigate economic risks from the depletion of natural as per the Energy Star system – a widely used resources and climate change, but also addressing energy efficiency label by the US government policy distortions that have stalled structural which is available for over 70 product categories, transformation in the country.¹³ Traditional policy including for homes, commercial buildings, and solutions might prove less effective for this industrial plants. Ethiopian firms are also among purpose. There is increasing evidence that the the least likely in the comparison group to have manufacturing- and export-based growth strategies energy efficient lighting (for example, LEDs) with that drove East Asia’s development miracles may only 26 percent of firms reporting to have these. not render the same transformative effect for low- Less than 1 percent of firms are equipped with income countries today (Rodrik and Stiglitz 2024). heating, ventilating, and air-conditioning systems For instance, hyper-globalization is retreating that operate using variable air volume technologies with recent geopolitical competition, rendering to be more energy efficient. the world economy less hospitable to growth through trade. Similarly, skill- and capital-biased Policy Context technological changes have made manufacturing less labor-absorbing undercutting what once was A development approach that enables a the primary comparative advantages of low-income sustainable structural transformation in a economies.¹⁴ Additionally, the impending global context of climate vulnerability is essential for climate crisis is leading to rising sustainability 73 ANNEX 1A. COUNTRY CONTEXT AND POLICY FRAMEWORK Figure 1A.7. Firm Adoption of Energy-Efficient Technologies across Countries a. Energy Star b. Energy efficient lighting c. VAV HVAC system 100 100 89.7 100 Estimated probability (%) Estimated probability (%) Estimated probability (%) 87.0 80 75.9 80 59.1 80 66.6 64.2 53.4 43.8 60 43.2 60 60 38.5 47.3 37.4 29.9 37.4 40 37.6 40 26.0 40 23.2 18.2 23.5 20.1 20 9.47.6 20 20 6.6 3.4 2.3 0.7 0.5 0 0 0 IND BGD BRA HRV CHL ETH GEO IDN KHM IND BRA HRV BGD CHL GEO IDN KHM ETH BRA GEO IND CHL HRV IDN BGD ETH KHM Source: Data from the World Bank Firm-Level Adoption of Technology (FAT) survey (not available online). Note: Country abbreviations are International Organization for Standardization country codes. HVAC = heating, ventilation, and air conditioning; VAV = variable air volume. demands in export markets and new opportunities already been developed in Ethiopia, targeting climate in green transition industries. Conversely, a green mitigation and adaptation efforts. For instance, transition of the Ethiopian economy, while requiring the 1997 Environmental Policy of Ethiopia aims to considerable investments, presents opportunities protect and develop the environment and conserve that could allow for a more sustainable development national resources for sustainable use, the 2004 pathway (World Bank 2024). Ethiopian Water Sector Policy makes environmental conservation an integral part of water-related Fortunately, Ethiopia has a good starting advantage projects, the 2002 Environmental Pollution Control in the implementation of a sustainable development Proclamation notes that development endeavors that path. Ethiopia can bring in investments and strengthen cause environmental harm are counter-productive, international competitiveness by positioning itself as and the 2021 Proclamation to Provide for the a resilient and green economy. Given the country’s Definition of the Powers and Duties of the Executive small greenhouse gas (GHG) footprint,¹⁵ the country Organs establishes climate governance powers is well poised to leverage its substantial low-carbon and duties.¹⁶ Similarly, the National Biodiversity electricity generation potential, to meet rising energy and Action Plan takes steps toward promoting and transport needs for a sustainable structural sustainable ecosystems and safeguarding them, the transformation. With a more sustainable management 2011 Climate Resilience Green Economy Strategy of land and forests, Ethiopia is also well positioned to protects and reestablishes forests and aims to reduce mitigate the climate impacts of a potential increase GHG emissions, and the 2021 Updated Nationally in emissions of the agriculture and industry sectors, Determined Contribution (NDC)¹⁷ sets emission through increasing CO₂ sequestration, apart from reduction targets and priorities climate adaptation,. creating other development opportunities (for example, Sector-specific climate strategies in the agriculture improvement of soil productivity, diversification of the and forestry, energy, water, and transportation sectors country’s export basket). were also developed in its 2019 National Adaptation Plan (NAP-ETH), and the Ethiopian climate change Ethiopia has also put in place a set of environmental Education Strategy (2017-2030) aims to strengthen and climate legislation, although gaps remain that the integration of climate change in the country’s need to be addressed to enable the country to education system. However, the success of these pursue a green development pathway. With a legal policies and laws remains relatively limited, due to basis in the Ethiopian Constitution, a mix of economy gaps between policy and practice. Implementation of wide and sectoral policies and regulations have cross-cutting environmental policies and regulations 74 GREEN COMPETITIVENESS IN ETHIOPIA Figure 1A.8. Overview of Sectoral Contributions to Ethiopia’s GHG Mitigation Targets (metric tons of CO₂ equivalent) 450 192.9 -68.8% below BAU, 403.5 400 conditional pathway including 350 unconditional contribution 300 195 247.5 -14% below BAU, 250 91.8 27.3 unconditional pathway 200 112 11.5 14.9 10.9 9.5 11 26 150 9 20 9.5 10.6 22.6 2.9 180.0 5 100 347.3 120 140 -99.9 50 0 LUCF Energy Managed soils Industry Waste Livestock Historical BAU Emissions Emission in 20230 125.8 in 2010 LUCF Energy Managed soils Conditional Unconditional Industry Waste Livestock Conditional Unconditional Target Target Source: Federal Republic of Ethiopia, 2021. Note: Conditional NDCs are climate targets that are contingent on receiving support (for example, finance, capacity building). Unconditional NDCs are targets that Ethiopia committed to achieve with its own resources and without any external support. BAU = business as usual; GHG = greenhouse gas; LUCF = land use change and forestry. remaining for the most part rather weak,¹⁸ and sector- fiscal deficit and reduce the gap with the parallel specific policies are often not legally binding and exchange rate, among others. However, success of frequently not up-to-date or aligned with mainstream the agenda remains limited, largely as a consequence national policies (World Bank 2024). Future emissions of the adverse impact of recent shocks.²¹ In 2023, the by livestock, land use, land-use change and forestry government also launched an Import Substitution (LUCF) will thus continue to be considerable, and Strategy to promote domestic production of imported emissions from industrial and energy sectors are goods and strengthen economic competitiveness – projected to grow at the highest rates (figure 1A.8).¹⁹ a 10-year effort to increase production of currently imported goods. It is noteworthy that the government The country has already set policies to spur puts emphasis on fostering the circular economy to structural economic transformation, including initial achieve import substitution objectives.²² Over the past efforts to integrate these with environmental and years, other links between Ethiopia’s economic and climate considerations. The government of Ethiopia environmental frameworks have also been developed, has already launched an ambitious policy agenda for example, with the Long-Term Low Emission and to transform the country into a more diversified Climate-Resilient Development Strategy (LT-LEDS) and resilient economy. Perhaps most importantly, it and the Ten-Year Development Plan (10YDP) being launched the Home-Grown Economic Reform Agenda aligned. However, there is further room to integrated in 2019, aiming to create an economic environment environmental, social, and economic concerns both supportive of higher private investment and faster in terms of mitigation and adaptation.²³ The lack of structural transformation. The agenda comprises coordination between different ministries and levels three types of measures²⁰ that have made considerable of government, weak evaluation systems, and the strides, including the adoption of a new Commercial absence of a single legal climate directive, has also Code and New Capital Markets and e-Transactions increased complexities in policy implementation, proclamations, sectoral reforms in some key markets and the lack of feedback loops resulting from weak (for example, issuing of commercial licenses in the monitoring and evaluation systems impede policy Telco sector), a deepening of state-owned enterprise performance and progress (World Group 2024). reforms, and considerable efforts to lower Ethiopia’s Finally, many of the reforms necessary to enable 75 ANNEX 1A. COUNTRY CONTEXT AND POLICY FRAMEWORK the private sector to engage in climate action, like the strategy spelled out a detailed action plan for the development of a green finance taxonomy and implementing green manufacturing practices at strategy, remain embryonic. the national level. The strategy notes the following challenges to greening the manufacturing sector As key strategy to implement Ethiopia’s Paris in Ethiopia: i) low levels of environmental concern Commitments, the LT-LEDS from 2023 outlines and awareness, ii) limited concern and awareness important action areas for the country’s low-carbon of social standards, iii) low level of enforcement of trajectory.²⁴ Aligned with the 10-Year Development environmental regulations and social standards, iv) Plan and the updated NDC, the LT-LEDS offers a range insufficient technical support for addressing issues of sectoral priority interventions to guide sectors, related to environment and social management, development partners, financing institutions, the vi) low level of institutional capacity and capability private sector, and other stakeholders in implementing for implementing environmental and social the outlined activities. The strategy shows that the protection tools, vii) insufficient technical services primary cost components for the transition are related to certification of environmental and social investments related to energy and agriculture. More management systems, viii) lack of enforcement of than half of the total required investments are for regulations (for example, Pollution Prevention and power generation and the electrification of vehicles Control, Regulation No. 159/2008), and ix) under- and public transport, while agriculture accounts for provision of green financing. The strategy sets a approximately 25-30 percent. Regarding trade effects, range of objectives for the government to follow, the strategy projects a reduction in imports by 2.5 including targets for compliance levels of firms with to 4.5 percent, primarily due to decreased imports sustainability standards and regulations, construction of petroleum and, to a lesser extent, inorganic of state-of-the-art industrial landfills, installation fertilizers. The industry sector’s initiatives encompass of effluent treatment plants, implementation of the adoption of efficient and clean production energy management systems at firms, increase technologies, the electrification of process heat and in export volumes and value, and GHG emissions boilers across all industries (shifting from petroleum targets. Specific to industrial energy efficiency, to electricity), the use of green fuels (such as waste, USAID developed an Energy Efficiency Strategy for electricity, and hydrogen) for thermal processes, the Ethiopian Manufacturing Sector for the then and the implementation of electric technology for Ministry of Trade and Industry and Industrial Parks process heat in heavy industries like cement and brick Development Corporation.²⁶ The strategy notes that production. If the strategy is implemented as planned, the energy intensity of the Ethiopian manufacturing the strategy estimates that Ethiopia can generate industry is 0.33 tons of oil equivalent per $1,000 value nearly 680,000 green jobs annually. added which is higher than in peer countries such as Bangladesh. The study recommends an energy Other steps have also been taken toward Ethiopia’s efficiency improvement target of 40 percent by 2040, green transformation. In 2019, the then Ministry of notably to help achieve the sector’s GHG emission Trade and Industry, together with USAID and the reduction targets. The proposed action plan to achieve Industrial Parks Development Corporation, developed this includes three main activities: i) rolling out energy a Green Manufacturing Strategy.²⁵ The strategy was management programming to generate better firm- aimed at supporting the ministry’s implementation level data on energy consumption and savings of the Climate Resilience Green Economy Strategy potentials, ii) interventions at various policy levels by taking stock of Ethiopia’s strategies, legal and through capacity building, equipment labeling and institutional frameworks, and international good provision of finance, and iii) support to demonstration practices for green manufacturing. Based on this, projects to raise awareness about energy efficiency. 76 GREEN COMPETITIVENESS IN ETHIOPIA Notes 1. World Bank. World Development Indicators. 2. World Bank. World Development Indicators. 3. World Bank. November 2022. Ethiopia’s Great Transition: The Next Mile - A Country Economic Memorandum Overview (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/ en/099135107072224636/P175102033217c0c40bf400dc3bbaf4c28e 4. While the manufacturing sector has been the main target of Ethiopia’s development model, it continues to represent only approximately 7 percent of value added and contributes modestly to growth and quality employment. Labor and capital productivity in manufacturing has been negative since 2015, total factor productivity in manufacturing firms is estimated to have been negative since 2012, and the share of manufacturing employment within the industry sector has declined vis-à-vis that of construction – underscoring the lack of reallocation of labor from less productive and informal jobs to higher quality opportunities. Similarly, the services sector has remained characterized by mixed and stalling productivity and an extensive informal economy, as job creation in recent decades has been driven mainly through self-employment in micro, small and medium enterprises in urban areas. Finally, the shift of labor out of agriculture has been only nominal – with agricultural labor productivity lagging that of industry and services considerably, despite recent improvement. More specifically, about two thirds of total workers remain employed in agriculture, with rural to urban migration remaining limited and a lack of labor mobility preventing most households from participating in urban or rural off-farm opportunities. 5. UNDP. Ethiopia 2023: A country transformed? Options for a Next Generation of reforms. December 2022. 6. According to recent World Bank household surveys, about 88 percent of the poor still live in rural areas with the consumption of the bottom 20 percent in those areas not increasing in the last decade. For more information see: Bundervoet, T., A. Finn, S. Nakamura, B. Beyene, P. Paci, N. Mylenko, and C. Turk. 2020. Ethiopia Poverty Assessment - Harnessing Continued Growth for Accelerated Poverty Reduction. Ethiopia and Washington, DC: World Bank. 7. https://www.reuters.com/world/africa/fitch-cuts-ethiopias-foreign-currency-rating-after-downgrade- 2023-12-27/#:~:text=Ethiopia%20became%20Africa’s%20third%20default,Tuesday%20to%20provide%20 the%20money. 8. World Bank. November 2022. Ethiopia’s Great Transition: The Next Mile - A Country Economic Memorandum Overview (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/ en/099135107072224636/P175102033217c0c40bf400dc3bbaf4c28e 9. Observatory of Economic Complexity with data for 1995–2022. 10. Data from the International Energy Agency, Country Profile for Ethiopia, https://www.iea.org/countries/ ethiopia. 11. https://apanews.net/ethiopia-to-ban-importation-of-non-electric-cars/. 12. Cirera et al., “Understanding Firm-Level Adoption of Technology in Ethiopia.” 13. Stiglitz, Joseph. From Manufacturing Led Export Growth to a Twenty-First Century Inclusive Growth Strategy: Explaining the Demise of a Successful Growth Model and What to Do About It. (In Carlos Gradi, Murray Leibbrandt, and Finn Tarp (eds.), Inequality in the Developing World, UNU-Wider Studies in Development Economics, Oxford: Oxford University Press, 2021 14. Rodrik, Dani. Prospects for Global Economic Convergence Under New Technologies in David Autor et al., An Inclusive Future? Technology, New Dynamics, and Policy Challenges, Brookings Institution, Washington, D.C., May 2022. 77 ANNEX 1A. COUNTRY CONTEXT AND POLICY FRAMEWORK 15. Per-capita GHG emissions in Ethiopia have remained at 1.64 t CO₂e per person (much lower than the 6.48 t CO₂e per person average worldwide). For more information see: CAIT, 2023, Ethiopia Country Profile. 16. Other environmental protection laws in the country include:(i) the Environmental Impact Assessment Proclamation No. 299/20002; (ii) Environmental Pollution Control Proclamation No. 300/2002; (iii) the Biosafety Proclamation No. 655/2009; (iv) the Industrial Chemical Registration and Administration Proclamation No. 1075/2018; (v) the Solid Waste Management Proclamation No. 513/2007; (vi) the Water Resources Management Proclamation No. 197/2000; (vii) the Fisheries Development and Utilization Proclamation No. 315/2003; (viii) the Development, Conservation, and Utilization of Wildlife Proclamation No. 541/2007; (viii) the Control of Ozone Layer Depleting Substances Proclamation No. 716/2011; and the (ix) Forest Development, Conservation, and Utilization Proclamation No. 1065/2018. 17. Dagne, A., C. Elliott, J. Corfee, and S. Tsehay. 2022. “Mainstreaming Climate Change in Ethiopia’s Planning Process and the Path to a Climate-Resilient Green Economy.” Working Paper. Washington, DC: World Resources Institute. Available online at doi.org/10.46830/ wriwp.21.00032. 18. Mengistie, Belay Tizazu. Ethiopia: The Environmental Aspects of Policy and Practice in the Ethiopian Floriculture Industry. Environmental Policy and Law 50 (2020) 373-390. 19. From the 2021 Updated Nationally Determined Contributions (NDC) shows that livestock and LUCF will represent the major share of Ethiopia’s emissions in 2030 under business as usual (BAU) projections. However, in relative terms, emissions from industry and energy use are going to increase most given the country’s aspired structural transformation towards manufacturing outlined in the 10YDP. LUCF meanwhile has the largest GHG mitigation potential, notably due to afforestation and deforestation initiatives. The NDC’s mitigation interventions in the energy sector primarily focus on i) economy-wide improvements of energy efficiency of appliances, machinery and other capital assets, ii) transport electrification, iii) public transport, and iv) industrial fuel switches from petroleum to electricity or biomass. In the industry sector, the NDC focuses on interventions related to cement production via clinker substitution given that across the industry sector emissions remain low. 20. First, it aims to address constraints to private sector development through structural reforms that: (i) promote efficiency and competition in enabling sectors, (ii) improve the country’s business environment, (iii) lower tariff and non-tariff barriers to international trade, and (iv) improve the efficiency of public institutions. Second, it consists of macro-financial reforms to reduce overvaluation through buttressing the monetary policy framework and moving towards a flexible exchange rate regime, strengthening revenue mobilization and consolidating public expenditures (including by state-owned enterprises) to reduce the government’s fiscal deficit, or enhancing financial sector development to remove distortions in the flow of credit to the private sector. Third, it promotes sectoral reforms to address market failures and constraints in key economic sectors (for example, agriculture, manufacturing, mining, tourism, ICT). 21. With increased fiscal needs not allowing the government to fully phase out direct advances from the central bank and hindering its ability to reduce real overvaluation, and the suspension of preferential treatment under the African Growth and Opportunity Act minimizing the positive consequences of recent structural reforms. 22. For example, there are plans to pass a regulation and standards for recycling of polyethylene terephthalate (for example, plastic bottles) to reduce the import of plastics. 23. USAID. Green Manufacturing Strategy: Growing Industry Sustainably. 2019. 24. MoPD (Ministry of Planning and Development). “Ethiopia’s Long-Term Low Emissions and Climate Resilient Development Strategy (2020-2050).” MoPD of the Federal Republic of Ethiopia, 2023. 25. USAID, Government of Ethiopia, and EIC. “Green Manufacturing Strategy for Ethiopia - 2019.” USAID, 2019. https://www.climatelinks.org/sites/default/files/asset/document/2021-06/190817_ETH_Green%20 Manufacturing%20Strategy%20for%20Ethiopia%20-%20Final.pdf. 78 GREEN COMPETITIVENESS IN ETHIOPIA 26. USAID, and US Forest Service. “Energy Efficiency Strategy for the Ethiopian Manufacturing Sector.” Report Prepared for the Ministry of Trade and Industry of the Federal Democratic Republic of Ethiopia and the Industrial Parks Development Corporation of Ethiopia (IPDC), 2019. References Federal Democratic Republic of Ethiopia. 2021. “Updated Nationally Determined Contribution”. Rodrik, Dani, and Joseph E. Stiglitz. 2024. “A New Growth Strategy for Developing Nations.” Essay prepared for the International Energy Agency and the Economic Research Institute for ASEAN and East Asia project on the New Global Economic Order. World Bank. 2024. Ethiopia Country Climate and Development Report. Washington, DC: World Bank Group, 2024. 79 Appendix Key European Union A Sustainability Legislation In the coming years, the European Union will waste and packaging, while the Netherlands has enact a series of new laws affecting countries that drafted the Supply Chain Due Diligence Act requiring export products to Europe directly or indirectly. companies to identify and mitigate environmental These regulations fall under the European Green risks in their supply chains. Although these initiatives Deal and Circular Economy Action Plan, which aims aim for coherence, the proliferation of such measures to enhance product sustainability and practices highlights an increasingly complex landscape for in overseas supply chains outside the European exporters and policy makers to navigate. Union. These initiatives address various aspects of sustainability, including more transparent corporate These initiatives will influence firm behavior reporting, product design, production practices, and beyond businesses that export to the European the materials used in products destined for Europe. Union directly. Because of the cost and complexity Box A1.1 lists key legislative items. of adopting different production practices and data collection methods across multiple jurisdictions, Along with EU-level legislation, several individual several buyers and brands have indicated that they European countries are enacting their own will align with European legislation for all global sustainability laws. Germany, for example, has passed operations (BOF and McKinsey & Company 2023). the Supply Chain Due Diligence Act that requires This alignment means that even products made for firms operating abroad to comply with international the United States or other markets will likely follow standards on issues such as hazardous waste. these approaches, becoming de facto market access France’s Anti-Waste Circular Economy Law targets requirements for a larger share of global trade. Box A.1. Overview of Key Sustainability Legislation in the European Union The Corporate Sustainability Reporting Directive will introduce tighter and more consistent nonfinancial reporting requirements for larger firms operating in EU markets. The legislation will require more stringent and transparent reporting on a company’s direct activities and Scope 3 impacts across their supply chains. The first round of reporting, required for 2024 operations, will include greenhouse gas emissions for garment manufacturers selling to EU buyers. The Green Claims Directive and Empowering Consumers for the Green Transition will tighten the rules on how firms can communicate environmental data with customers. Compliance will likely require much more rigorous data collection from suppliers and increased use of officially sanctioned certification programs and data-intensive approaches such as life cycle assessments to back up claims about greenhouse gas emissions or the amount of water used throughout their supply chain. The Corporate Sustainability Due Diligence Directive will force companies to better understand and mitigate negative impacts within their supply chains and would cover both human rights 80 GREEN COMPETITIVENESS IN ETHIOPIA responsibilities and issues such as pollution, deforestation, excessive water consumption, or damage to ecosystems. In the coming years, this legislation is expected to be incorporated into national (European) laws, with the potential for sizable fines for firms found to violate the tightened rules. The Product Environmental Footprint initiative is a methodology for measuring the environmental impact of products throughout their life cycles. When finalized for all products, it will cover a standardized set of 16 indicators, including land use, water consumption, and the use of nonrenewable energy sources. This approach will allow for more straightforward comparisons between products, helping consumers make purchasing decisions based on a product’s environmental impact. The draft Eco-design for Sustainable Products Regulation is expected to introduce new requirements for products sold in Europe related to energy use, recycled content, and substances that prevent circularity. This umbrella legislation will later be followed by specific requirements for priority products, including textiles, metals, furniture, tires, paints, chemicals, and energy-using products such as electronics. The EU Carbon Border Adjustment Mechanism will introduce effective tariff rates for goods imported into the European Union based on estimated CO₂ emissions associated with production. Initially, this will apply only to a small set of products to which Ethiopia is not highly exposed (cement, electricity, fertilizers, aluminum, iron, steel, and hydrogen). However, this list could be expanded in the future. If Ethiopian goods become subject to coverage, it could be possible to reduce payments by demonstrating that greenhouse gas emissions are lower than global production averages (for example, by using green power) or by domestically pricing and taxing CO₂ emissions in line with EU levels. The EU Deforestation Regulation, which took effect in June 2023, will require firms seeking to sell goods in the European market to demonstrate that their production has not contributed to deforestation. The sectors covered include cattle and meat products, coffee, oil palm, soya, wood, and rubber, which represent almost 50 percent of Ethiopia’s exports to the European Union and nearly 9 percent of Ethiopia’s total export revenues, driven primarily by coffee exports to Germany and elsewhere. Exporters will need to provide geo-linked data proving that products are deforestation-free, produced in accordance with relevant local legislation, and covered by a due diligence statement. The ReFuelEU Aviation initiative will enforce an increasing share of sustainable aviation fuels (SAFs) for aircraft using European airports. The regulation requires fuel suppliers to blend SAFs with conventional jet fuels supplied at EU airports to ratios of 2 percent in 2025, 6 percent in 2030, and 70 percent by 2050. Airlines taking off from European airports (such as Ethiopian Airlines) will be required to refuel using these blended fuels. SAFs will include biofuels, recycled carbon fuels, and synthetic aviation fuels (e-fuels) but exclude food and feed crops. Source: Based on European Union legislation. 81 APPENDIX A. KEY EUROPEAN UNION SUSTAINABILITY LEGISLATION References BOF (the Business of Fashion) and McKinsey & Company. 2023. The State of Fashion 2024. London and New York: BOF and McKinsey & Company. 82 GREEN COMPETITIVENESS IN ETHIOPIA Appendix Stakeholders Interviewed B The World Bank team is grateful for the various interactions with representatives from the following organizations (in alphabetical order): Government of Ethiopia: Environmental Protection Authority (EPA) Ethiopian Civil Aviation Authority (ECAA) Ethiopian Coffee and Tea Authority (ECTA) Ethiopian Investment Commission (EIC) Industrial Park Development Corporation (IPDC) Leather Industry Development Institute (LIDI) Ministry of Industry (MoI) Ministry of Planning and Development (MoPD) Ministry of Trade and Regional Integration (MoTRI) Textiles and Garment Industry Development Research Institute (TGIRDC) Private sector Ethiopian Airlines Ethiopian Horticulture Producer Exporters Association (EHPEA) Ethiopian Textile and Garment Manufacturers’ Association (ETGAMA) FEDISCO Fortescue Growth Teams H&M Hawassa Investors’ Association Orcas Holdings PVH Corp. Roundtable on Sustainable Biomaterials (RSB) The Children’s Place Zoscales Partner 83 APPENDIX B. STAKEHOLDERS INTERVIEWED Development partners and non-governmental organizations: African Circular Economy Network Delegation of the European Union in Addis Ababa Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH IDH Sustainable Trade Initiative International Finance Corporation (IFC) Japan International Cooperation Agency (JICA) Solidaridad Tony Blair Institute United Nations Development Programme (UNDP) United Nations Industrial Development Organization (UNIDO) 84 GREEN COMPETITIVENESS IN ETHIOPIA Appendix Case Study: Wastewater Treatment C and Sludge Management in Hawassa Industrial Park Table C.1. Hawassa Industrial Park Wastewater Treatment Cost Cost component in original Original proposal in Actual costs studied Actual costs in $/KLD agreement with Arvind Envisol $/KLD¹ by IPDC in 2023² Power supply 0.25 Power cost 0.85 Power-additional utilities such as 0.03 Chemical Cost 2.25 lifting pumps and lighting Chemicals 0.17 IPDC labor cost 0.05 Consumables 0.56 Consumables 0.03 - Spare parts and 0.265 - Maintenance cost 0.03 - Sludge disposal 0.08 Total 1.01 Depreciation cost 4.12 Source: x. Note: IPDC = Industrial Parks Development Corporation. Arvind Envisol proposed $1.01 per cubic meter to use the pollution load in calculating the treatment fee be collected from Hawassa Industrial Park (HIP) in order to incentivize less polluters and discourage tenants. Based on the negotiation with tenants, $0.80 high pollution load. So, in addition to volumetric per cubic meter was agreed and Industrial Parks calculation pollution load should be considered. Development Corporation (IPDC) to subsidize more than $0.20 per cubic meter. In all industrial parks sludge management was not properly planned. And we can say that sludge is the There have been costs not considered in the Arvind most overlooked part of waste management. The Envisol proposal such as for sludge management, challenges related to sludge management in all labor, maintenance and depreciation. IPDC studied industrial parks are, the first one is initially there actual costs as can be seen in the above table column was no plan on how to manage sludge (to recycle, 4. IPDC actually spending in HIP ZLD $4.12 to treat 1 or dispose). The second major problem is the level of cubic meter of waste. It is under process to have a dryness. The treatment plant produces 15-23 % dried new treatment fee. In addition the waste treatment sludge which is very dangerous for environment fee should have escalation rate to adjust inflation to store because of dewatering. Enough and safe and also should be based on the pollution load. The Storage and transportation facility are not available. proposed rate was a flat rate that did not consider In Ethiopia, there is a lack of guidance on safe and the pollution load. environmentally sound disposal and reuse of sludge. Standards was not available for different uses of IPDC to be financially sustainable and stay above the sludge. IPDC by pushing the responsible institutions, water, should issue new treatment fee as started. Also Sludge limit requirement standards were developed 85 APPENDIX C. CASE STUDY: WASTEWATER TREATMENT AND SLUDGE MANAGEMENT IN HAWASSA INDUSTRIAL PARK in 2021 by Ethiopian Standards Agency. The sludge 15-23% dryness. Different options including solar limit requirements prepared for land application, drying is under implementation (BLIP) to dry the landfill disposal, incineration, agricultural use and sludge at its required level. air emission limit for storage, transportation and application. The standard still has a limitation in Sludge parameter testing laboratory is also not providing limit requirements for recycling ( using available at industrial parks except for some sludge for bricks and tiles preparation). parameters and they usually take the sludge to the areas were the full testing facility available. Now Different alternatives have been considered by IPDC to adays with the support of development partners reduce the burden of storing sludge in industrial parks. there is piloting of bricks and tiles production from One of the solutions was to transport the sludge to sludge at HIP. Rephi waste to energy generating plant. It was working for BLIP since it is very close to the plant but Hawassa As indicated above sludge management, manpower, was very far (more than 275 kilometers). In addition, maintenance and depreciation costs are overlooked the safe transportation and the transportation cost during the HIP ZLD operation and management were unbearable. The HIP transportation stopped agreement. However, the treatment cost and the after two tracks. Rephi waste to energy plant also fee collected from industrial park tenants has a has a requirement which is the sludge should be huge discrepancy even without considering these dried 85-90% and the calorific value should be above costs. Unless the institutions like IPDC looking for 3,300 kcal/kg. The attempts to transport the sludge another options to change sludge to income, options to cement factories were not working because of , supplying it to cement factories, energy generating transportation cost and also the requirement of plants, even taking it to landfills has a significant cement factors to raise the calorific level of the cost burden to industrial parks. So, strengthening the sludge by adding plastics and scrapped fabrics. started pilots by development partners to produce tiles and bricks from sludge and issuing sludge The sludge drying has been also a big challenge standards that can used in evaluating the sludge since the treatment plant produces sludge with only parameter for recycling is important. Notes 1. Components of costs considered by Arvind Envisol ,in determining the waste treatment fee, to be collected from HIP tenants. The cost component overlooked sludge treatment cost, manpower cost, maintenance cost etc. 2. Actual costs spent by Industrial Parks Development Corporation in treating 1 cubic meter of waste. 86