In this study, we assess the economy-wide effects of biofuel investment in Ethiopia, with a focus on the external sector. The Government of Ethiopia has been revising its energy policy to switch from imported fossil oil to domestically produced biofuels, partly in response to climate change and partly in response to rising world oil prices, which leave oil-importing countries such as Ethiopia vulnerable to external oil price shocks.

As a result of many years of deforestation, fuelwood scarcity is a critical problem in Ethiopia. The Ethiopian government encouraged afforestation and tree growing at both the community and household levels as a policy to stem deforestation and degradation of agricultural lands. The rationale underlying the tree growing strategy is that some significant part of whatever is planted will be used as fuelwood, thereby reducing the demand for wood from native forestlands and use of crop residues and animal dung needed for soil improvement.

This study examines the relationship between property rights, defined by land tenure security and the strength of local-level institutions, and household's preferences for fuelwood source. A multinomial regression model applied to survey data collected in rural Ethiopia underpins the analysis. Results from the discrete choice model indicate that active local-level institutions increase household dependency on open access forests, while land security reduces open access forest dependence.

A CO2 tax assures that different fossil fuels are taxed in a neutral way according to actual CO2 emissions. The Swedish experience can be summarized by increased tax levels over time and steps taken towards a more uniform national price on fossil CO2. Moreover, the CO2 tax base is only moderately elastic to price changes (particularly in the short run) when it comes to petrol and diesel implying quite stable tax revenues.

Previous studies on improved cookstove adoption in developing countries use cross-sectional data, which makes it difficult to control for unobserved heterogeneity and investigate what happens to adoption over time.