Ethiopia’s Path to Green Competitiveness: Adapting Key Sectors for a Sustainable Future

The World Bank's report highlights Ethiopia's need to enhance green competitiveness by adapting key sectors to climate impacts and meeting international sustainability standards, particularly from the EU. Addressing climate resilience, strengthening supply chains, and leveraging renewable energy could secure Ethiopia’s economic growth amid global environmental shifts.

In a comprehensive report, the World Bank examines the pressing need for Ethiopia to strengthen its economic resilience in the face of climate challenges and growing global sustainability demands. The report, conducted by the World Bank’s team, evaluates the impact of climate change on Ethiopia’s economy, focusing on four crucial sectors: textiles, coffee, cut flowers, and aviation. As climate change continues to alter global economic landscapes, Ethiopia faces specific pressures to adapt its production and supply chains to meet international sustainability requirements, notably from the European Union, while also dealing with severe local climate impacts such as droughts, floods, and shifting seasonal patterns. These climate challenges threaten key export sectors, impacting the country's ability to maintain market access and compete globally. The report identifies these shifts as opportunities and challenges for Ethiopia, urging targeted actions to bolster green competitiveness.

The Climate Challenge: Uneven Impacts Across Regions and Sectors

Ethiopia’s geographical diversity, while advantageous in some respects, leads to highly varied climate impacts across regions, making the effects of climate change uneven. For example, coffee production, one of Ethiopia’s largest export earners, faces growing instability as climate change alters traditional growing conditions. Higher temperatures and more frequent extreme weather events could reduce coffee yields, particularly for specialty varieties, which are vulnerable to subtle climate variations. In regions suited for coffee, rising temperatures risk reducing the quality of beans, while in other areas, climate variability could open new possibilities for different crops like sorghum and chickpeas. These changes, however, come with high uncertainty, as extreme events such as floods threaten to disrupt both agriculture and broader economic activities. The country’s infrastructure has faced significant disruptions, including a major route closure in 2024 due to flooding in Djibouti, which blocked fuel supplies and led to gasoline shortages, illustrating the direct economic risks of extreme weather. Such impacts necessitate adaptive measures across Ethiopia’s economic sectors.

Textiles and Garments: Seizing the Green Advantage

Ethiopia has attracted foreign direct investment in the textiles and garment sector in recent years, owing to its low labor costs and reliance on renewable energy. However, recent challenges including the loss of duty-free access to the U.S. market under the African Growth and Opportunity Act (AGOA) and an internal conflict have threatened the sector's growth trajectory. The AGOA suspension, due to human rights concerns, led to a redirection of exports toward Europe, but this shift means that Ethiopian textile manufacturers will face stricter EU regulations. The EU Deforestation Regulation, effective in 2024, requires exporting firms to verify that their products are not linked to deforestation, which will pose compliance challenges, especially for small and medium-sized enterprises. Furthermore, the textile industry is under pressure to reduce its environmental footprint in water use, greenhouse gas emissions, and waste management. While Ethiopia’s renewable energy could give it a competitive advantage, particularly over traditional garment producers, the country faces hurdles in producing certified sustainable cotton. Currently, Ethiopia relies heavily on imported cotton, which diminishes local value addition and undermines the country’s potential to fully integrate its cotton-to-garment value chain.

Securing Coffee’s Future with Sustainability Standards

For coffee, which constitutes around a quarter of Ethiopia’s exports, adapting to the EU Deforestation Regulation and meeting traceability demands will be crucial. The structure of Ethiopia’s coffee sector, primarily composed of smallholder farmers, poses a challenge to compliance with the EU’s stringent sustainability requirements, which necessitate proof that coffee is produced sustainably and without contributing to deforestation. The report highlights how Ethiopia could leverage sustainability demands to drive growth by strengthening value chains and investing in voluntary sustainability standards (VSSs), such as those required by the Better Cotton Initiative for textiles. These standards not only help producers gain premium prices but also improve market access by providing traceable production practices, making Ethiopian coffee more attractive to environmentally conscious buyers. Yet, implementing these practices requires substantial investment in training, data collection, and technological support to ensure that coffee producers meet international standards, particularly in geospatial data reporting, which verifies compliance with anti-deforestation laws.

Cut Flowers and Aviation: Adapting to Global Climate Pressures

The cut flower industry, a significant source of employment, especially for women, also faces mounting sustainability pressures. Ethiopia’s floral exports are vulnerable to EU regulations due to the heavy reliance on refrigeration and air freight, which carry high greenhouse gas emissions. Some buyers are considering sourcing locally grown flowers in Europe to reduce their carbon footprint. The Ethiopian government, therefore, is encouraged to promote sustainable practices within the floriculture sector, such as water recycling and reduced pesticide use, which could help maintain the industry’s attractiveness to international buyers. With growing concerns over climate impacts and sustainability, Ethiopian floriculture must adapt to increasingly stringent regulations that could threaten the sector’s growth unless proactively addressed.

Ethiopia’s aviation sector, largely represented by Ethiopian Airlines, contributes significantly to the economy but faces an uncertain future as global climate targets increase pressure on the aviation industry to reduce carbon emissions. The transition to sustainable aviation fuels (SAFs) is critical, particularly as EU regulations impose higher SAF use in flights to and from Europe. Establishing a local SAF production industry would help maintain Ethiopia’s competitiveness and potentially create an additional export market. However, the infrastructure investment required for SAF production is significant, and logistical challenges within agricultural value chains pose additional hurdles.

Moving Forward: A Green Path to Economic Growth

The World Bank’s report emphasizes the importance of immediate government action to address these sector-specific challenges and capitalize on green competitiveness opportunities. Strengthening Ethiopia’s national quality infrastructure (NQI) and building technical capabilities for certification and compliance are seen as key strategies for adapting to international regulations. With its high share of renewable energy, Ethiopia is well-positioned to attract environmentally conscious investors, but achieving green competitiveness will depend on concerted efforts across government and industry to support sustainable practices, improve infrastructure, and foster compliance with evolving global standards. The report ultimately positions Ethiopia at a critical juncture, where strategic investments in green resilience and adaptability could secure a sustainable path for economic growth.