The dynamic relationship between carbon emissions and electricity tariffs in Ghana

Establishing a clear relationship between carbon emissions and electricity tariffs is crucial for developing effective energy and environmental policies. In Ghana, electricity tariffs are determined using the rate of return methodology, which focuses on ensuring that electricity providers can recover costs and achieve a reasonable return on investment. However, this methodology currently excludes carbon emissions as a variable, resulting in tariffs that may not reflect the environmental costs associated with carbon emissions from electricity generation. The study investigated the relationship between carbon emissions generated from electricity generation and electricity tariffs in Ghana. Annual time series data from 1985 to 2021 were used. The research used the Autoregressive Distribution Lag (ARDL) (bounds test) methodology to establish the short-term and long-term relationships among variables. Based on the ARDL results, carbon emissions impacted tariffs positively in the long and short run. However, carbon emissions were reduced drastically in the long run, reflecting a decline in electricity tariffs. The study's findings indicate that, in the long run, a 1 % rise in the country's carbon emissions is directly associated with an increase in electricity tariffs of about 0.0153 %. However, a proportionate increase in carbon emissions in the short run is associated with an equivalent increase in electricity tariffs by 0.025 % at a 5 % significance level.

In conclusion, integrating carbon emissions into the electricity tariff-setting process is vital for creating Ghana's sustainable and environmentally responsible energy policy. By establishing a clear correlation between carbon emissions and electricity tariffs, policymakers can better align economic incentives with environmental goals. Encouragement of a favorable environment for renewable energy investments will contribute to reducing carbon emissions and support the long-term decline in electricity tariffs, aligning with global trends toward cleaner and more sustainable energy solutions.