Abstract
<jats:p>This paper estimates the welfare effects of removing fuel subsidies in Ethiopia and Rwanda and assesses compensatory options for protecting low-income households. We combine tax-benefit microsimulation models with input-output analysis to capture direct fuel price effects and indirect effects through higher prices of other goods and services. Removing fuel subsidies increases household consumption expenditure by 3.3% in Ethiopia and 0.5% in Rwanda. In both countries, indirect effects dominate, reflecting limited direct fuel consumption and the transmission of higher fuel costs through production and transport. Food is the main channel, especially for poorer households, because it accounts for a large share of their consumption. Although better-off households face larger losses overall, poorer households remain exposed through indirect effects. Compensation performs differently across countries. In Rwanda, expanding existing social assistance provides meaningful protection. In Ethiopia, larger indirect losses mean that fiscal savings arising from household fuel consumption alone are insufficient to offset poverty increases.</jats:p>