Ethiopia aims to restore 15 million ha degraded forests and woodlands, but effects on the potentially contrasting goals of long-term carbon storage, biodiversity and sustainable livelihoods are unknown. To quantify the effects of grazing exclusion on vegetation and fire behaviour, we established six 30 x 30 m fenced exclosures with grazed controls, in a mesic wooded savanna. Experimental burns were done after 1.5 years. Tree seedlings were few but more common inside fences. Field layer cover and biomass increased inside fences, and grass species increased in numbers and cover. Fire intensity was higher inside fences, killing shrubs and saplings but not mature trees. Interviews confirmed that overgrazing has resulted in “cool fires”, causing shrub encroachment. High-intensity fires occurred in the 1980s after a zoonotic disease killed most livestock. Short-term increase in carbon storage through fire and grazing exclusion may lead to loss of pasture, and in the long-term increased wildfire risk.