Options for a carbon tax in Bangladesh

Carbon is an element that is essential to all life on Earth. Carbon makes up the fats and
carbohydrates of our food and is part of the molecules, like DNA and protein that make up our
bodies. Carbon, in the form of carbon dioxide, is even a part of the air we breathe. It is also
stored in places like the ocean, rocks, fossil fuels, and plants.

Plants take in CO2. They keep the carbon and give away the oxygen. Animals breathe in oxygen
and breathe out carbon dioxide. Plants and animals depend on each other. It works out well. For
hundreds of millions of years, plants and animals have lived and died. Their remains have gotten
buried deep beneath Earth's surface. So for hundreds of millions of years, this material has been
getting squished and cooked by lots of pressure and heat.

For hundreds of millions of years, dead plants and animals were buried under water and dirt.
Heat and pressure turned the dead plants and animals into oil, coal, and natural gas. It turns into
what we call fossil fuels: oil, coal, and natural gas. This is the stuff we now use to energize our
world. We burn these carbon-rich materials in cars, trucks, planes, trains, power plants, heaters,
speed boats, barbecues, and many other things that require energy.

When fossil fuels burn, we mostly get three things: heat, water, and CO 2. We also get some solid
forms of carbon, like soot and grease. So that's where all the old carbon goes. All that carbon
stored in all those plants and animals over hundreds of millions of years is getting pumped back
into the atmosphere over just one or two hundred years. So, CO2 and other greenhouse gases are
good—up to a point. But CO2 is so good at holding in heat from the Sun, that even a small
increase in CO2 in the atmosphere can cause Earth to get even warmer. Throughout Earth's
history, whenever the amount of CO2 in the atmosphere has gone up, the temperature of Earth
has also gone up. And when the temperature goes up, the CO 2 in the atmosphere goes up even
more.

Climate change is having very profound impacts on nearly every aspect of our environment,
especially on the worldwide water system networks through increased flooding and ever-
widening droughts. As the climate temperature rises, then air can store higher water content,
which logically then makes rainfall amounts, as they move across the globe, more extreme.
Rivers then wash away more soil into the oceans and lakes, creating pollution and destruction of
our shores.

This is unfortunate in saying that Bangladesh is the most polluted country. Bangladesh ranks first
among the most polluted cities in the world. This claim has been made in the Swiss
organization’s IQ Air Survey. These results have come out from a survey conducted in 6,475
cities in 117 countries on the standards of the World Health Organization (WHO).

The main reasons why Bangladesh is one of the most polluted cities in the world.

According to the report of The Daily Star, the pollution in Bangladesh is up to 15 times higher
than the World Health Organization’s standards on pollution. The biggest reason for pollution
here is the smoke coming out of vehicles, brick kilns, and factories. Apart from this, the flying
dust in the cities is also a big reason for pollution.

The fine particles that cause pollution in the air are PM2.5. According to the World Health
Organization, this particulate in the air should not exceed 5 µg/m3, but in Bangladesh, it is 76.9
micrograms per cubic meter (µg/m3). The range of these particles present in the air is increasing.

According to the official website of the Swiss organization, Dhaka is the second most polluted
capital in the world after Delhi. The PM2.5 level in Delhi is 85.0 µg/m3 and in Dhaka, this figure
is 78.1 µg/m3. Last year also Bangladesh was at the fore of the list of polluted countries.
According to the report, the risk of chest infection has increased due to the increase in the level
of pollution in Bangladesh. Apart from this, the risk of influenza, pneumonia, and lung cancer
has also increased. At the same time, the effect of pollution on children is also affecting their
physical development.

Emissions mean the release of greenhouse gases and/or their precursors into the atmosphere over
a specified area and period. Carbon dioxide emissions or CO2 emissions are emissions stemming
from the burning of fossil fuels and the manufacture of cement; they include carbon dioxide
produced during the consumption of solid, liquid, and gas fuels as well as gas flaring.

This chart shows carbon emissions increased in an increasing trend throughout the years in
Bangladesh.

Carbon Tax Under a carbon tax, the government sets a price that emitters must pay for each ton
of greenhouse gas emissions they emit. Businesses and consumers will take steps, such as
switching fuels or adopting new technologies, to reduce their emissions to avoid paying the tax.
A carbon tax differs from a cap-and-trade program in that it provides a higher level of certainty
about cost, but not about the level of emission reduction to be achieved. Taxes on greenhouse
gases come in two broad forms: an emissions tax, which is based on the quantity an entity
produces; and a tax on goods or services that are generally greenhouse gas-intensive, such as a
carbon tax on gasoline. Taxes on greenhouse gases come in two broad forms: an emissions tax,
which is based on the quantity an entity produces.

Approach to a carbon tax in Bangladesh. The gasoline tax can be conceived as a part of a longer-
term plan to introduce a proper carbon tax at a later stage. This is how it has progressed in some
countries that have introduced carbon tax. For example, in India, the carbon tax emerged first in
2010 as a tax on domestic coal but was later broadened to include petrol and then diesel. So,
essentially, the carbon tax in India emerged over five years in different stages. The tax rates have
also been adjusted gradually.

This pragmatic approach is best suited to the current political economy environment of
Bangladesh. The pricing reform for natural gas is off the table and the government will not
accept taxation of fuel oil or coal for electricity generation to avoid electricity cost escalation

Carbon taxes can be a win-win for Bangladesh. They can help show the world that Bangladesh is
serious about climate mitigation, boosting the country’s influence in international negotiations
and helping it to access financing and technology.

They can play a role in nudging Bangladesh’s growth to a lower carbon and cleaner path, helping
to make it more sustainable and improving environmental (and health) conditions for its citizens.
They can help to raise additional resources – up to 1 percent of GDP – for social and economic
development, including infrastructure investment. Some of the additional resources can be used
to reduce taxes on labor or firms.

Bangladesh was among the first developing countries to publish an integrated Climate Change
Strategy and Action Plan (in 2009) and to establish its own Climate Change Trust Fund to help
mitigate and adapt to climate change. It also amended its constitution to enshrine the protection
of the environment as a key national aim.
Bangladesh still faces many challenges.

Bangladesh has many development needs, including significantly increased power availability
and transport infrastructure, as well as continued progress in social indicators. It is one of the
most vulnerable countries to climate change, with estimated annual losses of around 2 percent of
GDP by 2050. A significant proportion of the country is vulnerable to flooding and other
climate-related risks. At the same time, Bangladesh is an extremely resource-constrained
country, with public sector revenue averaging only 10 percent of GDP over the last decade.

Broad-based charges on greenhouse gases, such as a carbon tax, are effective instruments for
Encouraging cleaner fuels and reducing energy use. Carbon taxes are a highly practical extension
of existing administration for fuel taxes, can potentially raise substantial amounts of revenue, and
can be in Bangladesh’s national interest due to domestic health and other associated benefits.
These notwithstanding, carbon taxation is likely to face significant political challenges such as
strong lobbying by fossil fuel stakeholders (such as public transport owners and, power
producers); opposition from the general public because of the price impacts of the tax;
transparency regarding the effects on winners and losers; and the perception that taxes reduce
welfare and increase unemployment

Some possible solution is a carbon tax can help Bangladesh signal an unwavering commitment
to combating climate change. A carbon tax can be part of a strategy to reduce environmental
damage associated with its development and raise additional resources for development. It can
make it possible to finance tax reductions in “goods” such as work and production, shifting the
tax burden toward “bad” such as pollution. In tandem with efforts to reduce pollution overall, a
carbon tax can improve the nation’s health and environment.

 Bangladesh has nearly maintained fuel prices despite a decline in international prices. A
carbon tax would make explicit Bangladesh’s commitment to ensure fuel prices reflect
negative externalities. Preliminary estimates suggest that Bangladesh could, over time,
rise to 1 percent of GDP in carbon tax revenues. Carbon taxes are easier to implement
than many other taxes. International experience suggests that carbon taxes are
administratively simpler to implement than many other forms of taxation. Carbon taxes
 can be levied “upstream” on relatively few producers/importers and the costs are allowed
to be filtered down.

 Earmarking of resources from carbon taxes is not recommended but the additional
resources will allow for increased developmental expenditures – something Bangladesh
badly needs. Resources raised through a carbon tax can be used to finance improved
infrastructure and can compensate for reduced taxes or duties. Bangladeshi firms suffer
from a significant lack of infrastructure, harming their competitiveness.

 A carbon tax would lead to only small price increases but it will be important to moderate
the impact on vulnerable firms and households. The overall impact of a carbon tax on
prices is fairly low. Some price adjustments can be offset with corresponding reductions
in other taxes or duties. However, some sectors will be more impacted than others.
Industries that currently benefit from preferential pricing (compared to other sectors or
citizens) will see the largest price increases in percentage terms. Addressing the impact of
poor households will be particularly important.

 Further analysis and preparation are required to implement a carbon tax. While
international experience suggests implementation is simpler than for many other taxes, it
will be important to identify and prepare the administrative systems required to
implement a carbon tax. In addition, it will be important to assess in more detail which
sectors and which types of households hold will be most impacted. This will allow the
government to determine compensatory reductions in other taxes and duties, as well as
how to adjust the social protection system or another social spending to ensure the burden
on poorer households is minimized. Further work will notably be required to understand
the pass-through to households of energy price increases, particularly for power and
fertilizers. In addition, greater consideration should be given to energy price liberalization
while implementing the carbon tax.

Finally, say that the use of a carbon tax can be a major way to reduce carbon emissions.
Simulation analysis shows that with reasonable assumptions about demand elasticities of income
and prices for oil products a carbon tax would bring about a substantial reduction in CO2
emission. This reduction need not hurt GDP growth or adversely affect the income of the poor.
The carbon tax not only lowers CO2, but it also yields revenues. These revenues can be invested
in clean fuel, clean technology, and infrastructure projects that will help offset the loss of output
from carbon taxes. Bangladesh is way behind the rest of the world in clean energy and clean
technology. Proper pricing of fossil fuels along with the carbon tax will provide incentives to
reduce the consumption of these fuels and also motivate private investment in clean energy and
clean technology. The carbon tax incidence is progressive in the sense that the cost of living
increase is highest for the top ten percentile and lowest for the bottom ten percentile.
Furthermore, the increase in the cost of living for the poor can be offset through income transfers
from additional social protection spending based on carbon tax revenues. Thus, a proper
combination of fossil fuel pricing, carbon tax, and investments can make carbon tax a win-win
policy package.