Carbon Tax?

Bangladesh Government Proposes a Tk. 15 Carbon Tax". This headline would have been unthinkable even a decade ago. However, it appears that we are inching closer towards rolling out a tax that will have impact across the board! The Daily Star carried a news item on April 13, 2016 with the headline "WB recommends carbon tax on fuel". Carbon tax has been on the table for many years, but the drive to reevaluate this measure got a strong boost recently with the decline in price of crude oil. In an Op-ed in this newspaper on March 3, this commentator made a strong case for considering a carbon tax in the article "Petroleum price: Reduce price and add a green tax". Since the government is reported to be "now examining the proposal of the WB", as the DS report notes, it is worth taking another look at this economic tool.

A carbon tax is added to fossil fuel to offset the damage caused by emission of carbon dioxide. In August 1994, in a report to the Tariff Commission of the Government of Bangladesh, I proposed a carbon tax. The study was funded by UNDP under a grant, and I made the case even though I was aware that it would get nowhere in a fuel-deficient country, and I was equally cognizant that it is always a tricky issue to tax an essential item like kerosene and diesel. Who in their right mind would suggest another tax? In many other countries, including the USA, carbon tax has not proved to be a popular instrument to address climate change, and the Obama Administration could never get the approval of the Congress or the electorate.

For Bangladesh, a carbon tax could increase the price of all fuels: coal, motor oil, furnace oil, biofuels, aviation fuel, diesel, and natural gas. It might prove to be a very politically risky move, and voters might ask: what do we get in return for higher price of electricity, octane, and construction materials? While many countries around the world have instituted a carbon or green tax, very few countries have reported success. Little did anyone anticipate the resistance the idea would generate regardless of the economic soundness of the policy! Of the few countries which went ahead with carbon tax, a number of them had to either scrap the plan or scale it back. Australia on July 1, 2012 passed a carbon tax bill and implemented it, but then the people decided to abolish it in a referendum on July 17, 2014.

When the idea of imposing a carbon tax was first proposed, many labelled it a win-win proposition or an example of a low-hanging fruit. Why so? Unlike air which is free, using coal emits soot and carbon dioxide and needs to be paid for. But the tax would also allow the government to collect the revenue and allocate the funds for improvement of the environment and mitigate the effects of carbon in the environment. In developed countries, some governments have reduced income tax or subsidised low-income families. Some others have set up Green Projects or undertaken projects to save wildlife, e.g. elephants in India.

The recently concluded Paris Climate Agreement stipulates that signatory countries must take measures voluntarily as per their national climate action plans. Not surprisingly, some dissensions within the ranks have already come to the surface. At a meeting of the BASIC (Brazil, South Africa, India and China) countries, India's Environment Minister Prakash Javadeka opposed any surcharge on aviation fuel. "It will impose inappropriate economic burden on developing countries," he said.

There are many issues that must be resolved before Bangladesh can take a decision on carbon tax. A national consensus has to be reached on the disposal of the tax money collected. Does the cash go towards funding environmental projects which may ultimately prove a waste or provide relief to the poor in the form of lower VAT tax? The latter would be strongly opposed by environmentalists. In 2010, Bangladesh was on the verge of adopting carbon tax, but support has waned in recent years. One important reason for this disinterest is carbon tax hurts the pocket book of the average consumer. And then coal, which is the biggest source of CO2, will be hit hard. Another unintended consequence may be increased use of biomass. An example is the case of Sweden's carbon tax which has resulted in increased biomass use for heating and industry, because these fuels are classified as renewable. For Bangladesh, a carbon tax will unquestionably increase the consumption of firewood, biomass, bagasse, and agricultural waste. And then there is the case of electricity price. Almost all of our electricity is currently sourced from fossil-fuel burning power plants. Where do we make exemptions? Are natural-gas plants given a free pass?

So, to answer the questions raised at the outset: do the advocates of carbon tax have a slam and dunk case? Not really. And to use a well-worn cliché, the devil is in the details. There are two critical components: start slow and be prepared to fail. Also, the government should consider reducing tax to make the carbon tax revenue neutral, if possible.