Fiscal policies that could tackle air pollution and climate change
Bangladesh is going through a rapid urbanisation process, and its economy is undergoing significant structural changes. This transformation has the potential to harm the environment as carbon footprints tend to increase with urbanisation, as many studies have shown. As industrialisation progresses, it drives urbanisation and elevates energy consumption, resulting in a surge of carbon dioxide (CO2) emissions. This, in turn, causes a major environmental and climate-related problem – specifically air pollution.
Pollution has resulted in an alarming level of PM2.5 concentration in the air of Bangladesh, which was found to be much higher than the WHO-recommended levels in recent times. This worrisome trend highlights the urgent need for effective measures to tackle the detrimental effects of industrialisation on the country's environment and public health.
Bangladesh has made a pledge through its Nationally Determined Contribution (NDC) to significantly reduce its greenhouse gas (GHG) emissions unconditionally by 6.73 percent in five crucial sectors by 2030: electricity generation, transportation, industry, waste management, and land use. Under conditional commitment, i.e. with foreign financing and technology support, Bangladesh is targeting a further reduction of 15.12 percent in GHG emissions. Implementation of these commitments will require huge resources, for which, the country needs to generate resources domestically, too. And doing so requires appropriate fiscal measures.
Environmental degradation and climate change impacts create externalities that can be reduced through appropriate pricing mechanisms. This would help generate resources to address the negative impacts of climate change. Besides, government spending also needs to be aligned with environmental and climate goals. Given that Bangladesh is at the forefront among climate victims, we must adopt fiscal initiatives that address this issue. The national budget is one avenue for taking such initiatives as it spells out specific measures for spending and generation of resources from various sources.
Our existing fiscal policies to promote green transformation are limited. However, there are a few initiatives in place to facilitate the greening of our economy. The Renewable Energy Policy 2008, for one, grants VAT exemption for certain renewable energy equipment and associated raw materials, as well as the corporate income tax exemptions for renewable energy producers for a five-year period. The Finance Act, 2014 introduced an environment protection surcharge, and two green funds have been established by the Bangladesh Bank – the Refinance Scheme for banks and financial institutions, and the Green Transformation Fund for export-oriented industries.
To encourage sustainable production and consumption, more accessible tax incentives and green funds are needed. Climate-focused fiscal measures involve not only spending on green initiatives, but also generating resources through appropriate taxation. The government can leverage the high demand for a green transition in different sectors by mobilising resources through budgetary measures, and allocating them towards greening the economy. In order to tackle air pollution and climate change, the government can take some important measures right away.
First, the government ought to fulfil its commitments as outlined in the Renewable Energy Policy. Presently, there are VAT exemptions for solar panels and batteries. But no exemptions exist for solar inverters. Additionally, the import duty on inverters was increased by 37 percent in the FY2022 budget. It is important to devise a comprehensive policy that encompasses VAT exemption for all types of equipment used in renewable power plants, particularly solar power plants.
Second, an incentive tariff can be considered for electricity generated from renewables. The Renewable Energy Policy provides for the possibility of such an incentive tariff, allowing it to be priced up to 10 percent higher than the highest purchase price for electricity generated from fossil fuels.
Third, under the Finance Act, the one percent surcharge on goods produced by industries that contribute to environmental pollution must be fully enforced as soon as possible, in order to encourage environmental conservation.
Fourth, to promote the transition towards more sustainable practices, an effective strategy is to introduce a carbon tax on fossil fuels. Several studies have suggested that raising the price of carbon is the most effective and potent approach to tackling global warming and minimising air pollution. The revenue generated from this tax can be allocated towards the development and advancement of renewable energy sources. The Bangladesh government aims to implement a five percent carbon tax on fossil fuel prices by 2025, with a subsequent increase to 15 percent by 2041. However, from FY2024, the government may commence a carbon tax initially set at three percent. A carbon tax will serve as a significant incentive for businesses and individuals to shift away from fossil fuels and towards cleaner energy alternatives.
One may oppose a carbon tax due to concerns that it would result in increased energy costs for consumers. However, the revenue generated from such a tax can be utilised to provide rebates and dividends to consumers, ultimately mitigating the impact of any potential fuel price increase.
Fifth, to encourage the adoption of sustainable and renewable energy sources, it is imperative for the government to gradually phase out fossil fuel use. This process can be initiated by reducing the subsidies provided to the fossil fuel industry, which would lead to an increase in the cost of using fossil fuels, making them less attractive to consumers. The resources saved from these subsidies can be redirected towards the development and promotion of green energy technologies. This would help in creating an enabling environment for the growth of renewables, which have a much lower carbon footprint than fossil fuels.
Sixth, to decrease air pollution from transportation, it is suggested that the current advance income tax (AIT) system for private motor vehicles be revised. This would involve implementing higher AIT rates for fossil fuel-powered vehicles compared to hybrid and fully electric vehicles, with the degree of increase ranging from 5 to 50 percent, depending on the size of the engine and electric motor.
Fiscal policy measures like these are key towards addressing air pollution and combating climate change impacts. Implementing them will require an efficient and modern institutional mechanism. There should also be coordination among various institutions as the issue is cross-cutting in nature.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in the article are the author's own.