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Climate-friendly tax reform could help BD boost GDP: Report

It suggests carbon pricing and abolishing subsidies on fossil fuel

FE Report | September 26, 2019 00:00:00

Tax reform - including putting price on carbon emission, abolishing subsidies on fossil fuel and using the revenue in infrastructure, social spending and green-tech in textile sectors - could help Bangladesh boost gross domestic product (GDP), create new employment and protect environment, according to a latest report.

The proposed measures could help adding US$6.9-$7.8 billion to GDP, while saving 18.5-19.9 megatonnes of carbon and $405-$429 million in energy imports and create employment for 0.50 million by 2025, it revealed.

The report titled "Tax as a force for good: aligning tax systems with the SDGs and the inclusive circular economy. Case study Bangladesh' launched on Tuesday jointly by the independent Dutch think-tank The Ex'tax Project, Cambridge Econometrics and C&A Foundation.

It demonstrated how such tax reform - putting a price on pollution and using the revenues for social impact - could benefit low-income countries (LICs).

According to the research, it is possible to design policies that reduce resource use and harmful emissions while at the same time stimulating the economy and creating jobs as well as higher incomes for those who need it most.

Cambridge Econometrics, a UK-based economics consultancy, has modelled the impacts of two preliminary scenarios-infrastructure and social in Bangladesh.

These included putting a price on carbon emissions and abolishing fossil fuel subsidies, while using the revenues to invest in clean technologies, infrastructure and social spending.

The measures are assumed to be introduced gradually from 2020 to reach the full measures by 2024. In the year 2025, both scenarios are expected to raise $4.3 billion in revenues by introducing a carbon tax of $30 per tonne of CO2 emitted by industries and the power sector, and phasing out oil and natural gas subsidies for industries and power generation.

In the modelling, every year, the revenues are fully recycled. In the Infrastructure scenario, all revenues are recycled through investments in clean technology and infrastructure.

In the Social Spending Scenario (or Social Scenario), all revenues are recycled through investments in clean technology and social spending targeted towards the lowest two income quintiles. In both scenarios, the cleantech investments are targeted towards the textiles sector as Bangladesh's most important export sector.

"Bangladesh was chosen as a case study country as the country has one of the largest gaps between tax revenue and GDP, which means that there is a need to mobilise domestic resources," the report reads.

Also, its vulnerability to climate disruption could displace more than 30 million people by 2050, it added.

The modelling suggested that by 2025, tax reforms could lead to higher GDP and employment levels, while reducing carbon emissions and energy imports.

The transition can be highly progressive when revenues are mainly used to increase social spending.

Over the period from 2020 to 2025, both scenarios would add $ 6.9 billion (in the Infrastructure Scenario) and $ 7.8 billion (in the Social Scenario) to GDP, compared to business as usual (2017 prices).

Additional results show that, in both scenarios, Bangladesh could create over 500,000 new jobs, see a significant reduction in carbon emissions of over 18 megatonnes, and save more than $ 400 million on energy imports.

Phasing out fossil fuel subsidies could also potentially raise domestic resources by $ 4.7 billion, while a carbon tax could add an additional $ 10.6 billion, the report showed.

In all scenarios, the textiles sector showed a slight negative result in terms of production (0.24 per cent and 0.15 per cent respectively) by 2025. Overall, though, the Bangladesh economy would be stronger and more competitive in terms of carbon intensity and energy import dependency.

Also, it's important to note that the competitiveness impacts of the cleantech investments in the textiles sector (totalling more than $ 2.5 billion) are not yet captured in the model.

As one of the most polluting industries, operating in a fast-changing global market, the global textiles industry is at a crossroads; continuing the linear model or shifting to circular models and adapting to changing circumstances.

"In light of global trends, tax reform could be a way to reduce risks and future-proof of the sector," it said.

Hector Pollitt, Head of Modelling at Cambridge Econometrics, said: "Detailed macroeconomic modelling in developing countries is difficult, but the new FRAMES modelling framework provides a powerful tool to assess policy. This study shows that the 'polluter pays' principle, when applied progressively by governments, could be a force for good."

Femke Groothuis, President of the Ex'tax Project, said: "Tax reform will be key to tackle the climate crisis. This study connects the dots and demonstrates that climate policy can be social policy."

Leslie Johnson, Executive Director of C&A Foundation, said: "Public policy - particularly through the creation of carrots and sticks - is essential to tackling big, systemic challenges such as climate change and improve the livelihoods of workers in a country, like Bangladesh, that is so important to the global apparel industry."

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