World Bank for ending energy subsidy, imposing carbon tax

The World Bank, in a report, has suggested ending energy subsidies and imposing carbon tax on all kinds of production activities in Bangladesh for the country's transition to green growth.

The Washington-based development partner recently forwarded the study report to different government agencies, including the Finance Division, Planning Commission, and the Economic Relations Divisions (ERD), for their review, feedback and further analysis.

The Bangladesh government has also started talks with the World Bank recently over a budget support amounting to at least $250 million with green growth in view, according to sources at the ERD and the Department of Environment.

The global lender may set withdrawal of gas and electricity subsidies and imposition of carbon tax as prerequisites for availing its budget support for green growth, officials assume.

Subsidy proceeds can be redistributed to poor households, which will lead to a rise in their real income, the Washington-based development partner says in the report.

The World Bank also proposes introducing a cap-and-trade system to reduce carbon emissions.

In such a system, the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap. Emitters must surrender an allowance for every tonne of greenhouse gas they emit. Companies may buy and sell allowances among themselves. Companies that can reduce their emissions at a lower cost may sell any excess allowances for companies facing higher costs to buy.

Many countries or regions that have already passed cap-and-trade are the European Union, Australia, New Zealand and South Korea. They have all set hard limits on a significant portion of their carbon emissions.

In its analysis, the World Bank shows how the country will benefit from its shift to the new policies.

"In the energy subsidy withdrawal case, comprising both the gas and electricity subsidies, the policies examined result in an increased GDP because of the greater efficiency achieved by removing the price distortion and channelling the larger government revenues to the general economy via lump sum transfer," it says.

The reallocation of the government funds now used to finance energy subsidies will determine a more efficient use of resources in the entire economy, it adds.

However, economist Dr Mustafa K Mujeri told The Business Standard that the removal of energy subsidies will put the country's economy in stress amid soaring fuel prices globally.

"Production costs will go up putting a dent in people's income. As a result, inflation will be stoked," he said.

Subsidies can gradually be withdrawn when global uncertainties ease, Mustafa K Mujeri noted.

For FY23, the government has earmarked Tk18,000 crore in subsidies for the power sector, while the amount allocated for LNG imports has increased to Tk13,300 crore from Tk11,300 crore a year ago.

In the carbon tax cases, the World Bank's analysis says, "We have examined several alternatives, including standalone taxes, taxes combined with a cap-and-trade system. For both cases, we also looked at the impact of using the tax proceeds to increase general government revenues and to perform redistribution programmes towards the poor."

Overall, the scenario of a carbon tax with redistribution to the poor shows the strongest performance in social benefits, it points out.

Dr Mustafa K Mujeri said if carbon tax is imposed, product prices will shoot up and producers will pass it on to consumers.

He suggested gradually imposing such a tax on certain manufacturing industries.

"But we cannot impose carbon tax on export-oriented industries right now, which might lead to a loss of our export competitiveness," he added. 

Fazlul Hoque, a former president at Bangladesh Knitwear Manufacturers & Exporters Association, said, "Our apparel factories are now turning green. So, the government should not go for a strict measure that will affect our production."

"We are now not thinking about subsidies, rather we are worried about energy purchases. If prices of gas, oil and electricity go up further, we will be in serious trouble," he noted.

BGMEA president Faruque Hassan said if the government withdraws energy subsidies as per the advice of the World Bank it will take a toll on manufacturers and exporters.

"As a result, energy prices will be higher, definitely we will lose competitiveness in the export markets," he added.

In the meantime, the European Union has moved to impose carbon tax on several sectors as part of a long-term initiative, known as the EU's Green Deal.  

Although garments and leather items, the main export products of Bangladesh, are not included in the initial list, they can be added any time in the future as they are on the risk list, warned international trade experts. 

They said China has already imposed carbon tax as part of its efforts to reduce carbon emissions and avoid possible carbon taxes in the European markets. Several competitor countries of Bangladesh, including Vietnam and India, have already taken this initiative.

Research and Policy Integration for Development (RAPID), a non-profit research organisation, is studying the carbon tax, carbon market creation, world trade and its impact on Bangladesh in light of the EU's Carbon Deal.

MA Razzaque, chairman of the organisation, told TBS that Europe has initially included six sectors in the list of carbon taxes and has not yet introduced it for imported goods. As a result, there is no possible impact on Bangladesh right now.

"But our readymade garments and leather products are on the risk list and if it is introduced after 2026, our products could be subject to entry tax, which could mean added competition for us," he said.