Bangladesh's transition to low-carbon and its implications
Bangladesh is geographically vulnerable because of its location and dependence on primary commodities. Due to its poor integration with regional markets, the structural transformation of the country needs to frame its policies strategically
2022 was an eventful year, but even with the overwhelming number of pressing issues around the world, I believe the topic of climate change surpassed it all, especially for its impact on the most vulnerable Least Developing Countries (LDC) and developing countries.
The most important reason behind this is its link with trade and business.
About 60% of manufacturers in LDCs ship to developed countries such as the EU and about 91% of these manufactured exports are made by low-technology manufacturers with low-income elasticity. It is difficult for them to have the necessary climate-resilient infrastructure, policies and technologies needed for a low-carbon transition without international support.
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The UNCTAD LDC report of 2022, published in November last year, highlighted the low-carbon transition and its disquieting impact on structural transformation. According to the report, LDCs have set ambitious emission-reduction targets and have committed to developing climate-resilient pathways and delivering net-zero emissions by 2030.
To deliver on this, LDCs need huge investment, technology, planning and many other supportive measures. It has been recognised that while LDCs are the least responsible for climate change they are still severely punished by the effects of climate change; and in most cases, these countries are unaware of this reality.
The report captured several issues regarding structural transformation, international support for green growth and green industrial policies. UNCTAD took into account the contemporary issues faced by the LDCs and recommended them accordingly to ensure they could cope best.
For LDCs, the green structural transformation will ensure green growth and a structural economic transformation. It needs synergies between productive upgrading and resource efficiency.
To achieve a reduction in emission, which is known as a contraction, there has to be a shift in focus from the declining sunset industries to the sunrise industries which are generally greener since it was developed with innovation.
The sunset and sunrise industries may differ depending on the country's context, such as in India where steel and shipbuilding could be considered sunset industries and the modern automobile sector and tourism sector could be some examples of sunrise industries.
However, LDCs are sometimes a host of polluted sunset industries, and even policymakers and business sectors sometimes do not bother to opt for the relocation of sunset industries from advanced developing countries. For a transformation, businesses and investors have to be cautious about the technology, innovation and, in that respect, supportive mechanisms, and the differences between sunset and sunrise sectors.
Bangladesh is geographically vulnerable because of its location and dependence on primary commodities. Due to its poor integration with regional markets, the structural transformation of the country needs to frame its policies strategically.
About 85% of Bangladesh's export is concentrated on RMG. Since it is fully dependent on imported raw materials, its profit levels change depending on the increase in the price of raw materials. Manufacturing goods are low technology-based. And there is less diversification even within the sector, only four low-valued products dominate, contributing about 75% of export.
Now RMG is also facing the transition from cotton-based products to Man-Made Fibre (MMF)-based products; this transformation also needs huge investment. There are several LEED-certified factories in the country, however along with greening, it also needs to focus on the circular economy and ensure resource efficiency to contribute to green growth.
The manufacture-based export-led growth strategy announced by the 8th FYP will face a number of challenges towards its green transformation. Countries around the world are now preparing their own way to go for green transformation, they've opted for stringent market access and rules of origin.
The EU is one of the important markets for Bangladesh, they also opted for new innovations for greening their production base. The recent introduction of the Carbon Border Adjustment Mechanism (CBAM) could be unfavourable for the country, however, our most important sector, RMG, is still out of the CBAM list. They initially included cement, iron and steel, aluminium, fertiliser and electricity under CBAM, gradually they can include new products.
The LDC report has shown baseline carbon tax rates using different simulations. Several items, such as agriculture and forestry and fishing, mining and quarrying, manufacturing, construction, electricity, gas, steam and air conditioning supply will have an impact on carbon pricing. Tax rates will be depending on the emission per unit of output, and domestic technology.
Bangladesh is now facing the challenges of conflicting priorities - there are environmental commitments with pollution commitment, energy mix criterion, achieving development goals with low-carbon emission etc.
Juggling all these at the same time is demanding and very complex. Gathering funds for adaptation through collective negotiation has not happened. Bangladesh, once an LDC leader has now been termed as a graduating LDC, and the remaining four years are very critical in terms of negotiation, and fulfilling the graduation commitment challenges.
Loss and damage issues have in principle been included in the COP27, however, no negotiation modalities have been established so far. Technology transfer has not happened, and while a technology bank has been established, the benefits from these efforts have not been percolated among LDCs.
Now private sector financing for climate change issues has been coming up broadly. Different estimates suggest that the Paris agreement's temperature and adaptation goals will require $3-6 trillion per year until 2050. Currently, Global climate finance adds about $600 billion per year.
There are variations in climate data, however, the amount is indeed huge. At present, the private sector's financial landscape is not promising due to many reasons, in the case of spending on their own, they are unaware of risk-adjusted returns.
The private sector experiences large up-front costs of climate projects and uncertain financial returns. Through incentives like transparent financial intermediaries and stable political and regulatory infrastructure, they can be encouraged. If the social benefits of carbon reduction can be internalised, the financial return risk could be reduced.
However, the internalisation of the greenhouse gas externality is difficult and needs to be seized for the environment. Policies to address uncertainties of climate-related technologies, financial return of climate projects, future carbon markets and emission pathways can encourage private sector participation.
Public Private Partnerships can work if seed money can come from the government, along with public sector plus international funding and private sector plus international funding. The readiness for initiating innovative projects could create some new pathways for low-carbon transition through structural transformation.
Ferdaus Ara Begum is the chief executive officer of BUILD, a public-private dialogue platform that works in the area of private-sector development.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
