The Ex'tax Project: Tax as a force for good - aligning tax systems with the SDGs in Bangladesh
Bangladesh may not need to choose between economic development and environmental sustainability. Cambridge Econometrics’ modelling suggests that well-designed environmental tax reform could reduce carbon emissions, support employment, raise GDP and generate revenues for development priorities at the same time.
Bangladesh faces a dual challenge common to many emerging economies: financing sustainable development while managing severe environmental pressures. With one of the lowest tax-to-GDP ratios in the world, one of the highest exposures to climate disruption, and a rapidly growing population in need of jobs and social protection, the country has strong incentives to rethink its fiscal system.
Cambridge Econometrics partnered with The Ex’tax Project, supported by C&A Foundation, to explore how shifting the tax burden away from labour and towards pollution and fossil fuel use could support inclusive and sustainable growth.
Approach
Cambridge Econometrics developed FRAMES: Bangladesh, a macroeconomic model based on the theoretical framework of E3ME to assess the economy-wide impacts of environmental tax reform. The model captures the integrated linkages between the economy, energy systems and the environment, and includes distributional analysis across five household income groups.
The modelling assessed two revenue-neutral tax reform scenarios, both phased in gradually from 2020 to 2024:
- A carbon tax of $30 per tonne of CO₂ on industrial and power sector emissions.
- The removal of fossil fuel subsidies for oil and natural gas in industry and power generation.
Revenues were fully recycled each year under two contrasting spending strategies:
- Infrastructure Scenario: revenues invested in public infrastructure and clean technology for the textiles sector.
- Social Scenario: revenues directed towards social spending targeted at the two lowest income quintiles, alongside clean technology investment.
Key Findings
The modelling results demonstrate that well-designed tax reform can simultaneously reduce carbon emissions, raise GDP and employment, and generate progressive distributional outcomes. Bangladesh does not need to choose between development and environmental sustainability.
Both scenarios deliver higher GDP and employment by 2025
By 2025, the Infrastructure Scenario adds 0.4% to GDP and the Social Scenario adds 0.5%, compared to the baseline. Employment increases by 0.2% in both cases — equivalent to around 139,000 additional persons employed in the Infrastructure Scenario and 172,000 in the Social Scenario by 2025. Over the full 2020–2025 period, cumulative GDP gains reach $6.9 billion and $7.8 billion respectively, with a cumulative 139,000 and 172,000 added jobs in each respective scenario.
Carbon emissions fall significantly in both scenarios
CO₂ emissions decline by 4.0% in the Infrastructure Scenario and 3.7% in the Social Scenario relative to the baseline by 2025. Across the 2020–2025 period, the scenarios avoid a cumulative 19.9 and 18.5 million tons of carbon emissions respectively. The largest reductions occur in carbon-intensive industrial sectors, which account for approximately 85% of coal use in Bangladesh.
Green tax reform can be highly progressive
In the Social Scenario, real incomes for the poorest quintile rise by 12.3% and by 4.9% for the second-lowest quintile, while the top three quintiles face a modest 0.6% reduction. Even in the Infrastructure Scenario — where no explicit redistribution is built in — lower-income households experience smaller real income reductions than wealthier groups, making the reform progressive by design.
Revenue mobilisation supports domestic resource needs
The combined measures are projected to raise $4.3 billion annually by 2025. Between 2020 and 2025, phasing out fossil fuel subsidies could generate $4.7 billion in domestic resources, with the carbon tax contributing a further $10.6 billion. Bangladesh also saves $405–429 million on energy imports across the scenarios.
The textiles sector faces modest short-term costs, offset by clean technology investment
As Bangladesh’s dominant export industry — representing 80% of foreign earnings — the textiles sector faces a slight reduction in gross output (0.24% in the Infrastructure Scenario and 0.15% in the Social Scenario) due to higher energy costs and some export competitiveness losses. A dedicated cleantech fund, totalling over $2.5 billion across the period, is designed to support the sector’s transition to lower-carbon, more resource-efficient production methods, with long-run quality and competitiveness benefits not yet fully captured in the model.
About FRAMES: Bangladesh
FRAMES is a single-country modelling tool designed for economies where data availability may be limited, and where the country is not individually represented in E3ME. It provides detailed sectoral disaggregation, integrates the economy, energy and environmental systems, and supports distributional analysis.
For this study, Cambridge Econometrics developed FRAMES: Bangladesh using a national input-output table and behavioural parameters drawn from the E3ME model. The model was calibrated against baseline projections from the World Bank and HSBC.
A replicable framework for other countries
This study was the first application of the Ex’tax Methodology to a lower-middle income country context and is designed to serve as a template for similar analyses elsewhere. The findings suggest that Environmental Tax Reform is not only viable in developing country settings but may offer particularly strong benefits — given large informal sectors, inefficient existing tax systems, and significant unmet needs for public investment in infrastructure and social protection.
Cambridge Econometrics continues to develop FRAMES applications for countries seeking to understand the economy-wide impacts of green fiscal transitions.
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