Low-income countries benefit from carbon pricing – study shows
“We should tax pollution, not people”, advocates United Nations Secretary-General António Guterres.
New research by the independent Dutch think tank The Ex’tax Project, in cooperation with Cambridge Econometrics and supported by C&A Foundation, demonstrates how such tax reform – putting a price on pollution and using the revenues for social impact – could benefit low-income countries.
According to the study ‘Tax as a force for good: aligning tax systems with the Sustainable Development Goals (SDGs) and the inclusive circular economy. Case study Bangladesh’, 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.
Key findings of the study include:
- Tax reform could boost GDP and public investments, while cutting pollution in Bangladesh
- The analysis applies the ‘polluter pays’ principles, including carbon pricing and reducing fossil fuel subsidies for industries. Revenues are used to invest in infrastructure and social spending, as well as cleantech investments in the textiles industry
- Over the 2020-2025 period, the scenarios add $6.9-$7.8 billion to GDP, while saving 18.5-19.9 megatonnes of carbon and $405-$429 million in energy imports
- The transition can be highly progressive when revenues are mainly used to increase social spending
- Climate policy can be social policy
Cambridge Econometrics modelled the impacts of two preliminary scenarios in Bangladesh. These include putting a price on carbon emissions and abolishing fossil fuel subsidies, while using the revenues to invest in clean technologies, infrastructure and social spending.
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 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.
Bangladesh was chosen as a case study country as its vulnerability to climate disruption could displace more than 30 million people by 2050. Also, 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 modelling suggests 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 2020-2025 period, both scenarios would add USD 6.9 billion (in the Infrastructure Scenario) and USD 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 USD 400 million on energy imports.
Phasing out fossil fuel subsidies could also potentially raise domestic resources by USD 4.7 billion, while a carbon tax could add an additional USD 10.6 billion.
For the textiles sector, which represents 80% of Bangladesh’s foreign earnings, a new tax model would have consequences. In all scenarios, the textiles sector shows a slight negative result in terms of production (0.24% and 0.15% 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 USD 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 the sector.
Download more information from the Ex’Tax website here: