Carbon Tax: Where are we heading
Mother Earth faces a major threat now as its very existence has come into question due to the mind boggling behaviour of its habitants in their desperate search for prosperity. Developed countries' frantic ambition for global superiority resulted in the rapid buildup of gas emissions, leading to the phenomenon known as 'greenhouse effect'. Carbon dioxide being one of the main components of greenhouse gas is targeted by many countries in their efforts to mitigate climate change related problems. Bangladesh has already started looking at a bleak future as the ominous picture of a disastrous situation looms large.To address this nagging problem and to have a role in decreasing greenhouse gas in the atmosphere, Bangladesh is planning to introduce carbon tax for the first time. Carbon tax is basically an instrument for pricing the production, import and distribution of carbon content of fuels. There are three ways in which pricing of carbon is practiced for reducing CO2 emissions (Stern, 2008): first, carbon taxation (tax) which imposes a tax on the emission of CO2; second, cap-and-trade which is a market based environmental instrument that gives a limit on the level of carbon emission; third, implicit pricing via regulations and standards, which imposes constraints on technologies that can be necessary where irremovable or unavoidable market imperfections exist. While cap-and-trade controls quantity of emissions, carbon tax controls the price of emissions. Carbon tax is based on the economic principle of negative externalities. Externalities are costs or benefits generated from one person's actions on the well-being of a bystander. Negative externalities are costs that are not paid for and which are adverse to a bystander. When utilities, business or households consume fossil fuels, they create pollution in the form of greenhouse gases, that has a societal cost; which is borne by peoples many miles away from the source. This is negative externality and there have been attempts for addressing it through carbon pricing. According to Nordhaus (2009) raising the price of carbon (by taxation) provides strong incentives to reduce carbon emissions through some mechanisms. First, it gives an indication to consumers about what goods and services produce high carbon emissions and therefore leads them to use those more sparingly. Secondly, it gives producers a clear picture about which inputs (such as electricity from coal) emit more carbon, and which inputs (such as electricity from wind) emit less or none. Hence this leads producers to move to low-carbon technologies. Thirdly, high carbon prices provide market signals and financial incentives to spur inventors and innovators to develop and introduce low-carbon products and processes that eventually replace the prevalent carbon-intensive technologies. Political, social and economic considerations will affect Bangladesh's policies to reduce carbon emissions. It has been found in a study (Devarajan, et al, 2009) that the welfare costs of achieving significant reductions in CO2 emissions are fairly small. If the total increase in revenue from carbon tax is used in productivity, investment, economic growth and employment, it may bring two fold benefits -- environmental and economic. This additional revenue can also be used to reduce existing tax distortions. However, this would mean a major re-structuring of Bangladesh's tax system which is a major obstacle to the betterment of the society. In general, the more targeted the tax to carbon emissions, the better the welfare results. Environmental taxes and regulations tend to discourage economic activity because they raise the costs to firms producing output. Typically, this leads to a lower overall level of employment and investment in the economy. These "spillover" effects of environmental policies on labour and capital markets add to the distortions created by the tax system, which is termed as the tax-interaction effect. Bangladesh may face a hard time if this tax is levied on electricity as it comes from the combustion of natural gas or coal . RMG sector uses a huge amount of electricity, and pharmaceutical sector uses both electricity and gas as input. Taxiing carbon will increase the input cost which in turn will reduce the competitiveness of these products and services in international markets resulting in lost jobs or, in the worst case, an economic downturn. The carbon tax may impact agricultural production costs directly through an increase in the price paid by the farmer for fuels. Due to the unavailability of electricity, farmers will largely be unable in substituting away from these fuels (for example, diesel) by using alternative energy or less carbon emitting technology (for example, solar power) and as such the tax cannot be avoided by the farmers as demand for fuel inputs is very inelastic (meaning whatever the price is they will use those fuel input). As price takers, farmers, will not be able to increase the price of their output to offset the increases in production costs (e.g. increase in input prices) induced by the tax. As a result the tax will reduce farmers' profitability unless they resort to low-carbon technologies. A carbon tax will discriminate against rural areas. Rural residents use relatively more diesel fuel than residents in urban areas do, whereas rural residents also tend to have lower incomes than their urban counterparts. According to the Irish Economic and Social Research Institute (ESRI), carbon tax weighs more heavily on rural households. It has been seen that, typically poor consumers spend a greater proportion of their income on energy-intensive goods and fuel. Therefore cost increases in energy tend to impact the poor worse than the rich. Applying a carbon tax in Bangladesh may not be appropriate as it may exert a detrimental effect on our immediate goal of economic development. It may become a bane rather than a boon for us as our fragile economy has a high possibility of getting affected by raised energy prices. So another option we can ponder about is a cap-and-trade policy under which financial and technology support are given to invest in clean energy infrastructure [for example, reducing carbon through reduced deforestation, availing fund from carbon market through implementing 'Clean Development Mechanism' (CDM), and 'Reducing Emissions from Deforestation and Forest Degradation' (REDD) etcetera]. Bangladesh has already taken CDM projects and can think further in this regard. It is imperative that developed countries, who have greatly contributed to the climate change problem by emitting greenhouse gases since the industrialisation, help developing countries like Bangladesh to invest in cleaner technologies while developed countries should build their own environment-friendly energy system. As more than half of the land of Bangladesh is less than 20 feet above sea level, Bangladesh faces a double threat: one is rising sea level as a result of the melting ice caps and glaciers, and the other is extreme climatic events, like cyclones and heavy rain. Erratic climate pattern, global warming, and other problems caused by high fossil fuel consumption justify bold actions to push energy conservation and emission reductions to the table. Carbon tax carries both positive and negative corollary with it. Keeping all these implications in mind such taxes should be broad, gradual and government should not rush headlong into a policy which may compromise our economic development. If the government authorities have the mechanism in place for reaping its benefit and adopt this policy, they should be careful in keeping it progressive so that it is fine-tuned to our economy and is not harmful to the rural poor, especially the farmers.
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