INTERNATIONAL Monetary Fund's (IMF's) 'Selected Issues' Report (SIR) on Bangladesh has pitched carbon tax (CT) as one of the means to ramp up its tax revenue. Released on 17th September, SIR says that CT can help Bangladesh raise significant tax revenue. It has cited a recent policy note by the World Bank as estimating CT's revenue impact for Bangladesh as 1% of GDP.

As put by SIR, CT "can be linked to existing fuel taxes and can be revised based on fiscal needs or political economy considerations". SIR points out CT would help limit urban pollution. It observes: "Dhaka is now considered the second most polluted capital city, and a 2018 World Bank study estimates losses linked to urban pollution and environmental degradation at close to 3% of GDP". According to SIR, carbon taxes are relevant in a low-income environment, as (i) they are less regressive where poor households have limited access to the power grid or personal vehicles; and (ii) the revenues they generate can finance targeted transfers and social spending.

SIR explains: By helping establish a predictable price for carbon emissions, carbon taxes also provide clear incentives to promote investments in emissions-saving technologies. While opponents argue that such taxes harm economic activity and slow job creation, the revenue they generate may over time be used to reduce other distorting taxes on labour and capital. It may also be used to facilitate continued investment and research into the use of renewable energy, which at present accounts for less than 2% of Bangladesh's power production. At the same time, regional initiatives should promote cross-border energy trade and secure access to cheaper and cleaner energy from neighbouring countries.

Possible negative impacts on more vulnerable households from subsidy reforms and carbon taxes will need to be addressed, including though targeted transfers. While using taxes and elimination of subsidies to promote mitigation and raise revenue for adaptation should be encouraged, energy pricing needs to remain affordable to facilitate the country's inclusive growth objectives. A recent study by the Policy Research Institute in Dhaka notably emphasizes that political economy considerations warrant a gradual approach, where the tax should initially apply to petrol and diesel at the pump, before eventually applying to fuel oil or coal for electricity generation.

According to IMF calculations, pre-tax energy subsidies in Bangladesh in 2017 amounted to USD 1.05 billion, while post-tax subsidies reflecting negative environmental impacts and other externalities amounted to USD 8.83 billion at about 3.4% of GDP. These subsidies run the risk of increasing closer to levels observed in neighbouring emerging markets, notably as imports of more expensive liquified natural gas are required to meet the country's growing energy needs.