Shifting to a low-carbon growth trajectory—key to climate change mitigation—and investing in resilient infrastructure will require considerable resources. Photo: Shutterstock.com
Last year, residents of Karachi, Pakistan, bore the brunt of unprecedented rainfall since 1967: 223.5 mm in 12 hours, the highest amount of rain ever recorded in a single day in the city. Homes, public buildings, roads, underpasses, and other infrastructure were flooded in the throes of the COVID-19 pandemic. In May 2020, cyclone Amphan triggered more than three million evacuees and damaged nearly two million homes across Bangladesh, India, and Bhutan—the largest global disaster displacement of the year.
Such climate catastrophes are not new to South Asia: more than 750 million people in the region have been affected by one or more climate-related disasters in the past two decades, with the estimated damage worth more than $150 billion. The new IMF Climate Change Dashboard shows that South Asia’s climate vulnerability index is among the highest in the world (See Figure 1 below). What’s worse is that these climate disasters are only becoming more frequent with climate change. A recent report by the United Nations Intergovernmental Panel on Climate Change (IPCC) predicts that South Asia will see hotter weather, longer monsoon seasons, and increased droughts in the next two decades.
Figure 1. South Asia is particularly vulnerable to climate change
Source: IMF Climate Change Dashboard, Feyen et al. (2020), and World Bank calculations using a sample of 187 countries in 2020.
To keep a check on this burgeoning storm, South Asian countries have already committed to joining global efforts in accordance with the Paris Agreement and have integrated climate change into long-term development plans. The draft climate accord just in from the global climate COP26 held in Glasgow also urges nations to phase out coal and fossil fuels. However, shifting to a low-carbon growth trajectory—key to climate change mitigation—and investing in resilient infrastructure will require considerable resources. This shift is particularly daunting in South Asia’s post-pandemic recovery phase, as COVID-19 has reduced government tax revenues and increased expenditures.
The key question then is: How can governments help reduce greenhouse gas emissions, minimize the impacts of climate disasters, and promote long-term growth, given limited fiscal resources?
One way out for governments is to rely on carbon tax, a form of climate-smart fiscal policy, especially for countries with high greenhouse gas intensity. With carbon tax, governments collect taxes from individuals and companies on the use, production, import, or distribution of fossil fuels. This in turn decreases carbon emissions, limits air pollution, reduces health hazards, and encourages efficient and environment-friendly innovations. It also creates incentives for greater use of the region’s abundant renewable energy.
South Asia is already leading the way in decarbonization initiatives. India has exceeded a hundred gigawatts in renewable energy this year and ranks fourth in the world in terms of installed renewable energy capacity. Bangladesh is a model for the rest of the world for building coastal resilience. Bhutan is the world's first carbon negative country. In Nepal, community-based forest management programs have helped reduce deforestation by 40 percent.
More than 750 million people in the region have been affected by one or more climate-related disasters in the past two decades, with the estimated damage worth more than $150 billion.
Yet, these successes are not enough compared to the magnitude of the challenge.
All the more, revenues collected from climate-smart policies such as carbon tax in countries with high greenhouse gas intensity help increase government’s fiscal resources, which in turn can be used to help economies grow in a green, resilient, and inclusive manner. Our latest South Asia Economic Focus (See Box 2.2 on page 81) depicts how having more fiscal resources before a natural disaster helps a country speed up recovery right thereafter.
In addition, these resources can be used to expand social protection coverage and provide relief efforts to people affected by natural disasters. Adaptive social protection systems combine social protection with disaster risk management and climate change adaptation, and can help build resilience to shocks and ensure timely delivery of social assistance to protect the poor. In its latest South Asia Roadmap for the Climate Change Action Plan, the World Bank has committed to providing technical assistance to India and investments to Bangladesh to help increase the climate-responsiveness of the countries’ social protection systems.
Carbon tax though is not without its downsides. Some believe that taxing carbon in the short term could negatively affect economic activity. And carbon tax alone can have negative distributional impacts, because the same tax would make up a proportionally larger share of a poorer household’s income. However, well-designed climate-smart fiscal policies can help offset these negative side effects. Governments can pair carbon tax with a tax cut in the green and innovative sectors, increase investment in public infrastructure and green energy, or rebate part of the tax revenue back to households to address the negative distributional impact.
In fact, in our latest South Asia Economic Focus (See Box 2.3 on page 92) we simulate a hypothetical energy reform in Bangladesh where the introduction of a carbon charge and gradual fossil fuel subsidy phase-out is followed by an increase in public investment and lump-sum transfers to the poorest households. This approach not only curbs carbon emissions but also raises government revenue, promotes long-term economic growth, and improves overall well-being of households over the next decade.
Figure 2. A carbon tax policy package would yield positive impacts on public revenue and economic growth in Bangladesh
Source: Simulations using World Bank – IMF Carbon Pricing Assessment Tool (CPAT). Updated November 10, 2021.
Well-designed climate-smart fiscal policies can reduce climate harming emissions and help the region transition to a green economy while also increasing government revenues to better prepare for climate disasters and promote long-term economic growth. But economic structures and tax systems vary dramatically across countries and designing well-functioning fiscal policy packages requires both a thorough understanding of climate fiscal policies and a country’s economy and tax system. The World Bank is engaged with the Ministry of Climate Change in Pakistan to provide technical support on a feasible carbon-pricing mechanism that should facilitate clean energy transition and provide a source of domestic revenue for the government.
Transitions are never easy. Yet, with climate change, they are absolutely vital for South Asia for a green recovery beyond the COVID-19 pandemic and for reducing poverty in the long term. We have the technical tools and solutions to reduce the emission of greenhouse gases through well-designed tax policies. However, to witness real outcomes, countries, individuals, and international partners have to come together to play a role—come rain or shine—in building climate resilience and shared prosperity across the region.
This blog is part of a series centered around the latest edition of our South Asia Economic Focus (SAEF)- Shifting Gears: Digitization and Services-Led Development.
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