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Economics of climate change

Determining compensation to be paid by the big emitters of carbon

Hasnat Abdul Hye | Published: November 29, 2019 20:52:07 | Updated: December 06, 2019 21:14:12


Nearly one in three children in Bangladesh are at risk from cyclones, flooding and other climate change-linked disasters, the United Nations warned on April 05, 2019, urging more help for one of the world's worst-hit countries. —Photo: bdnews24.com

The economics of climate change involves two types of costs which may be considered as two sides of the same coin. First is the economic loss incurred by countries individually and the global economy as a result of damages and loss, as in the case of crops, by climate change. The second cost is the money that has to be spent for adaptation and mitigation to address the damages and loss caused. Both types of costs are calculated tentatively, based on guesstimates and should be updated at intervals.

According to the Economist Intelligence Unit (EIU), the latest Climate Change  Resilience Index measured the preparedness of the world's 82 largest economies and found that based on current trends the fallout of warming temperatures would shave off 3.0 per cent of global gross domestic product (GDP) by 2050 (AFP, Paris, November, 2019. In its analysis developing countries have been found poorer in terms of resiliency than richer ones. Richer nations are able to be more resilient towards the impacts of climate change, so this really threatens growth trajectories of developing countries as they try to catch up with the developed world. With global inequality on the rise between the developed and developing countries the challenges of the latter are much greater and severer to cope with the impacts of climate change. According to the study of EIU released recently, the most climate vulnerable nations and their loss in terms of GDP are: (a) Angola (6.1 per cent of GDP loss), (b) Egypt (5.5 per cent of GDP loss) and Bangladesh (5.4 per cent of GDP).

In its special report released last year the Inter-Governmental Panel on Climate Change (IPCC) found that keeping warming below 1.5 degree Celsius - a level already dangerous for low-lying countries - would require an annual investment in de-curbonisation of $ 3.0 trillion through 2050. Trillions more will be required to adapt to the climate impacts already locked in. Repair in the loss and damage of storms and other damages is expected to cost $ 300 billion a year by 2030, jumping to $1.2 trillion a year by 2060. As the world's largest emitter of green house gases (GHG) and its biggest economy, the United States has both the ability and the responsibility to de-carbonise rapidly and to offer funds to developing countries to cope with the crisis of climate change. The record of US and other developed countries in these two reports are very dismal.

In 2009 developed countries, including America, pledged to mobilise $100 billion a year by 2020 in response to persistent demands from developing countries. As of September, 2019 only $ 3.5 billion had actually been allocated to the multi-lateral body that has been established to disburse that money. The multi-lateral body, by consensus, has been named Green Climate Fund (GCF). Before he left office President Obama promised $3.0 billion toward the GCF. Just $1.0 billion of that ever materialised before President Trump reneged on that commitment. That amount is a fraction of the estimated $ 15 billion a year that US Federal Government spends on subsidy to fossil fuel development. Bernie Sanders, the Democratic candidate for presidency, has promised a Green New Deal pledging $200 billion to the GCF making climate a centrepiece of American trade & foreign policy. That promise can become a reality only if Bernie Sanders wins the race to White House, which seems a long shot at the moment.

A recently released blueprint of Green New Deal for Europe lays out a rapid transition away from fossil fuels but the Yellow Vest Movement in France directed against green tax to finance climate change project does not augur well for a radical change in the use of fossil fuel in Europe either.

So far, the GCF has authorised some $206 billion in projects globally. Bangladesh got only one project approved so far, the Climate Resilient Infrastructure Main Streaming (CRIM) project worth $40 million. Many more projects are in the pipe line waiting for approval. The scrutiny and analysis of projects have proved to be time consuming. The public finance constraints on the budget of countries like Bangladesh is well known. In Bangladesh, budgetary provision for climate change project by the lead ministry, the ministry of environment and forest, is very limited, increasing from 0.05 per cent of GDP in fiscal 2000 to 0.06 of GDP in fiscal 2016. According to an estimate made by Policy Research Institute (PRI), the budget allocation should be increased to at least 0.5 per cent of GDP by fiscal 2041.

Before discussion the financing of climate change projects the size of the physical problem posed by climate change in Bangladesh may be re-visited. According to a report prepared by the International Monetary Fund (IMF), Bangladesh is specially vulnerable to climate change with one-third of its population at risk of displacement because of rise in sea level. The Global Climate Risk Index, 2019, prepared by IMF covering the period 1998 to 2017, used indicators under which Bangladesh ranked among the top 10 countries in the world most affected by extreme weather events caused by climate change. Losses incurred by the economy that were linked to these extreme weather events have been estimated by IMF to be annually around 1.08 per cent of the country's GDP. Giving more details, the IMF report has cited from the UN Panel on Climate Change (IPCC) according to which a rising sea level and coastal erosion would lead to a loss of 17 per cent of land surface and 10 per cent of food production in Bangladesh by 2050.

Bangladesh is responsible 0.35 per cent of green house gas emissions. But recognising its vulnerability to climate change Bangladesh is one of the most active countries in terms of initiating an action plan to address climate change impacts. The focus of the strategy in the action plan is more in adaptation than on mitigation, the requirement of the latter being insignificant in Bangladesh. To pinpoint investment for adaptation, Bangladesh government has adopted a financial framework to facilitate channelling of more resources towards this end. Alongside this, new guidelines have been prepared to promote green financing, foster green banking and establishing green fund. Faced with resource constraint, Bangladesh has been actively seeking grant from the international community, notably through the GCF.

In its latest assessment report (2019), IMF acknowledges the achievement of Bangladesh in reaching development goals like poverty reduction. But it points out that the country faces several challenges as it aspires to attain upper middle income country status by 2021. The IMF report has pointed out that near the top of these challenges is coping with climate change risk. According to it more can be done to promote climate-friendly investment. Among the options mentioned in the IMF report are: 1) Reduction and gradual elimination of costly energy subsidy while mitigating the impact on the poorest through targeted transfers;  2) Phased introduction of carbon tax on selected fuel products (petrol, diesel), notably those used by the rich and affluent households; 3) Financial preparation against the impact of natural disasters through a contingency fund in the annual budget and use of insurance mechanism; 4) Increased revenue collection going beyond the present 10 per cent GDP-tax ratio; 5) Fostering climate-friendly investments by taxing pollution, incentivising use of green products and improving the business environment to attract foreign investors who promote the use of clean technologies.

That IMF would come up with the above recommendation or policy prescription has not come out as a surprise. It was a foregone conclusion that with its tunnel vision on economic management conditioned by neo-liberal ideology of free market, de-regulation, and balance budget it would not emphasise on grants coming from donors. But where it went grossly wrong was in failing to realise that so-called grants from developed countries are actually compensations to be paid to countries like Bangladesh because of their profligate living style that entails ever larger carbon footprints year after year. It has failed to appreciate that GCF which was set up in 2012 by 194 countries was predicated on the admission that the cost of repairing the damage caused to developing countries by the developed ones will require at least $ 100 billion annually. IMF was also silent about the premature withdrawal of funds by donors amounting to $50 million from the Bangladesh Climate Change Resilient Fund (BCCRF) after five years it was set up only because of disagreements about co-ordination among the donors and the reluctance of the World Bank to continue as the manager of the fund. Bangladesh government has prepared a number of priority projects to be financed out of BCCRF.

Resource mobilisation to tackle climate change being awfully short, the poor in Bangladesh have been forced to bear the brunt of additional expenditure required by climate change. According to a report by International Institute of Environment and Development (IIED) for 2019, rural families, many of home are living in poverty, are spending double the amount spent by government of Bangladesh and twelve times the amount Bangladesh receives from multi-lateral and bi-lateral sources. Data collected by IIED shows that even though GoB's annual budget for climate change projects in rural areas increased to $1.46 billion (Tk. 123.18 billion) in 2018-2019 from $884 million (Tk. 74.32 million) in 2014-2015, it is still less than the amount rural households are spending to cope with climate change, particularly for adaptation. The IIED report for 2019 shows that rural households in Bangladesh received an estimated total of $15 million annually from various international climate change and disaster management fund which amount to $ 6.42 (Tk. 533) for each rural household per year. As a result of the insignificant amount received and spent on climate change project rural households are spending more on climate adaptation, diverting money from many of the expenditures on basic necessities.

Bangladesh is not going around with a bowl in hand, asking for grants from developed countries. It is asking for compensation for the damages and costs inflicted on its population by the developed countries through their prodigal living style that entails excessive carbon emission. When multi-lateral institutions like IMF considers it their obligation to report on climate change and its impact on countries like Bangladesh, a balanced view is required to review  'costs' involved and to determine compensation to be paid by the big emitters of carbon. Given the evolving nature of the problem it would be a continuing exercise, no doubt. But a beginning has to be made and the sooner it is the better for everyone. 

hasnat.hye5@gmail.com

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