Bangladesh: Selected Issues

Abstract

Bangladesh: Selected Issues

Bangladesh: Mitigating and Adapting to Climate Change1

A. Introduction

1. Bangladesh is categorized as one of the world’s most vulnerable countries to climate change. The country’s geographic location and topography (including dominance of floodplains and low elevation from the sea), poses significant risks. Additionally, high population density, poverty levels, fragile infrastructure and a dependence by many on agriculture magnify the risks. Vulnerability to tropical cyclones, storm surges, floods, and other climatic hazards is higher in regions which also have higher concentrations of the poor and socially most vulnerable. These groups, including subsistence farmers, the rural landless, the urban poor, fishing communities, women, children, and the elderly, have the lowest capacity to cope with climate-change-induced losses.

2. Climate change has an impact on economic growth and other key economic objectives. Potential economic consequences in Bangladesh include productivity changes in agriculture, strains on health and water sectors, altered migration patterns and increased vulnerability to shocks, all these with implications for fiscal and external sustainability.

3. The government is taking a number of initiatives to address climate change vulnerabilities. There is an increasing awareness in the government, and among development partners, that climate change could compromise much of the hard-earned economic and social gains in the country.

4. This note takes stock of Bangladesh’s policies and financing arrangements in mitigating and adapting to the impact of climate change and suggests policies to strengthen the fiscal framework. The note is organized as follows: the first section summarizes existing literature on the expected impact of climate change; the second discusses current initiatives and financing arrangements; the third section discusses policy considerations, and the final section concludes.

B. Bangladesh’s vulnerability to climate change: An Overview

5. Several indices confirm that Bangladesh is one of the countries with the highest vulnerability to climate change. The Maplecroft Index (2015) ranks it as the most vulnerable country.2 Assessing a number of variables to calculate the vulnerability of 170 countries, Maplecroft identified Bangladesh and India as the two countries ‘facing the greatest risk to their populations, ecosystems and business environments’. Meanwhile, Germanwatch 2014 ranks Bangladesh as fifth most vulnerable country to climate change-induced natural calamities (Germanwatch, 2014). In its report, Germanwatch estimates that, during the period 1993–2012, Bangladesh sustained US$1.8 billion in damages from a variety of natural disasters.

6. A significant number of research papers have shed light on climate change’s contribution to increased frequency and severity of disasters in Bangladesh, with adverse impacts on human life (Huq et al., 1998; Huq et al., 1996; Yu et al., 2010; World Bank, 2000; Ahmed, 2005; Rahman et al., 2010). It is also well documented that vulnerability, capability and resilience are partly a function of gender and social conditions: climate change impacts are far more severe for women, the poor and marginalized groups (Alam et al., 2008; Ahmed et al., 2007). These vulnerabilities, coupled with existing inequalities, might negate the gains in poverty reduction for women and other marginalized groups.

7. Frequent inland monsoon floods and other disasters tax the Bangladesh economy. Significant damages to crops, destruction of roads and other infrastructure, disruptions to industry and commerce, and injuries and losses in human lives impose significant costs on the economy. Between 1990 and 2008, the average annual extreme weather event-related losses are estimated at 1.8 percent of GDP (Germanwatch Risk Index, 2010). The 1998 flooding that affected over two-thirds of the country resulted in estimated damages and losses of over US$2.0 billion, about 4.8 percent of GDP. Moreover, it is forecast that the country will lose 15 percent of land area by 2050 as a result of rising sea levels and coastal erosion, and one in seven people will be displaced by climate change triggering a move to the already densely populated urban centers (IPCC, 2007). At the same time, the population is expected to rise to over 200 million people by 2050 (World Bank, 2011).

8. Climate change would particularly entail devastating effects on food security given the growing population and poverty levels. Studies have shown that for vulnerable countries reliant on rain-fed agriculture, yields could be reduced by 50 percent by 2020 (IPCC, 2007). Agriculture is still an important sector of the economy, comprising about 16 percent of the country’s gross domestic product (GDP) but employing around 40 percent of the total labor force. The performance of this sector has an overwhelming impact on economic goals such as employment generation, poverty alleviation, human resource development, and food security.

9. In addition to climate-induced damages, initiatives to recover from calamities normally require diversion of investments from development. Both factors tend to decelerate economic growth and the efficiency of public service delivery. It is therefore imperative to prepare and plan for adapting to the effects of climate change through well-articulated strategies with financing arrangements in place.

C. Current Initiatives and Financing Arrangements

10. Through a number of initiatives, Bangladesh is placing climate change policies at the center of the country’s development agenda. The Government introduced the National Adaptation Program of Action (NAPA) in 2005, later updated and renamed the Bangladesh Climate Change Strategy and Action Plan (BCCSAP, 2009), as a guiding and coordinating policy to cope with climate change. There are six thematic groups of focus within the plan but no detailed costing or prioritization beyond the estimated figure of US$5 billion over the initial five year period. Implementation of the BCCSAP is facilitated through two climate change funds: the Bangladesh Climate Change Trust Fund (BCCTF) and the Bangladesh Climate Change Resilience Fund (BCCRF). Bangladesh is the first developing country to set up a coordination plan as well as the first to come up with its own climate trust fund. Recognizing these initiatives, in September 2015 Prime Minister Hasina was awarded the Champions of the Earth award at the UN.

11. The BCCTF is financed through Bangladesh’s own budgetary resources. Its oversight is guided by the Climate Change Trust Act 2010. A Committee comprised of representatives from line ministries and nongovernmental organizations (NGO’s) with an interest in climate change screens and recommends to a Board of Trustees projects for financing by the BCCCTF. From FY10 to FY14, US$360 million has been allocated to BCCTF.

Table 1.

Bangladesh: Budget Allocation for BCCTF

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Source: Bangladesh authorities.

Fiscal year begins July 1.

12. The Bangladesh Climate Change Resilience Fund (BCCRF) was established in May 2010 as a vehicle for development partners to support Bangladesh in implementing the BCCSAP. So far, about US$200 million has been disbursed from donor countries such as the UK, Sweden, Australia, Denmark and others—a small fraction of the government’s indicated requirement of US$5 billion between 2010 and 2015. Through the fund, donors are also supporting NGOs in the implementation of community-based adaptation, enhancing local innovation and the capacity of vulnerable people and local government institutions.

Table 2.

Contribution of Development Partners to BCCRF

(In millions of U.S. dollars)

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13. Bangladesh is also a beneficiary of the Pilot Program for Climate Resilience (PPCR), a disbursing arm of the Climate Investment Fund.3 The PPCR, designed under government leadership in coordination with the Asian Development Bank (AsDB), the World Bank Group, and other stakeholders, focuses on improving climate resilience in agriculture and food security, strengthening the security and reliability of fresh water supply, sanitation, and infrastructure, and enhancing the resilience of coastal communities and infrastructure. In addition, the program supports technical assistance for Bangladesh to better assess and address impacts of climate change. Under the program, a total of US$110 million (45 percent in grants, the rest in near-zero interest credits) was approved for Bangladesh in 2010.

Table 3.

Projects financed under the Strategic Program for Climate Resilience (SPCR)

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14. Promoting clean and renewable energy is another priority of the government. Bangladesh currently hosts one of the world’s largest solar home energy systems, covering 10 percent of the off-grid population. In 2009 Bangladesh Bank (BB) introduced a revolving refinancing scheme for banks, with US$26 million for financing six green projects, including solar power, bio-gas, and effluent treatment plants. The scheme was restructured in 2013 and now includes a wide range of products (see Table 4). BB introduced another US$50 million refinancing window in 2012 with support from the Asian Development Bank for projects to improve brick kiln efficiency and reduce carbon and other greenhouse emissions.

Table 4.

Bangladesh: List of Green Products under BB Refinance Schemes

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Source: Bangladesh authorities

15. On a broader scale, climate financing is delivered as routine sector programs under the budget rather than part of a climate strategy. Within the Government, as many as 37 ministries/ divisions and other agencies have climate-related activities with an estimated spending of about US$1 billion annually, representing 6-7 percent of the annual budget and roughly 1.1 percent of GDP. Only 25 percent of this comes from foreign resources. In addition, the government is implementing a wide range of measures to help citizens prepare for the unpredictability of climate change. These include new health services dealing with waterborne diseases linked to increased flooding, training community groups about early warning systems, and promoting climate-friendly agricultural technologies.

D. Policy considerations

16. Despite the initiatives discussed above, significant policy challenges remain. The lack of comprehensive costing and prioritization of long-term needs, as well as insufficient resources and capacity and coordination among the facilities and agencies remain major challenges.

17. The government needs to mobilize more resources for climate change adaptation and mitigation. Available information shows that government transfers to the BCCTF are declining. At the same time, expected donor flows to the BCCRF have not materialized. In the absence of donor financing, the government needs to reposition itself to provide more resources for climate change. In addition to impacting on public finances, climate change calls for deploying fiscal instruments to mitigate its extent and adapt to its remaining effects. Tax and spending instruments plus enhanced public financial management play a key role in responding to climate change.

18. Fiscal policy plays a key role in addressing challenges from climate change:

  • Taxation: Tax policy can induce firms and households to adopt environmentally-friendly capital investments and practices. Tax reform could focus on restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, and towards carefully designed taxes that promote an environmentally-sustainable growth strategy. For instance, Bangladesh has been exploring introducing a specific carbon tax, on a trial basis, on higher greenhouse emitting vehicles. Receipts from carbon taxes could enable a reduction in other distortionary taxes as well as strengthening revenue mobilization. While earmarking revenues from carbon taxing is generally not recommended, as it constrains public finances, tying the proceeds to specific spending programs could be considered if it makes carbon taxes politically acceptable.

  • Energy pricing reform: More subsidy reform is warranted, particularly with regard to getting prices right in energy and transportation systems to reflect market and environmental costs. Subsidies tend to encourage over-consumption and inefficient use of energy. Investment decisions may also be altered by changes in relative prices, thereby discouraging energy diversification and creating disincentives for building necessary energy infrastructure. The under-pricing of natural gas for producers, for instance, discourages exploration and domestic production, shifting energy away towards dirtier sources. Similarly, subsidies for dirty energy discourage initiatives aiming to expand green energy alternatives such as solar power. The initial heavy investment needed makes these energy sources relatively more expensive.

  • Targeting of social safety nets: Adverse impacts of the removal of subsidies on low-income houses could be mitigated by an expansion of well-targeted safety nets. New poverty programs have tended to target the extremely poor. However, more attention is needed to the moderately poor and other vulnerable segments of the population, who live above the poverty line but are significantly vulnerable to natural hazards. As the impact of climate change affects women and men differently, the design of adaptation programs should integrate gender sensitivity.

  • Strengthening public financial management: Climate change financing represents a critical challenge for public financial management. The BCCSAP provides a list of programs, but no effort has been made to cost and prioritize the projects. A comprehensive estimate of long- term climate change programs is needed, including careful project prioritization, taking into consideration the country’s absorption capacity. Such estimates are needed not only to properly integrate spending on adaptation into wider development programs but also as a basis for mobilizing financing.

    • Bangladesh’s Climate Fiscal Framework (CFF, Finance Division, June, 2014) is an attempt to make public finance systems ready for utilizing domestic and international climate financing in the most efficient and effective manner. Finalizing and implementing the CFF will ensure efficiency in distributing climate funds to relevant sectors. The framework, as a governance tool for climate funds, should identify a financial authority for mobilizing resources, exploring financing options and coordinating climate related financial activities among the various institutions. Ideally a cell within the Finance Division would be better placed to facilitate the coordination and tracking of expenses.

    • A thorough assessment of the two separate funds, the BCCTF and BCCRF, is also in order. Both funds have been supporting activities by government agencies and civil society as part of the BCCSAP. Decisions should be taken on whether there is merit in managing the funds separately or whether they could be merged to avoid duplication of projects. In the interim, capacity in the Climate Change Unit at the Ministry of Environment and Forest charged with supervising and coordinating the two funds should be strengthened.

    • Transparency in reporting projects financed by the BCCTF could also be reviewed and enhanced. As a beneficiary of budgetary resources, projects implemented under this fund ought to be recorded by the concerned line ministries and reported in public finance accountability frameworks.

    • Finally, capacity at line ministries should be strengthened to integrate climate change requirements in planning and budgeting processes.

E. Conclusion

19. Climate change presents new challenges on fiscal policy and institutional capacity and coordination. Adapting to climate change is already incurring significant economic and social costs, an additional strain on limited resources in Bangladesh. These costs are expected to increase significantly, warranting a more coordinated approach to estimating long-term needs, coordinating various financing arrangements, strengthening coordination among stakeholders to avoid duplicating projects, enforcing better tracking of expenditures, and strengthening resource mobilization.

20. Over the past few years, Bangladesh has been one of the most proactive developing countries to invest in adapting to climate change and pioneer a national policy agenda. The approach has paid off and there is a high degree of awareness of the climate change challenges among stakeholders and the public. The knowledge capacity in the country, compared to other developing countries, is relatively high and policies are taking shape. The challenge remains to implement policies in a more coordinated, effective manner and develop capacity and institutions for executing climate change adaptation policies.

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1

Prepared by Stella Kaendera, Resident Representative.

2

The Maplecroft Climate Vulnerability Index evaluates the vulnerability of populations to extreme climate-related events and changes in major climate parameters over the next 30 years plus the capacity of the country to adapt to the potential impact of climate change

3

Developing countries require an estimated US$100 billion per year in climate finance. The Climate Investment Fund (CIF, 2008) administered by the World Bank, is one donor commitment designed to assist developing countries to pilot low emission and climate resilient development approaches through the Multilateral Development Banks (MDBs). CIF financing is disbursed through two different multi donor trust funds—the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF)