Carbon tax and the journey towards net zero

According to the definition published by the United Nations (UN), the 'net zero' means cutting greenhouse gas (GHG) emissions, such as carbon dioxide (CO2) emissions, as close to zero as possible, with any remaining emissions being reabsorbed from the atmosphere.

The science shows that the global temperature rise must be limited to 1.5°C above the pre-industrial levels to sustain the Earth as a liveable planet.  That's why the net zero programme has global significance.

However, changing the behaviour of businesses and consumers in order to meet this objective is going to be a difficult task. Most businesses prioritise the provision of direct financial benefits to their investors, such as revenue and profit. Unless business leaders understand and recognise the benefits of becoming carbon efficient through financial parameters, such priorities are unlikely to change.

One way to address this is by introducing carbon tax. Taxation increases the cost of production of goods and services, thereby influencing businesses to think harder about how they can reduce the cost of taxation.

For instance, a carbon tax could discourage the use of fossil fuels, or the input materials produced by burning fossil fuels, thereby, limiting emissions of CO2, which is by far the most prevalent greenhouse gas.

Many countries that pledged to reduce their carbon emissions in the 2015 Paris Agreement have started undertaking ambitious targets to achieve net zero goals faster. Due to their ambitious goals, many of them have also started imposing carbon tax on various products and services, such as automotive vehicles that run on gasoline.

As with any emerging nation, the practice of carbon taxation has multilateral impacts on the Bangladesh economy and society. That's why, it is important to understand the various types of impact of carbon taxation and to perform a thorough analysis of the areas where the business organisations of Bangladesh may see the same.

For example, Bangladesh is the world's second-largest exporter of ready-made garments. This sector uses electricity to a great extent, and the supplied electricity is largely produced by burning fossil fuel.

Similarly, the input materials such as fabrics may be manufactured using electricity that is produced through fossil fuel. Collectively, all these factors increase the overall carbon footprint of the garments produced in Bangladesh and exported all over the world.

Many countries, including the countries of the European Union, are contemplating imposing carbon tax for imported items at the time of entry.  This will in turn influence the apparel manufacturing companies in Bangladesh to take measures towards carbon reduction, such as using electricity from renewable sources.

While the present electrical power transmission system in Bangladesh does not offer such alternatives, adoption of modern technologies will enable all participants in this system to switch to renewable electricity.

In other words, the imposition of carbon tax might trigger cross-sector modernisation to keep the country's export economy thriving. It's, therefore, important to start planning in order to mitigate the impact of the net zero agenda on Bangladesh's businesses.

The writer is a Partner with PwC. The views expressed here are his own.