Strengthening Climate Finance in Bangladesh

Development Context

Bangladesh is highly vulnerable to climate change and the government is well aware of the need to integrate climate change considerations in the national development process. Several climate change strategies have been developed and climate change considerations are increasingly being integrated with national development strategies. Bangladesh is a strong player in the international fora in managing the global climate change outcomes. It has provided its own nationally determined contribution (NDC) commitments to help reduce greenhouse gas emissions (GHG) required to achieve global climate goals, even though Bangladesh is a small contributor to these emissions. 

To implement climate strategies and associated goals and targets, Bangladesh has made notable progress with developing policies and regulations, providing climate finance, and establishing climate change institutions. The government’s efforts are complemented by a vibrant non-government (NGO) sector that is active both nationally and internationally. 

Progress with Climate Finance

A particularly notable institutional progress has been in the area of climate finance. Early efforts focused on advocating and mobilizing global financing for climate change initiatives in developing countries like Bangladesh. This is based on the rationale that since much of the global carbon pollution is caused by advanced industrial countries and developing economies are hurting from these climate-insensitive development strategies, they should pay their fair share in helping developing countries fight the adverse consequences of climate change. Despite the fairness and sound rationale for this argument, actual results so far is very disappointing. The amount of financing received by Bangladesh from global climate facilities is negligible. So far, much of the climate finance has come from domestic sources.

Adoption of the Climate Fiscal Framework

Armed with this reality, in 2014 Bangladesh adopted the Climate Fiscal Framework (CFF) that was updated in 2020. The CFF seeks to provide a comprehensive resource mobilization and expenditure strategy for fighting climate change. But unfortunately, the CFF has been implemented only to a very limited extent. 

The CFF resource mobilization strategy: While the revised CFF 2020 recognized the importance of integrating climate change considerations in resource mobilization strategy, in practice very little has been done. The resource mobilization strategy does not account for the implications of climate change for the medium -term resource availability. It similarly notes the significant role that taxes, subsidies and pricing policies can play in resource mobilization as well as in providing incentives to private sector for adopting climate sensitive technologies and avoiding pollution behavior. Yet, very little progress has been made in these areas. Fossil fuel subsidies continue to prevail. Major resources including irrigation and drinking water continue to be underpriced. The implementation of polluter pays principle is almost non-existent. Tax policy to discourage excessive forestry logging does not exist. The continued use of fossil fuel subsidy suggests a major disconnect with the NDC targets.

CFF expenditure management policies:  While there is commendable progress in integrating climate change concerns in expenditure allocation, the integration is done somewhat mechanically as an accounting framework. It is not clear how the identified level of climate financing from the budget estimated between 7-9% of total public spending relate to the goals of the NDC, the Bangladesh Climate Change Strategy and Action Plan (BCCSAP), and the national development plans. This disconnect between expenditure and strategies and outcomes is a major weakness of the present approach to integration of climate change in national development. 

The costing of major climate change programs such as the NDC, the Bangladesh Delta Plan and the Bangladesh Country Investment Plan for Environment, Forestry and Climate Change (CIP- EFCC) and their implications for annual budget allocations and financing options have not been worked out. Indicative estimates suggest that these three programs alone could require 5-6% of GDP annually, which is the size of the annual development program. The strategy how these programs can be funded is not available. 

Bank Financing of Climate Change Programs

Recognizing that private sector financing is essential for supporting green investments, the government has put considerable attention to bank financing for green investments. In 2011 the Bangladesh Bank (BB) launched a comprehensive green banking initiative to support and promote environmentally responsible financing, issuing guidance for environmental risk assessment of borrowing proposals and for the greening of internal processes and practices within banks and financial institutions (FIs). In 2015 the Green Banking initiative and CSR were folded into a new Department called the Sustainable Finance Department. A number of re-financing schemes were introduced including the establishment of the Green Transformation Fund (GTF) to support refinancing of green investments. A target of at least 5% of total loans for green financing was set for banks and non-bank FIs. Available evidence suggests that notable progress was made in implementing these initiatives. But several road-blocs have emerged including inadequate demand, complexities of rules for accessing green re-financing schemes, lack of technical knowledge, and absence of reliable standards and certification process for green technology. Total green financing disbursed so far is only a small proportion of estimated investment required to implement a comprehensive green growth strategy in Bangladesh. A particularly important gap is the inability to reach the micro and small enterprises. 

Recognizing that private sector financing is essential for supporting green investments, the government has put considerable attention to bank financing for green investments. In 2011 the Bangladesh Bank (BB) launched a comprehensive green banking initiative to support and promote environmentally responsible financing, issuing guidance for environmental risk assessment of borrowing proposals and for the greening of internal processes and practices within banks and financial institutions (FIs). In 2015 the Green Banking initiative and CSR were folded into a new Department called the Sustainable Finance Department. 

The Way Forward

Strengthening the CFF:  What are the feasible options to strengthen the strategic focus and implementation of the Bangladesh Climate Fiscal Framework? The revised CFF2020 provides an excellent starting point to sharpen up and implement a meaningful Climate Fiscal Framework. 

As a first step, Bangladesh should move forward to converting the Mujib Climate Prosperity Plan into a meaningful and well- articulated Green Growth Strategy that integrates climate considerations into the national development strategy. This Green Growth Strategy must be fully consistent with the Bangladesh Delta Plan (BDP2100), the Perspective Plan 2021-2041 and the 8th Five Year Plan. 

The strengthening of the CFF should then concentrate on costing out the resource needs for implementing the Green Growth Strategy and developing a domestic resource mobilization strategy for that. While effort can continue to fight for grant resources from developed countries through the Global Climate Fund (GCF} and other funding channels, realistically speaking the main reliance will have to be on domestic resource mobilization including from domestic private sector, green foreign direct investment and green financing from development partners, especially multilateral sources. 

On the domestic policy front strong emphasis on environmental fiscal reforms is necessary. Some particularly powerful instruments include the elimination of fossil fuel subsidies, the introduction of a carbon tax, implementation of the polluter pays principle, and proper pricing policies for all SOEs, especially public utilities. 

On the expenditure front, a set of core well-defined climate-focused public expenditures linked to outcomes defined in the Green Growth Strategy should be undertaken every year. The climate spending should be linked to achieving specific climate change objectives and targets rather than ad-hoc spending labels from line ministries.

Until such time as a Green Growth Strategy is adopted, well-identified core climate programs such as the Bangladesh Delta Plan, the NDC and the CIP-EFFR should be properly costed, and an implementation timetable established. The annual funding requirements emerging from this exercise should be incorporated in the national budgets and the annual development programs. The CFF resource mobilization targets should focus on financing these programs.

Strengthening the implementation of bank green financing: The topmost priority here should be to create adequate demand for green financing in Bangladesh. The private sector will not adopt green technology and produce green products unless the profitability and incentives are consistent with these objectives. Adoption of green technology and associated products increase the financial cost of production. This cost increase must be offset with a comprehensive incentives program for adopting green technology comprising of regulations, taxes, and subsidies. As an example, the RMG sector is moving strongly towards complying with green technology requirements because of buyer country regulations that require such compliance as a condition for market entry. Similar regulations must be established and enforced for home products. International experience shows that successful adoption of green technologies and products have benefitted from a range of subsidy and tax incentives, provision of technical knowledge, clarity of standards, and simplified rules and procedures for certifying green compliance. Bangladesh can learn for these experiences.

A particularly limiting factor for the greening of Bangladesh has been the dominance of micro and small enterprises (MSEs) in both manufacturing and services sectors. These MSEs provide the bulk of employment outside agriculture and hold the key to successful implementation of a green Bangladesh. Yet, they suffer from a range of constraints including finance, technology, and low value-added. 

A particularly limiting factor for the greening of Bangladesh has been the dominance of micro and small enterprises (MSEs) in both manufacturing and services sectors. These MSEs provide the bulk of employment outside agriculture and hold the key to successful implementation of a green Bangladesh. Yet, they suffer from a range of constraints including finance, technology, and low value-added. The BB approach to setting lending targets for these MSEs has not worked well in general and has been even less effective for green financing. Institutional constraints such as lack of registration and tax IDs, combined with lack of credit ratings and physical collateral, and high cost of financial intermediation have largely constrained the access of MSEs to bank financing schemes. For green financing, additional constraints are the absence of technical knowledge and standards for green technology and green products. Reaching out MSEs for access to green financing will require innovative thinking and technical assistance from public institutions. Focused research on this subject is a high priority policy action.