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Path forward in global climate economy

Oct 26, 2024

| Md Zahurul Al Mamun | TNA

As Bangladesh grapples with the devastating effects of climate change, the need for innovative financial mechanisms to bolster its resilience is more pressing than ever. Despite its relatively low contribution to global greenhouse gas emissions — accounting for less than 0.5 per cent of the world total — the country bears a disproportionate burden of climate-related disasters. For this South Asian nation, addressing climate change is no longer a policy choice but an existential imperative.


In this context, carbon markets offer a promising yet complex financial tool. While these markets have the potential to provide the much-needed climate finance for Bangladesh’s adaptation and mitigation efforts, engaging effectively requires navigating a web of technical, regulatory and ethical challenges. For Bangladesh to harness the potential of carbon markets, it must do so with a keen focus on climate justice, capacity-building, and local development priorities.


Understanding carbon markets


CARBON markets operate on a simple premise: pricing carbon emissions to incentivise reductions. At their core, the markets put a monetary value on the external costs of carbon emissions, encouraging countries, industries and corporations to invest in cleaner alternatives. Broadly, there are two types of carbon markets: compliance and voluntary.


Compliance markets are driven by regulatory frameworks such as the European Union Emissions Trading Scheme or the mechanisms under the Kyoto Protocol and the Paris Agreement. Voluntary markets, on the other hand, are driven by corporations or entities that wish to offset their carbon emissions to adopt net-zero targets as part of their sustainability goals. Bangladesh has participated in both, notably under mechanisms such as the Clean Development Mechanism, earning certified emission reductions for solar projects.


However, the global carbon market landscape has evolved. Article 6 in the Paris Agreement enables more a flexible international cooperation in carbon trading, potentially expanding Bangladesh’s role. The voluntary market, in particular, has seen exponential growth, driven by global corporations adopting net-zero targets. According to Fortune Business Insights, in 2022, the global carbon offsets market size reached nearly $938.75 billion, with projections suggesting that it would grow to $2,549.42 billion by 2030, exhibiting a CAGR of 13.1 per cent during the forecast period. These figures highlight the burgeoning opportunities — but also the complexity — of this financial space.

 

Local context


FOR Bangladesh, engaging in these markets is fraught with specific challenges. While the potential financial benefits are evident, significant barriers remain in place that could hinder the nation’s ability to fully capitalise on carbon trading.


Institutional capacity and infrastructure: One of the most pressing challenges is the limited institutional capacity to develop, monitor, and certify carbon projects. Carbon trading requires robust monitoring, reporting and verification systems to ensure the credibility of the credits being sold, but Bangladesh’s technical skills and infrastructure in this area remain underdeveloped. Although the government has made strides in building climate resilience, these advancements have not extended sufficiently to the technical complexities required for carbon markets.


This shortfall is not unique to Bangladesh but is indicative of broader structural inequalities in the global carbon trading system. Wealthier nations, armed with advanced technologies and institutional capacity, dominate carbon markets while countries such as Bangladesh struggle to meet the stringent requirements of international buyers. This discrepancy raises the risk of ‘carbon colonialism,’ wherein wealthier nations or corporations exploit carbon markets at the expense of less-developed countries, profiting from projects that offer little tangible benefits to the local populations involved.


Regulatory framework and policy coherence: A lack of clear regulatory frameworks is another impediment. While Bangladesh has environmental legislation in place, it lacks a comprehensive national policy on carbon pricing or trading. The absence of clear guidelines creates uncertainty for potential investors, particularly in sectors such as renewable energy and waste management — two areas ripe for carbon credit generation.


The development of a coherent carbon pricing strategy, whether through a tax or a cap-and-trade system, would send out a strong signal that Bangladesh is serious about leveraging carbon markets. Such a framework would also align domestic policies with international climate commitments under the Paris Agreement, encouraging both private-sector engagement and foreign investment. Neighbouring countries such as India have begun experimenting with such frameworks, offering potential lessons for Bangladesh.


Market volatility and financial risks: Carbon markets are notoriously volatile. The price of carbon credits fluctuates, influenced by market conditions, regulatory changes and international policy decisions. For a country such as Bangladesh, which already has constrained fiscal space, over-reliance on such an unpredictable revenue stream poses considerable risks. Without long-term price stability or guarantees, carbon trading could exacerbate financial vulnerabilities, particularly, if carbon prices plummet or demand weakens.


Bangladesh would do well to draw lessons from countries such as Kenya, which have navigated both successes and failures in carbon trading. By analysing their experience, Bangladesh can develop strategies to mitigate these financial risks, ensuring that carbon markets complement — rather than undermine — its broader climate and economic goals.


Engaging stakeholders: multi-layered approach


FOR Bangladesh to fully capitalise on carbon markets, an effective engagement across various levels — global, national, and local — is essential.


International partnerships: At the international level, multilateral institutions such as the World Bank and the International Monetary Fund are increasingly recognising carbon markets as a mechanism to support climate finance in the Global South. Initiatives like the World Bank’s partnership for market implementation can offer technical and financial support to help Bangladesh to establish its carbon pricing mechanisms. Bangladesh needs to strengthen its collaborations with such international bodies to harness technical and financial assistance.


However, these engagements must not be merely transactional. Bangladesh should use its position in global forums, such as the forthcoming COP29, to advocate more equitable carbon market practices that account for the unequal distribution of climate impacts and the historical responsibility of wealthy nations.


Local stakeholders and capacity building: Domestically, more substantial involvement from both the private sector and local governments is essential. Industries such as textiles, which are a significant part of Bangladesh’s economy and are frequently scrutinised for their environmental footprint, could benefit from the adoption of energy-efficient technologies and renewable energy projects that generate carbon credits. However, for this to happen, the government must provide clear financial incentives, such as tax breaks or subsidies, to encourage private-sector participation.


Local governments also have a pivotal role to play. Decentralising climate governance and empowering local authorities with the tools to enforce regulations and oversee monitoring, reporting and verification systems could significantly improve project outcomes. Equally important is the community engagement. Too often, carbon projects fail to consult or include local communities in the decision-making process, leading to resentment and pushback. Prioritising the participation of vulnerable groups, such as smallholder farmers and Indigenous communities, is crucial to avoid exploitation and ensure that carbon projects deliver tangible benefits to those most affected by climate change.


Ethical considerations: equity and climate justice


CARBON markets, while offering financial opportunities, are rife with ethical pitfalls. Bangladesh’s engagement with these markets must be framed within the broader context of climate justice. The country must ensure that its participation is not just about generating carbon credits for wealthy nations to offset their emissions. It should, rather, focus on integrating carbon markets into its broader development strategy, ensuring that revenue from these markets is reinvested in projects that directly benefit the country’s most vulnerable populations.


In this regard, robust monitoring, reporting and verification systems are critical for not only compliance but also ensuring transparency and accountability. Emerging technologies such as blockchain could offer innovative solutions for tracking and verifying carbon credits, reducing the potential for fraud or mismanagement. Bangladesh should look to countries such as Jordan and Sri Lanka, which have successfully implemented such systems, as models for building credibility in the global carbon market.

 

Seizing opportunities: long-term vision


IN THE long term, carbon markets should be viewed as one piece of a broader strategy to transition Bangladesh to a green economy. Investments in renewable energy, afforestation and nature-based solutions will be key to unlocking carbon market potential while addressing climate resilience. For example, expanding solar and wind energy projects could generate a reliable stream of carbon credits. Likewise, restoring mangrove forests along the coastlines could both sequester carbon and protect communities from storm surges and rising sea levels.


However, these efforts must be underpinned by a long-term vision that goes beyond short-term financial gains. Carbon markets should not replace the need for more robust climate action and policy reform. Instead, they should complement a broader strategy aimed at sustainable development, climate adaptation and building a low-carbon, climate-resilient economy.


Policy recommendations


To unlock the full potential of carbon markets, Bangladesh needs a forward-thinking, multi-faceted policy approach.


Strong institutions: First and foremost, Bangladesh must build stronger national institutions to engage effectively with carbon markets. A dedicated climate finance body — similar to Kenya’s Climate Change Directorate or India’s Bureau of Energy Efficiency — could coordinate carbon market initiatives, streamline regulatory processes, and engage with international stakeholders.


National carbon pricing strategy: Establishing a national carbon pricing mechanism, whether through a carbon tax or cap-and-trade system, would send a clear signal to both domestic and international stakeholders that Bangladesh is committed to market-based climate solutions.


Private-sector participation: The government should establish clear guidelines and financial incentives to encourage private-sector engagement. By promoting public-private partnership schemes in key sectors such as renewable energy, waste management, and sustainable agriculture, the government can unlock opportunities for carbon credit generation. Incentives could include tax benefits for industries that adopt energy efficiency measures or renewable energy technologies, thereby generating carbon credits. This approach will be crucial for the successful transition to a low-carbon economy.


Capacity building and technical assistance: International partnership with organisations such as the World Bank and the United Nations Framework Convention on Climate Change should focus on capacity building, particularly in carbon accounting, monitoring, reporting and verification systems and project certification. Training programmes for government officials, industry leaders and local communities will be key to ensuring that the benefits of carbon markets are equitably distributed.


Climate justice campaign: Bangladesh must advocate equitable carbon market practices at global forums, ensuring that the benefits of participation are shared with vulnerable communities.

 

Just and sustainable path


CARBON markets present a promising avenue for Bangladesh’s climate finance strategy, but the path forward is fraught with challenges. By focusing on capacity-building, regulatory coherence and ethical considerations, Bangladesh cannot only engage effectively with these markets but also use them as a lever for broader sustainable development. The urgency is undeniable. But with the right policies and partnership, Bangladesh can position itself as a leader in advocating a more just, transparent, and climate-resilient future.


News Link: Path forward in global climate economy

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