Sri Lanka’s New ‘Carbon Tax’ – Five Reasons Why its Design is Flawed

Nearly 14 months since it was first announced, a Carbon Tax has been put into effect in Sri Lanka w.e.f. 1st January 2019. The tax first made its appearance in the Budget 2018 speech of the Minister of Finance Mangala Samaraweera in November 2017. The Finance Minister has announced this week, that the tax would come into effect from 1st January 2019, but payable from 2020 onwards. Presumably, the move is to shore up Treasury revenues amidst challenging budget deficit targets and gains from income tax reforms that are yet to fully materialize, but no doubt also to encourage greater environmentally-conscious behaviour by citizens. But, like many policies in Sri Lanka, policymakers and bureaucrats spend little time on getting the design right, and weak design is often the achilles heel of good policy ideas in this country.  Here are five reasons why I think the design of this tax is flawed:

  1. Unless revenue from this Carbon Tax is earmarked and ring-fenced specifically for green initiatives (staying true to the laudable objectives stated in the Budget speech in 2017), this new tax would not achieve the intended goals and is nothing but another revenue raising measure for the general Treasury to support the ever-widening Government expenditure. The Ministry of Finance (or the Department of Motor Traffic) should set up a special fund to ring-fence the revenue from this tax and have it spent specifically on meaningful green initiatives.
  2. There is no point in having a Carbon Tax that exempts electric vehicles when the incentives are not properly aligned for electric vehicle purchase – specifically, the unfavorable and frequently changing import duty regime for electric vehicles. According to the latest available vehicle registration data (courtesy JB Securities), monthly electric car registrations recorded just 6 units in November 2018, down from 5 units in October 2018 and 5 units 12 months ago. This is the same trend seen over the past couple of years, because buyers don’t see the duty regime as attractive. If we are to substantially increase EV usage, then the duty structure on EV should be substantially more favorable too.
  3. There is no point in having a Carbon Tax – that is purported to have been introduced on environmental considerations – that exempts electric vehicles when the electricity generation in Sri Lanka is dominated by fossil-fuel burning sources. According to the CEB’s generation data from 2017, nearly 70% of Sri Lanka’s electricity generation was with thermal oil (34%) and thermal coal (35%). Only 27% was generated by hydro (major + mini) and 4$ by other renewable energy (solar, wind, dendro, biomass etc.) Unless the design of the tax specifically incentives households using rooftop solar to charge their EVs, rather than pulling from the general grid, then the design of the Carbon Tax is flawed given the high fossil-fuel burning thermal generation of electricity in the country.
  4. The design of the Carbon Tax shouldn’t really be based on engine capacity, but instead of usage. Take a simple example of Mr. Silva vs. Mr. Wijewardena. Mr. Silva owns a car, but uses it only on weekends – to take the family around, to go and do weekly shopping, etc. During weekdays, for office etc., he travels by public transport. His car burns less than 10 litres of fuel every week.  Mr. Wijewardena also owns a car, but he uses it every day and to travel everywhere. He never uses public transport, and burns nearly 40 litres of fuel every week. So, by not taxing based on usage, both Mr. Silva and Mr. Wijewardena both pay the same amount of Carbon Tax, even though logically they have very different environmental impacts. At a time when a fuel price formula has been introduced, it would have been better to tag on a small percentage of Carbon Tax on at-the-pump fuel, in order to link it to usage.
  5. The current design of the tax that penalizes older vehicles in favour of newer vehicles (presumably using vehicle age as a proxy for emissions content) is unnecessary and flawed since all vehicles have to undergo a compulsory annual emissions test to check if the vehicles emissions are below the permissible levels. To elaborate this point, I borrow from the excellent article on Economynext on the subject:

“In another peculiar basis, cars newer than 5 years are charged 50 cents per cubic centimetre of engine capacity while cars between 5 and 10 years are charged twice that. Cars over 10 years are charged three times. But all cars – except classic cars – have to pass an emission test, making a mockery of the basis. Cars that do not pass the test have to tune the engine or repair it. Older cars are generally owned by poorer and older people, who hardly use it, making Sri Lanka’s carbon tax peculiarly iniquitous. Many retirees keep an older car for weekend shopping or to go the doctor. Arguably new cars are bought by richer people. Arguably they would go around more.”

– Economynext, 9th Jan 2019, ‘Sri Lanka defends feel-the-pain carbon tax as eco-tax trigger riots in France’

 

Having said all this about its flawed design, the beauty about public policies are that they can be adjusted according to user feedback and sensibility. I hope the implementers will consider tweaking the design if they see that any of the above design issues merit attention. Ultimately, I am sure we all do care about placing Sri Lanka on a more green-growth and sustainable development trajectory, and so any intervention that is well designed and truly and genuinely helps us achieve that must be welcomed.

 

 

Disclaimer: Views expressed in this post are entirely personal and not to be associated with my official roles. Also, I have not touched on (as I am not expert in) the impact of a carbon tax on the usage of fossil fuels or vehicles, and for that, do read widely, since the jury is still out on the empirical evidence. 

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‘Trade Tensions and Strained Global Cooperation’ – Guest Blog for LKI

A version of this article first appears on ‘The Prospector’, the blog of the Lakshman Kadirgamar Institute (LKI) https://www.lki.lk/blog/trade-tensions-and-strained-global-cooperation/ . I thank my co-author Aquilah Latiff, my former intern and final-year student at Royal Institute. 

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This September marked the tenth anniversary of the onset of the Global Financial Crisis, and the economic downturn that followed, delivering ripples throughout the global economy. In the immediate aftermath of that crisis, trade recovered faster than the overall global economy and it is widely recognised that one of the key reasons for this was that countries did not descend into a ‘race-to-the-bottom’ tariff war. In fact, unlike during the Great Depression of the 1930s, countries did not impose protectionist tariffs against each other; we didn’t see the ‘Smoot Hawley’ type tariffs by the United States[2]. After the 2008 crisis, the G20 countries did a remarkable job of coming together to fend off any protectionist tendencies and taking a unified and coordinated approach to stem the tide. They managed, through cooperative action, boost trade and soothe financial markets.

Fast forward 10 years, post-crisis era trade has undergone some major shifts. Asia – led by China – has strengthened as the centre of gravity for much of the world’s supply chains; an inevitable coming of age that the world must adapt to. Advancements in production technology and the rise of digital has meant that some workers in the West have not been able to adjust to the new economy; sectors, industries and geographies that had been left behind in parts of rural America, Europe, and Britain, continue to decay. And most notably, the promise of better international economic cooperation or improved global economic governance simply has not materialized. While the G20 was able to fight the initial fires, it has been unsuccessful in making huge strides since then, and neither has the established order of multilateral financial institutions set up after the Second World War.  What is troubling is, unlike the 2008 crisis that was a global phenomenon that elicited a global response, the growth of nationalist sentiment in many countries since then is likely to impede any chances of similar cooperation in this present time.

Indeed, a subtler form of protectionism has been creeping in – not tariffs, but other trade restrictive measures often called ‘non-tariff barriers’. These are well documented in the Global Trade Alert (GTA) database[3]. According to GTA’s latest assessment, the number of new discriminatory trade measures introduced per year have jumped to 898 by week 43 of 2018, compared to 286 by week 43 back in 2009 – an increase of over 3 times. The data shows a progressive worsening since 2012, with a substantial spike in 2018. Around one-third of the discriminatory measures are unfair subsidies or bailouts to domestic manufacturers and farmers. As the lead author of the GTA report Simon Evenett notes, “Tariff hikes get a lot of attention while government largesse operates under the radar screen. Murky protectionism matters too.”

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Interdisciplinary Design

During a recent visit to the renowned architecture firm ‘Foster + Partners’ in London (of ‘Gherkin’ building fame), I was struck by how interdisciplinary their team was. And it was a reflection of how interdisciplinary their projects – in 70+ countries – had needed to become, marrying the built environment with concerns around mobility, sustainability, and society. It was not just about architects designing a building anymore, but it was now also about – what place did that building have in the city and community that it was located in?; what was its place in the local economy?; how would it interact with people and how would people interact with it in return?; what was the building role in recognizing and solving the environmental challenges that a place is faced with?… All complex questions that clearly require interdisciplinary answers and solutions. So, the Foster + Partners team of nearly 1,400 staff is now comprised of a ecclectic mix of behavioral psychologists, urban planners, acousticians, design thinkers, data scientists, environmental engineers, sustainability modelers, anthropologists, workplace strategists, etc. In particular, thinking of environmental sustainability throughout their projects seemed to be a key focus, and something that one of their senior team said to us was quite poignant – “There is 3 times as many people on the planet as when our practice began and that drives what we do”.

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Interdisciplinary teams work at the Thames-riverside offices of Foster + Partners, in the London Borough of Wandsworth.

A Meeting Inside the World’s First 3D Printed Office Building

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The world’s first functional 3D printed office building at the Dubai Future Foundation. Image (c) Anushka Wijesinha

During a recent visit to Dubai, for the World Economic Forum’s Annual Meeting on Global Future Councils, we visited the Dubai Future Foundation that is at the cutting edge of driving innovation and foresight in the emirate. We were fortunate to have the final group session of our Council (the ‘Global Future Council on Innovation Ecosystems’) at a very special venue – the world’s first functional 3D printed office building, pictured here. It was made in just 17 days. The real innovation, we were told, was the materials science – developing a concrete mixture that dries super fast, in order to have the ‘layers’ print one after the other. The aim was to go from talking about the concept to demonstrating that it’s possible. The leadership had declared a goal that 25% of all buildings in Dubai must be 3D printed by 2025, to cut down on time and waste of resources. So the Dubai Future Foundation (which sits under the ‘Cabinet Minister for the Future of UAE’) wanted to show that it’s possible and practical, not just a concept. So, they made this. Pictured below is the CEO of the Dubai Future Foundation – Khalfan. A fantastic guy, who is leading a lot of this work.

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The Curionomist Podcasts | A Chat with Eric Miller on Why Sri Lanka is Primed for Logistics Success

We recently launched the ‘Multi Country Consolidation’ initiative in Sri Lanka under a new project by the Global Alliance for Trade Facilitation where Sri Lanka is only the second country in Asia to be selected for such project. The aim is to provide a new dimension of competitive advantage for the Colombo Port, which despite its fast growth, natural geographic advantages, efficient terminal operations, and impressive liner connectivity, is facing fresh challenges from other ports in the region. For the launch of the MCC project, the GATF’s lead for Sri Lanka visited the country and I caught up with him in this latest edition of the ‘Curionomist Podcasts’ to discuss Sri Lanka’s logistics potential.

Have Economists Failed to Interrogate Sri Lanka’s Post-War Development Approach? – Reflections from the Kelegama Memorial Conference

The IPS held the ‘Saman Kelegama Memorial Conference’ recently, which had a bunch of thought provoking sessions exploring a number of topics anchored to the theme of ‘post-conflict development’. The session on ‘Smarter Development for Sustaining Peace’, which looked at the strategies Sri Lanka adopted for economic recovery and development, post-war, has been nicely recapped on the IPS’s blog here. While the session was very insightful, particularly the perspectives of Ramani Gunatilake, Udan Fernando, Dilani Gunewardena and Ganga Tilakaratna, I felt that a couple of pertinent issues were missed in the session and I chose the Q&A segment to highlight these. Especially since the session was about exploring ‘Sri Lanka’s strategies of post-conflict development’.

The first remark was of the ‘model’ or approach of post-war development that was followed by Sri Lanka, and the need to interrogate the consequences of that approach. I would argue that the defining feature of Sri Lanka’s post war recovery approach was that building of, or giving away of, assets. On one hand we had the Government at the time focussing almost entirely on building assets – it was connective infrastructure (like roads, bridges, causeways, etc) and social infrastructure (hospitals and schools). On the other hand we had some NGOs that were giving assets, for example donors who were giving families cows. (I did a podcast about this ‘cow dropping syndrome’ previously on the blog).

Of course at the time, the reconstruction of built assets would have been priority and no-one is faulting that. But from an academic and research perspective we never really got around to interrogating that post-war recovery approach. What were the factors that led to that approach at the time? What were the drivers of that approach and what did that mean for the way in which it was done? Could it all have been done differently? What lessons did that approach throw up for the for other governments and for donors, in other post-war or conflict-affected settings? What are the consequences today of that particular approach followed then?

Unfortunately, this kind of interrogation has just not been done by economists in Sri Lanka, and sadly this session too disappointed on that front.

There was another notable element that the session did not cover, and yet again is something that economists in Sri Lanka have failed to interrogate, while political science, sociology, and human rights researchers have done a creditable job of covering extensively. That is, what I called in the session “the elephant in the room, or rather the ‘camouflaged elephant’ in the room”. I was referring to the role of the military. This was yet another defining feature in Sri Lanka’s post-war recovery and development journey and there hasn’t been a strong discourse among the economics fraternity on this.

Both of these issues were issues that Dr. Kelegama did deliberate on and from time to time did articulate in different forums – publicly or in private groups. I hope that in next years edition of the ‘Saman Kelegama Memorial Conference’ we can have a more pointed and more systematic interrogation of the defining features of Sri Lanka’s post-war development approach, with a special emphasis on the two elements highlighted above.

 

Cover image copyright Anushka Wijesinha, Batticaloa 2009. 

Dire Data, the 2018 Economics Nobel Prize, and Making a Dent in Climate Change

It has been a great week for advancing the climate change mitigation and adaptation agenda. The IPCC (Intergovernmental Panel on Climate Change) just released its latest report asserting that the world has just 12 years to get climate change under control or face the rather dire consequences of a 2-degree celsius rise in temperatures. It conveys a rather scary and bleak message, but also has a hopeful connotation – if economies get a grip on climate change (yes, a big “if”), rising temperatures can be stemmed at 1.5 degrees. According to the Washington Post article on the latest report,

Most strikingly, the document says the world’s annual carbon dioxide emissions, which amount to more than 40 billion tons per year, would have to be on an extremely steep downward path by 2030 to either hold the world entirely below 1.5 degrees Celsius, or allow only a brief “overshoot” in temperatures. As of 2018, emissions appeared to be still rising, not yet showing the clear peak that would need to occur before any decline. Overall reductions in emissions in the next decade would probably need to be more than 1 billion tons per year, larger than the current emissions of all but a few of the very largest emitting countries. By 2050, the report calls for a total or near-total phaseout of the burning of coal.

Alongside the release of this incisive and alarming report, was the announcement of this year’s winners of the Sveriges Riksbank Prize – more often known as the ‘Nobel Prize in Economics’ – was won by two economists who have done much to demonstrate to the world the link between economic growth and climate change and also the power of technological advancements to do something about the challenges emanating from global climate change. This year’s winners are William Nordhaus of Yale University and Paul Romer of NY Stern School of Business and former World Bank Chief Economist. Nordhaus is widely acknowledged as the first person to create an economic model that described the interplay between the economy and the climate. Romer, meanwhile, has shown how economic forces govern the willingness of firms to produce new ideas and innovations – an area I am personally very passionate about. I am particularly excited that Romer is one of two winners. His work has focussed on the positive side-effects of technological progress and has often argued that market economies left to their own devices tend not generate enough new ideas and that there is a role for well-designed government action to stimulate more innovation. This echoes the views and work of Marianna Mazzucato, among others.

I was in the North Central Province this week, and saw the power of technological advancements and economic incentives to promote a more climate-friendly trajectory. Jetwing Lake, a mid-sized hotel located in the Dambulla area owned by local tourism giant Jetwing Hotels, has moved wholeheartedly intro green initiatives. And they are being rewarded for it. Earlier this year the international travel body PATA awarded a ‘Gold’ award to Jetwing Lake for their sustainable operations.

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As I turned off into the dirt road leading to the property, you suddenly come across a solar farm (pictured above). I later learned that Jetwing Lake hosts one of the largest solar installations in a Sri Lankan hotel, generating 300kW. Moreover, their solar installation features ‘bifacial panels’ which generates electricity from both sides of the panel increasing yield by 15%. Apparently its the first commercial project in the country to have these bifacial panels. The solar plant generates over 40% of the hotels daily energy needs.

They’ve also installed solar as the roof for hotel’s guest and staff car park (pictured below).

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They also have an biomass boiler onsite that generates steam using over 2,000kg of cinnamon wood, that is otherwise thrown away by cinnamon peelers. This steam powers  a vapour absorption chiller which generates 100% of the hotel’s air conditioning needs.

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Pictured above is their effluent treatment plant where waste water is treated on-site and reused to irrigate the gardens, as flushing water in toilets, and for the cooling towers.

The circular economy truly at work, right here in Sri Lanka.

Linking back to the Nobel winners – Romer’s work on the potential of technological progress to drive a new growth trajectory is at play here, where with the advancements made in pollution abatement technologies, photovoltaic panels, etc., are being deployed to show how a sustainable growth path can be forged and can also garner valuable global recognition. Imagine initiatives like this multiplied across the tourism sector in Sri Lanka, and multiplied across more sectors in Sri Lanka, and multiplied globally – we can make a dent in global climate change, and hopefully avoid the dangerous 2-degree celcius tipping point.

 

(All images copyright Anushka Wijesinha.)

Arancha González on Trade

During her recent visit to Sri Lanka for the launch of the National Export Strategy, the head of the International Trade Centre*, Arancha González, held a session for the business community. I was fortunate to have chaired that session during which she shared some very interesting perspectives on the current trends in the global economy. Here are some of my key takeaways:

She emphasized that “We are in a turbulent landscape” where there are dangerous trade winds; “probably even a hurricane – the hurricane of unilateralism”.

She asked, how can we protect our countries? and went on to argue that in order to do so, countries must focus on “Facilitating trade, not blocking it”. She added that we must focus on “creating jobs, not just protecting existing jobs” and asserted that protectionism is actually self-harming and wont protect jobs.

Arancha emphasized the importance of improving competitiveness of our economies – “everyone has to up the game and every player is constantly changing, constantly on the move”. As part of this, countries need to ensure inclusiveness of trade – in particular do more to support youth entrepreneurship for men and women.

The ITC chief observed that in Sri Lanka, the proportion of firms connected to global markets is low and the country needs to invest more in regional cooperation and integration. She credit Sri Lanka’s ongoing trade reforms, and said “It is intelligent to build up a network of trade agreements”.

She made an important argument that it is actually technology, not trade, that is causing the stress to workers during this era of rapid globalization, and asserted that, “If governments had done better on helping those who lose out – better social policies – there would be less opposition to trade”.

In concluding, Arancha called on Sri Lanka to support multilateralism and multilateral institutions, especially as smaller countries would need it to buffet against the wave of unilateralism. She said, “Frankly I don’t see who wins in a world where might is better than right”.

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*The ITC is is a multilateral agency which has a joint mandate with the World Trade Organization (WTO) and the United Nations through the United Nations Conference on Trade and Development (UNCTAD). The ITC supported the development of the National Export Strategy in Sri Lanka, under financial support from the European Union Trade Related Assistance Project.