Selim Raihan. Climate Change in Bangladesh: Impact Assessment through a Dynamic CGE Model

Transcription

1 Selim Raihan Climate Change in Bangladesh: Impact Assessment through a Dynamic CGE Model July 2014

2 Climate Change in Bangladesh: Impact Assessment through a Dynamic CGE Model 1 Selim Raihan 2 July Under ADB TA 7432 (REG): Regional Economics of Climate Change in South Asia, Part II, Adaptation and Impact Assessment. 2 Dr. Selim Raihan is Professor, Department of Economics, University of Dhaka, Bangladesh and Executive Director, South Asian Network on Economic Modeling (SANEM). selim.raihan@econdu.ac.bd Page 1 of 88

3 CONTENT EXECUTIVE SUMMARY... 5 I. INTRODUCTION II. METHODOLOGY The Static Module of the BGDDyn CGE model The Dynamic Module of the BGDDyn CGE model Social Account Matrix (SAM) of Bangladesh III. SIMULATIONS IN THE BGDDYN CGE MODEL AND RESULTS Shock on Paddy Yield Construction of shock on paddy yield Results of paddy yield shock Shock on Land Quantity (sea level rise and permanent inundation) Construction of shock on land quantity Results of land quantity shock Shock on Labour Quantity and Productivity Construction of shock on labour supply Results of labor supply shock Shock on Infrastructure Construction of shock on infrastructure Results of infrastructure simulation Shock on Water quantity Construction of shock on water quantity Results of the water quantity shock Shock on Electricity Supply Construction of electricity supply shock Results of the electricity supply shock IV. SENSITIVITY ANALYSIS V. ADAPTATION STRATEGIES AND POLICY IMPLICATIONS Agriculture productivity and land Health Water Infrastructure Electricity Economic policies and export competitiveness Social safety net VI. CONCLUSION REFERENCES ANNEX: EQUATION OF THE BANGLADESH DYNAMIC CGE MODEL Page 2 of 88

4 List of Tables Table 1: Disaggregation and Description of Bangladesh SAM Accounts Table 2: Structure of the Bangladesh economy in 2007 as reflected in the Social Accounting Matrix, Table 3: Impact of climate change on paddy yield in Bangladesh under scenario A1B Table 4: Total area under different variants of paddy (hectare) Table 5: Calculated total production of paddy in different climatic zones (metric ton) Table 6: Weights of different variants of paddy Table 7: Changes in aggregate yield of paddy Table 8: Weights of different climatic zones in the total production Table 9: The percentage changes in the yield of paddy for the country as a whole Table 10: Construction of shock on BjVA parameter for paddy in the BGDDyn CGE model Table 11: Impact of paddy yield shock on sectoral production (% deviation from the BaU scenario) Table 12: Impact of paddy yield shock on households' total real consumption (% deviation from the BaU scenario) Table 13: Impact of land quantity shock on sectoral production (% deviation from the BaU scenario) Table 14: Impact of land quantity shock on households' total real consumption (% deviation from the BaU scenario) Table 15: Construction of labour supply shock on the parameter LSl, t in the BGDDyn CGE model Table 16: Impact of labour supply shock on sectoral production (% deviation from the BaU scenario) Table 17: Impact of labour supply shock on Households' total real consumption (% deviation from the BaU scenario) Table 18: Impact of infrastructure shock on sectoral production (% deviation from the BaU scenario) Table 19: Impact of infrastructure supply shock on households' total real consumption (% deviation from the BaU scenario) Table 20: Water balance projection under different scenarios for Bangladesh Table 21: Construction of water quantity shock on the parameter B_KD in the BGDDyn CGE model Table 22: Impact of water quantity shock on sectoral production (% deviation from the BaU scenario) Table 23: Impact of water quantity shock on households' total real consumption (% deviation from the BaU scenario) Table 24: Demand-supply gap of electricity in Bangladesh Table 25: Construction of electricity supply shock on the parameter B_KD in the BGDDyn CGE model Table 26: Impact of electricity supply shock on sectoral production (% deviation from the BaU scenario) Table 27: Impact of electricity supply shock on households' total real consumption (% deviation from the BaU scenario) Table 28: Results of sensitivity analysis Page 3 of 88

5 List of Figures Figure 1: Impact of paddy yield shock on production of paddy (% deviation from the BaU scenario) Figure 2: Impact of paddy yield shock on real GDP (% deviation from the BaU scenario) Figure 3: Impact of paddy yield shock on market price of rice (% deviation from the BaU scenario) Figure 4: Impact of paddy yield shock on CPI (% deviation from the BaU scenario) Figure 5: Impact of paddy yield shock on total export (% deviation from the BaU scenario) Figure 6: Impact of paddy yield shock on import of rice (% deviation from the BaU scenario) Figure 7: Impact of paddy yield shock on total import (% deviation from the BaU scenario) Figure 8: Impact of land quantity shock on real GDP (% deviation from the BaU scenario) Figure 9: Impact of land quantity shock on CPI (% deviation from the BaU scenario) Figure 10: Impact of land quantity shock on total export (% deviation from the BaU scenario) Figure 11: Impact of land quantity shock on total import (% deviation from the BaU scenario) Figure 12: Impact of labor supply shock on real GDP (% deviation from the BaU scenario) Figure 13: Impact of labor supply shock on CPI (% deviation from the BaU scenario) Figure 14: Impact of labor supply shock on total export (% deviation from the BaU scenario) Figure 15: Impact of labor supply shock on total import (% deviation from the BaU scenario) Figure 16: Impact of infrastructure shock on real GDP (% deviation from the BaU scenario) Figure 17: Impact of infrastructure shock on CPI (% deviation from the BaU scenario) Figure 18: Impact of infrastructure shock on total export (% deviation from the BaU scenario) Figure 19: Impact of infrastructure shock on total import (% deviation from the BaU scenario) Figure 20: Impact of water quantity shock on real GDP (% deviation from the BaU scenario) Figure 21: Impact of water quantity shock on CPI (% deviation from the BaU scenario) Figure 22: Impact of water quantity shock on total export (% deviation from the BaU scenario) Figure 23: Impact of water quantity shock on total import (% deviation from the BaU scenario) Figure 24: Impact of electricity supply shock on real GDP (% deviation from the BaU scenario) Figure 25: Impact of electricity supply shock on CPI (% deviation from the BaU scenario) Figure 26: Impact of electricity supply shock on total export (% deviation from the BaU scenario) Figure 27: Impact of electricity supply shock on total import (% deviation from the BaU scenario) Page 4 of 88

6 EXECUTIVE SUMMARY Bangladesh is one of the most vulnerable countries in the case of the negative impacts of climate change. Bangladesh, like many other developing countries, is also the least equipped to face new health crises or increase in the number of natural disasters due to financial constraints which impede investment in research and development for solutions to climate change. Bangladesh is highly vulnerable to climate change impacts because of its vast low-lying areas, its large coastal population, high urban population density, inadequate infrastructure, and high dependence on natural resources. This research explores the impact of climate change on the macro and sectoral economy as well as on the households, using a dynamic CGE model of Bangladesh, through projected changes in different parameters as provided by the sector specialists in ADB (2012) study. The results of the paddy yield simulation suggest that due to the reduction in yield, paddy production would fall by 0.68 percent in 2030, 1.60 percent by 2050, 3.67 percent by 2080 and 5.05 percent by There would be negative on production in almost all sectors of the economy and the magnitude of the negative impacts would intensify in the future. Fall in production in most of the sectors would have negative impact on real GDP. In 2030, real GDP would fall by 0.12 percent compared to the BaU scenario. The negative impact on real GDP would intensify further by 2050, 2080 and 2100 when the real GDP would fall by 0.3 percent, 0.67 percent and 0.93 percent respectively from the BaU scenario. The fall in production of paddy would increase the price of rice. By 2030 the rice price would increase by 0.77 percent from the BaU scenario, which by 2050, 2080 and 2100 would increase further by 1.84 percent, 4.32 percent and 6.02 percent respectively from the BaU scenario. The rising price of rice would have upward pressure on the overall CPI of the economy. The CPI in 2030, 2050, 2080 and 2100 would increase by 0.2 percent, 0.47 percent, 1.1 percent and 1.51 percent respectively. The negative impact on the overall economy would also be evident through the fall in total exports. Compared to the BaU scenario, total exports would be fall by 0.05 percent, 0.11 percent, 0.26 percent and 0.36 percent in 2030, 2050, 2080 and 2100 respectively. Fall in the production of rice would lead to rise in the import of rice. In 2030, the import of rice would increase by 1.03 percent compared to the BaU scenario which by 2050, 2080 and 2100 would increase further by 2.45 percent, 5.78 percent and 8.09 percent respectively. Overall import would also increase. In 2030, total import would increase by 0.05 percent compared to the BaU scenario. In 2050, 2080 and 2100, total imports would further increase by 0.13 percent, 0.3 percent and 0.41 percent respectively. Fall in rice yield would have negative impact on households' real consumption. The negative impacts would become more acute in 2030 and onwards. The poorer households both in the rural and urban areas would have larger negative impacts than their counterparts. This suggests that the climate change, manifested in the reduction in paddy yield, would reduce the potential growth in real GDP in the future. It is important to note that the government, in the Sixth Five Year Plan ( ) and in the Perspective Plan, has set achieving high growth rate in GDP. To increase one percentage point of growth of GDP, according to the current incremental capital-output ratio of Bangladesh (which is roughly equal to four), the country would need rise in the investment- Page 5 of 88

7 GDP ratio by four percentage points. To compensate the reduction in real GDP in 2030, 2050, 2080 and 2100, the investment-gdp ratio would have to rise further by 0.03, 0.075, 0.17 and 0.23 percentage points respectively. This would exert extra pressure on the economy. Also, keeping the price of rice within the reach of the poor people has been one of the priorities of the governments of Bangladesh. Government provides input subsidies and conduct open market sell to contain the hike in rice prices. During the global price hike in , the government had to undertake a number of measures to ease the inflationary pressure of rice price. It is thus evident that the future rise in rice price due to the reduction in rice yield would put pressure on government's budget to increase the allocation of subsidies. The land quantity shock would have negative impact on all sectors in the economy. Because of the linkage effects, not only the agricultural sectors, but also the industrial and services sectors would be affected. The magnitude of the negative effects would intensify by 2050, 2080 and Among the agricultural sub-sectors production of paddy and other crops would shrink more than those of the other sub-sectors. The fall in production in all the sectors in the economy would lead to fall in real GDP. Compared to the BaU scenario, the real GDP would fall by 0.73 percent in 2030, 0.82 percent in 2050, 0.9 percent in 2080 and 0.92 percent in The land quantity shock would lead to rise in CPI by 0.47 percent in 2030 compared to the BaU scenario. The CPI would rise further by 0.51 percent in 2050, 0.56 percent by 2080 and 0.58 percent by The land quantity shock would have negative impacts on total exports and imports. By 2030, exports would decline by 0.81 percent and this negative impact would exacerbate further by 2050, 2080 and The impacts on imports would however be small. The land quantity shock would have negative impact on households' real consumption. The negative impacts would become more acute in 2030 and onwards. In the rural areas both the poorer and richer households would be affected by similar magnitudes. In the urban area, the poorer households would have larger negative impacts than their counterparts. It is important to point out that Bangladesh is an agricultural land scare country, as far as per capita availability of agricultural land is concerned. Degradation of land is a vital issue throughout the world with the particular references to Bangladesh as it a threat to agricultural productivity. The loss of cultivable land would make it difficult to ensure the country's self-sufficiency in food production. Sufficient domestic food production to meet the needs of a growing population is depended largely on protecting agricultural lands. The decline in farmland is a threat not only to ensure food production but also to create jobs to accelerate the pace of poverty reduction. The negative impacts on real GDP would be higher under the land quantity shock than those under the paddy yield shock. The reason is, land is a critical factor of production for almost all sectors of the economy. Unless the productivity of land is increased substantially in the coming years, such negative impacts on the economy would persist and would lead to undermine the potential economic progress in the future. The labour supply shock would have negative impact on all sectors in the economy and the magnitude of the negative effects would increase further in 2050, 2080 and In general, the industrial subsectors would experience larger negative impacts than the agricultural and services sub-sectors. In 2030, real GDP would fall by 0.94 percent compared to the BaU scenario, and real GDP would fall Page 6 of 88

8 further by 1.01 percent, 0.95 percent in 2050 and 2090 respectively and would continue to fall at a rate of 0.91 percent in Falls in sectoral production and real GDP would lead to rise in the CPI. The CPI would rise by 0.53 percent, compared to the BaU scenario by 2030, and would increase further by 0.57 percent in By 2090 it would be increased to 0.54 percent and it would continue to increase at a rate more than 0.5 percent until The labour supply shock would lead to fall in both exports and imports. Exports would fall by 1.19 percent by 2030 and it would fall further by 1.26 percent in In 2090 exports would fall by 1.16 percent and would continue to fall by more than 1 percent afterwards. The impact on imports would however be small. The labour supply shock will have negative impacts on households' real consumption by almost similar magnitudes. However, the poorer households would have some larger negative impacts than their counterparts. The negative impacts would intensify further in the later years. Diseases like Malaria and Diarrhoea are closely linked to the quality of sanitation. In Bangladesh, 75 percent of the population lives in rural areas, and many communities in hard-to-reach regions do not have adequate access to sanitation. In such a densely populated country, where a large proportion of the land regularly floods, sanitation is a continuing challenge. In recent years only 39 percent of the population has improved sanitation coverage, although this is up from 20 percent in Despite improvements, large numbers of people remain at risk. It is evident that the climate change and its impacts through frequent floods and water logging would slow down the progress in improving the quality of sanitation in the country. It is important to note that Bangladesh is a heavily populated country with very high density of population. Labour productivity is considered to be very low in Bangladesh compared to many countries in the world. It is a matter of great concern for the policy makers to enhance labour productivity in order to achieve high and sustainable economic growth. However, increasing the labour productivity is a daunting task and it requires changing the current labour-intensive production process in most of the agricultural and industrial sectors to more capitalintensive production process. Also, sustained investments are needed in enhancing skill of the labour force. Therefore, unless and until significant improvement in productivity of labour is achieved in the coming years, the climate change would exert negative impact on the overall economy through reduction in the level of production in most of the sectors as a result of reduction in supply of labour. The infrastructure shock would have negative impact on all sectors in the economy. In general, larger impacts would be observed in the industrial and services sectors and the magnitude of the negative effects would intensify by 2050, 2080 and Real GDP would continue to fall. Compared to the BaU scenario, the real GDP would fall by 0.62 percent in 2030, 0.82 percent in 2050, 1 percent in 2080 and 1.07 percent in The infrastructure shock would have positive impact on CPI. CPI would increase by percent in 2030 compared to the BaU scenario. The CPI would rise further by percent in 2050, 0.96 percent by 2080 and percent by The infrastructure shock would lead to fall in total exports and imports. By 2030, exports would decline by 0.59 percent and this negative impact would continue to intensify in 2050, 2080 and In 2050, 2080 and 2100, exports would fall by 0.82 percent, 1.03 percent and 1.11 percent respectively. The impacts on imports would however be small. The infrastructure shock should would have negative impact on households' real Page 7 of 88

9 consumption. The negative impacts would intensify further 2030 onwards. Both in the rural and urban areas poorer households would be affected more than the richer households. It is generally acknowledged that an efficient supply of infrastructure is conducive to economic development. Infrastructure is argued to be one of the critical factors for economic growth in the low income countries like Bangladesh. Efficient and reliable infrastructure services are essential for economic growth and have a major impact on the investment climate in Bangladesh. Unreliable infrastructural services have led to substantial costs on the Bangladeshi economy and hindered growth. For example, power shortages reduce industrial output and GDP growth. Therefore, a negative shock on infrastructure, as a result of the climate change, would have some serious negative impacts on the overall economy of Bangladesh. Under the Sixth Five Year Plan ( ) Bangladesh government aims to achieve 8 percent growth in real GDP by the end of the plan period. However, poor status of infrastructural development is acting as a serious binding constraint to realizing that growth target. Improving the country s infrastructural system will thus be essential for achieving high economic growth which is important if poverty reduction is to accelerate. It is evident that the negative impacts of climate change would put extra hurdles, through depleting the country's infrastructure, in achieving the growth targets in Bangladesh. Under the water quantity shock of the A1B scenario all sectors would suffer during However, after 2030, situation would improve and after 2050, there will be positive impacts on production in all sectors. By 2030 real GDP would fall by 0.78 percent. In 2050, situation would improve where the real GDP would fall by 0.31 percent. In 2080, real GDP would rise by 0.72 percent compared to the BaU scenario. CPI would rise by 0.51 percent in 2030, and would then start to fall. Both exports and imports would experience fall until They would continue to fall, though at reduced rate, until 1960 and after that they would rise. The impacts on exports would be larger than those on imports. There would be negative impacts on households real consumption in 2030 and 2050 and the poorer households would suffer more than the richer households. In 2080, all household categories would experience some rises in real consumption. In contrast to the A1B scenario, under the A2 scenario, the negative impacts on sectoral production would intensify in 2050 and Interesting to note that, not only the agricultural sectors would be affected, but also manufacturing and services sectors would be affected due to the fact that many of these sectors also require water in their production process and also because of the sectoral interlinkges. Real GDP would fall by smaller margin in 2030; however, it would fall further in 2050 and CPI would rise and it would rise by larger magnitude after Both exports and imports would fall and they would fall in larger magnitudes after All categories of households would experience fall in real consumption and the situation would deteriorate after The directions of impacts of B1 and A2 scenario would be similar. However, negative impacts would be much larger under the B1 scenario than the A2 scenario. Under the A1B scenario, the electricity supply shock would have negative impacts on all sectors in the economy and the industrial sub-sectors would suffer more than the agricultural and services subsectors. In 2050 and 2080 the negative impacts would intensify further. Under this scenario, the real Page 8 of 88

10 GDP would fall by 0.62 percent in 2030, 1.48 percent in 2050 and 1.82 percent in CPI would rise in 2030 and it would rise further in 2050 in Also under this scenario, both exports and imports would fall. The negative impact on exports would be larger after The impact on imports would however be small but would intensify after All household categories would be affected and the negative impacts on real consumption would intensify further after In the rural area, the rural non-farm households would be affected most, while in the urban area, the urban households with high-educated heads would be affected most. The directions of the impacts under the A2 scenario would similar to those under the A1B scenario. However, the magnitudes would be less pronounced. The directions of the impacts under the B1 scenario would be similar to those under the A1B and A2 scenario. However, the magnitudes would be higher than those under the A2 scenario and would be lesser than those under the A1B scenario. According to the Sixth Five Year Plan of the Government of Bangladesh, the frequency of power and gas outages is threatening citizen welfare and development prospects. The annual loss to production and income from power outages could well exceed 0.5 percent of GDP per year. The availability of domestic primary fuel supply is getting so scarce that it is forcing severe measures like shutting down fertilizer factories, rationing gas supplies for household and transport uses, and keeping idle installed power units. Every 1 percent of GDP growth is estimated to lead to a growth of 1.4 percent in electricity demand in a typical developing country. For a 5-6 percent typical annual economic growth rate, this would imply a need for close to 7-8 percent growth in electricity supply. However, all three scenarios, A1B, A2 and B1, show increasing trend of excess demand for electricity, indicating the possibility of negative impacts on economic growth, sectoral production, exports and household welfare. There should be several adaptation strategies for agriculture. In the case of drought the adaptation strategies included introducing drought tolerant crops, efficient use of water, use of surface water for irrigation, more plantation, introducing alternative income generation activities and creating opportunities. In the case of flooding the suggestions included introducing short duration crop varieties, introducing flood tolerant crop varieties, promoting community based seed preservation, introducing raised seed bed in highlands and floating seedbeds in low-lying areas, constructing flood friendly infrastructure. In the case of flash flood suggestions included introducing short duration crop varieties, constructing flood friendly infrastructure. To adapt the changes in temperature suggestions included changes in crops (crop versification; emphasis on heat and cold tolerant varieties) and cropping pattern, practicing Integrated Crop Management (ICM). To adapt to more extreme weather suggestions included crop diversification, adopting crop cultivation considering the changes in weather, facilitate drainage of runoff and creating options for reserving surface water for irrigation. In the case of riverbank erosion, suggestions included constructing and maintaining infrastructure to protect river bank erosion, plantation, distribute khas lands among eroded people and introducing alternative income opportunities. In the case of sea level rise, the suggestions included promoting community based open water fisheries, alternative options of aquaculture (e.g. cage aquaculture, pen culture, crab fattening, etc.). In the case of salinity intrusion the adaptation strategies include domestication of saline and brackish water fish species, constructing and rehabilitating climate Page 9 of 88

11 resilient water infrastructure, introducing saline tolerant crops and vegetables variety. For the cyclone and storm surges there would be need to construct and rehabilitate cyclone resilient infrastructure, increase veterinary support. For water logging and drainage congestion there would be need to promote community based fisheries management, duck rearing, introduce economically and nutritionally important aquatic crops, facilitate drainage system In the case of health, the adaptation strategies should include water treatment facilities, improved sanitation, access to improved healthcare system, surveillance and monitoring of conditions favourable for disease outbreak, improve public education, especially in reproductive health and technological/engineering controls for pests In the case of water broad adaptation measures could include strengthening field bunds to conserve more rain water, re-excavation of traditional ponds, re-excavation of small canals and other water conveyance structures, building of water control structures, check dams across the water ways, construction of mini-ponds, shallow and deep tube wells. The major adaptation strategies for infrastructure would include repair and maintenance of existing flood embankments, repair and maintenance of existing cyclone shelter, planning, design, and implementation of resuscitation of networks of rivers and khals through dredging and de-siltation work, repair and maintenance of existing coastal polders, improvement of urban drainage adaptation against floods, adaptation against future cyclones and storm-surges and planning, design, and construction of river training works. The strategies in the electricity sector should include: (i) establishing transparent corporate governance and a regulatory regime to provide performance-based incentives to sector entities; (ii) improving the commercial performance of the sector to improve its cost recovery and financial viability. This requires fundamental corporate and institutional reforms; (iii) attracting investments from the private sector to increase the generation capacity of the country and maintain an adequate and reliable power supply; (iv) encouraging development partners to provide concessionary financing for investments in urgently needed power transmission and distribution projects; (v) changing the prevailing culture of electricity pilferage and nonpayment of electricity bills in collusion with utility employees; (vi) establishing the performance-driven and accountable corporate culture in the newly established companies. This requires a drastic change from the existing practices and culture of the power sector; (vii) maintaining the reform momentum with further unbundling of power generation and distribution operations of BPDB and the restructuring of the operations of DESA; (viii) addressing the power shortages as a matter of urgency through a combination of investments from the private sector and the public sector; (ix) commercializing the generation operations of BPDB, which have not been restructured. BPDB continues to operate in a suboptimal manner, with low plant factors and thermal efficiencies. The existing generation assets need to be rehabilitated to improve their efficiency and availability. The generation companies created out of BPDB need to be made fully operational with the transfer of assets and the signing of PPAs with BPDB; (x) further improving the Page 10 of 88

12 power distribution operations of WZPDC, BPDB, and DPDC; (xi) addressing the financial insolvency of BPDB and the former DESA, which have large unpaid Government debts and irrecoverable accounts receivable. To set the power sector s financials on a sound basis, a major financial restructuring is required including the write-off of BPDB s liabilities to the Government; and (xii) addressing overall financial non-viability of the sector despite improvements in control over losses and bill collection. Significant increases in retail power tariffs are needed to ensure that all sector entities achieve financial viability. It has been observed in the simulation results using the BGDDyn CGE model that the climate change would have significant negative impact on the export growth of different sectors in Bangladesh. In order to mitigate these negative impacts, government should adopt policies and programmes to enhance the productivity of the export-oriented sectors. There are a number of cross-cutting issues, such as lack of infrastructure and high cost of doing business which hamper the competitiveness of the export sectors. Policies and programmes should be targeted towards reducing those cost of doing business so that the export-oriented sectors become capable of adapting to the negative impacts of the climate change. In addition to the structural causes of poverty, shocks induced by climate change, such as floods, cyclones, have a significant accumulated impact. There is some evidence to suggest that such severe and repeated shocks contribute to poverty traps in certain areas of the country. The coastal belt of Barisal is a case in point. It is no coincidence that Barisal has the highest incidence of both rural and urban poverty. The high incidence of natural disasters suffered by this Division calls for special efforts to design growth, employment and poverty strategies that seek to offset to the best possible way the adverse implications of these disasters. Economy wide, the rural and urban poor are also highly vulnerable to increases in food prices. The steep rise in food prices, especially of rice prices during 2007 and 2008, while benefiting a relatively small group of (larger) farmers, has had an especially severe impact on the poorest households. The frequency and severity of such large shocks calls for safety nets programs to play a critical role. By (at least partly) mitigating the impact of the shocks, a well-functioning safety net system would ensure that the considerable gains Bangladesh has achieved through rapid economic and social transformation are not eroded. The Bangladesh Climate Change Strategy and Action Plan 2009 was originally developed through a participatory process involving all relevant ministries and agencies, civil society, research organizations, the academia and the business community. Programs funded under the Action Plan should be implemented by the line ministries and agencies, with participation, as appropriate, of other stakeholder groups, including civil society, professional and research bodies and the private sector. While adaptation and mitigation are the main tasks, finance and technology are the means to achieve them. The Government has established a National Climate Change Fund. The Government desires that all development partners who so wish will contribute to this fund. Exactly what would be the operational modality may be worked out by the government and the particular development partner. But the cardinal principle of the operation of the fund shall be that it will be used solely to Page 11 of 88

13 finance activities under the Action plan. Secondly, this contribution will not be a substitute for other normal funding for development by the development partners. Finally, information on climate change impacts needs to be translated from the scientific research domain into language and time scales relevant for policy makers. Page 12 of 88

14 I. INTRODUCTION World temperatures are expected to increase between 1.4 and 6.4 C by At this point in time an increase of 2 C will be nearly impossible to avoid. Besides the temperature increase the number of severe weather events, such as hurricanes and tornadoes is also expected to increase. Different parts of the world will be affected positively and negatively: countries closer to North and South poles will experience warmer temperatures and once inhospitable land will experience melting of ice. Small island nations will be at risk of extinction due to rising sea levels again associated with the melting of polar ice caps and thermal expansion in oceans. Low lying islands will be at a greater risk of flooding from increased precipitation. Countries near the equator, many of which are LDCs, will experience unbearable heat. Some of the countries are already experiencing more frequent droughts and ruined crops, which are exacerbating the hunger crisis. Health issues will become a greater cause of concern. Diseases such as malaria and dengue are expected to become more prevalent due to increasing mosquito populations. Incidences of diarrhea are also expected to rise due to lack of clean water. These health problems will continue to lower life expectancy. Severe weather events are predicted to increase, such as, hurricanes, floods, heat waves and droughts. Bangladesh is one of the most vulnerable countries in the case of the negative impacts of climate change. Bangladesh, like many other developing countries, is also the least equipped to face new health crises or increase in the number of natural disasters due to financial constraints which impede investment in research and development for solutions to climate change. Ironically, Bangladesh and many developing countries will be hit hardest by global warming, despite their own insignificant greenhouse gas (GHG) emissions. In the case of Bangladesh, hurricanes are likely to harm coastal regions by damaging important infrastructure, often located near coastal areas. Severe weather changes will include increased precipitation in certain areas that may cause damage to crops, roads, bridges, and infrastructure used for trade. It may also exacerbate the contamination of water supplies. Increased precipitation will also lead to greater amount of saltwater intrusion as a result of flooding. This will lead to more water conflicts as a result of the salinisation and drying up of bodies of water. Agriculture is an area where Bangladesh is expected to suffer greatly. Increases in global temperatures will make it impossible to grow crops that once flourished. People will have to adapt to growing new crop varieties or migrate. Some areas that were once fertile may not be able to support any crops. Increases in flooding will increase soil erosion. At the same time droughts will increase in frequency and lead to shrinking livestock populations as well as crop failures. Thus, Bangladesh will become more dependent on trade for food, but problems are Page 13 of 88

15 anticipated as real food prices are likely to rise with decline in world food output. The tropical location and dependence on agriculture makes Bangladesh extremely vulnerable to the effects of global warming. ADB (2012) highlights that Bangladesh is highly vulnerable to climate change impacts because of its vast low-lying areas, its large coastal population, high urban population density, inadequate infrastructure, and high dependence on natural resources. Observations indicate that the monsoon is weakening during the early part of the season, but becoming stronger in the later months. Annual and seasonal mean temperatures have shown increasing trends. All modeling scenarios agree on increased rainfall in the 2050s (9 percent to 26 percent) and 2080s (12 percent to 16 percent). The ADB (2012) also reports that for Bangladesh, climate change will manifest both as changes in the severity of extreme events and in greater climate variability. Climate variability will be manifested by more pronounced variation of wet and drought years, whereas extreme weather events will manifest through stronger tropical cyclones which will also generate more powerful storm surges, and whose effects will be amplified by the effects of rising sea levels. Projected sea level rise, in particular, will have serious effects. About 20 percent of the population lives in the low coastal zone and any increase in sea level will have enormous negative effects. Indeed, studies are indicating that the rate of sea level rise along Bangladesh s coastline is more pronounced compared with the global rate, partly due also to the exacerbating effect of land subsidence. Because of the flat topography, even small increments in sea level rise will affect large areas, directly through inundation and farther inland through salt intrusion. Sea level rise is both a direct threat as well as an exacerbating factor. Not only will result in widespread coastal inundation, it will also prolong the riverine flooding by blocking the discharge of water from the Ganges, Brahmaputra and Meghna river systems. Against this backdrop, the objective of this research is to explore the impact of climate change on the macro and sectoral economy as well as on the households through projected changes in different parameters as provided by the sector specialists in the ADB (2012) study. This report provides the detailed methodology, simulation design, and simulation results under this research. The organisation of the paper is as follows: Section II discusses on the methodology of the research which includes description of the Bangladesh Dynamic (BGDDyn) CGE model and the Social Accounting Matrix (SAM). Section III presents the simulation exercises and simulation results. Section IV suggests the adaptation strategies and policy implications. Finally, Section V concludes. Page 14 of 88

16 II. METHODOLOGY This research connects the results from the ADB (2012) with a recursive dynamic CGE model for Bangladesh and derives macroeconomic, sectoral and household impacts of different changes in climate parameters. The Bangladesh dynamic CGE (BGDDyn CGE) model is built using the Partnership for Economic Policies (PEP) standard recursive dynamic CGE model (Decaluwe et al, 2010). A majority of CGE models are static in nature. The inability of this kind of models to account for growth effects make them inadequate for long-run analysis of the economic policies or any shock to the economy. They exclude accumulation effects and do not allow the study of transition path of an economy where short-run policy impacts are likely to be different from those of the long-run. To overcome this limitation we use a sequential dynamic CGE model. This kind of dynamics will not be the result of inter-temporal optimisation by economic agents. Instead, these agents have myopic behaviour. It is a series of static CGE models that are linked between periods by updating procedures for exogenous and endogenous variables. Capital stock is updated endogenously with a capital accumulation equation, whereas population (and total labour supply) is updated exogenously between periods. The equations of the BGDDyn CGE model are provided in Annex. The BGDDyn CGE model has both the static and dynamic model. The static model presents the behaviour of the economic agents in the economy whereas the dynamic model shows the transition path of the economy due to any external shock. The BGDDyn CGE model uses the latest Social Accounting Matrix (SAM) of Bangladesh as the dataset. Below the static and dynamic modules of the BGDDyn CGE model and the description of the SAM are provided The Static Module of the BGDDyn CGE model A representative firm in each industry maximizes profits subject to its production technology. The sectoral output follows a Leontief production function. Each industry s value added consists of composite labour and composite capital, following a CES specification. Different categories of labour are combined following a CES technology with imperfect substitutability between different types of labour. Composite capital is a CES combination of the different categories of capital. It is assumed that intermediate inputs are perfectly complementary. They are combined following a Leontief production function. Household incomes come from labour income, capital income, and transfers received from other agents. Subtracting direct taxes yields household s disposable income. Household savings are a linear function of disposable income, which allows the marginal propensity to save to differ from the average propensity. Page 15 of 88

17 Corporate income consists of its share of capital income and of transfers received from other agents. Deducting business income taxes from total income yields the disposable income of each type of business. Likewise, business savings are the residual that remains after subtracting transfers to other agents from disposable income. The government draws its income from household and business income taxes, taxes on products and on imports, and other taxes on production. Income taxes for both households and businesses are described as a linear function of total income. The current government budget surplus or deficit (positive or negative savings) is the difference between its revenue and its expenditures. The latter consists of transfers to agents and current expenditures on goods and services. The rest of the world receives payments for the value of imports, part of the income of capital, and transfers from domestic agents. Foreign spending in the domestic economy consists of the value of exports and transfers to domestic agents. The difference between foreign receipts and spending is the amount of rest-of-the-world savings, which are equal in absolute value to the current account balance but are of opposite sign. The demand for goods and services, whether domestically produced or imported, consists of household consumption demand, investment demand, demand by government, and demand as transport or trade margins. It is assumed that households have Stone Geary utility functions (from which derives the Linear Expenditure System). Investment demand includes both gross fixed capital formation (GFCF) and changes in inventories. Producers supply behaviour is represented by nested constant elasticity of transformation (CET) functions. On the upper level aggregate output is allocated to individual products; on the lower level the supply of each product is distributed between the domestic market and exports. The model departs from the pure form of the small-country hypothesis. A local producer can increase his share of the world market only by offering a price that is advantageous relative to the (exogenous) world price. The ease with which his share can be increased depends on the degree of substitutability of the proposed product for competing products; in other words, it depends on the price-elasticity of export demand. Commodities demanded on the domestic market are composite goods, combinations of locally produced goods and imports. The imperfect substitutability between the two is represented by a CES aggregator function. Naturally, for goods with no competition from imports, the demand for the composite commodity is the demand for the domestically produced good. Page 16 of 88

18 The system requires equilibrium between the supply and demand of each commodity on the domestic market. The sum of supplies of every commodity made by local producers must equal domestic demand for that locally produced commodity. Finally, supply to the export market of each good must be matched by demand. Also, there is equilibrium between total demand for factors and their available supplies The Dynamic Module of the BGDDyn CGE model In every period capital stock is updated with a capital accumulation equation. We assume that the stocks are measured at the beginning of the period and that their flows are measured at the end of the period. We use an investment demand function to determine how new investments will be distributed between the different sectors. Investment here is not by origin (product) but rather by sector of destination. The investment demand function used here is similar to those proposed by Bourguignon et al. (1989), and Jung and Thorbecke (2003). The capital accumulation rate (ratio of investment to capital stock) is increasing with respect to the ratio of the rate of return to capital and its user cost. The latter is equal to the dual price of investment times the sum of the depreciation rate and the exogenous real interest rate. By introducing investment by destination, we respect the equality condition with total investment by origin in the SAM. Besides this, investment by destination is used to calibrate the sectoral capital stock in base run. Total labour supply is an endogenous variable, although it is assumed to simply increase at the exogenous population growth rate. Note that the minimal level of consumption in the LES function also increases (as do other nominal variables, like transfers) at the same rate. The exogenous dynamic updating of the model includes nominal variables (that are indexed), government savings and the current account balance. The equilibrium between total savings and total investment is reached by means of an adjustment variable introduced in the investment demand function. The model is formulated as a static model that is solved sequentially over a certain period time horizon. 3 The model is homogenous in prices and calibrated in a way to generate "steady state" paths. In the baseline all the variables are increasing, in level, at the same rate and the prices remain constant. The homogeneity test (for example, a shock on the numéraire the nominal exchange rate with the steady state characteristics) generates the same shock on prices, and unchanged real values, along the counterfactual path. This method is used to facilitate welfare and poverty analysis since all prices remain constant along the business as usual (BaU) path. 3 The model is formulated as a system of non linear equations solved simultaneously as a constrained non-linear system (CNS) with GAMS/Conopt3 solver. Page 17 of 88

19 It is, however, important to note that, in contrast to the static CGE models, which make counterfactual analysis with respect to the base run (generally the initial SAM), a dynamic CGE model allows the economy to grow even in the absence of a shock. This scenario of the economy (without a shock) is termed as the business-as-usual (BAU) scenario. The counterfactual analysis of any simulation under the dynamic CGE model is, therefore, done with respect to this growth path. One of the salient features of the dynamic model is that it takes into account not only efficiency effects, as also present in the static models, but also accumulation effects. The sectoral accumulation effects are linked to the ratio between the rate of return to the capital stock and the cost of investment goods Social Account Matrix (SAM) of Bangladesh The BGDDyn CGE model uses the latest available Social Accounting Matrix (SAM) of Bangladesh for the year The 2007 SAM identifies the economic relations through four types of accounts: (i) production activity and commodity accounts for 41 sectors; (ii) 4 factors of productions with 2 different types of labour and 2 types of capital; (iii) current account transactions between 4 main institutional agents; household-members and unincorporated capital, corporation, government and the rest of the world; and (iv) two consolidated capital accounts distinguished by public and private origins to capture the flows of savings and investment. The 2007 SAM has 41 sectors. The disaggregation of activities, commodities, factors and institutions in the 41-sector SAM is given in Table 1. Set Commodities (41) Agriculture (6) Manufacturing (22) Services (13) Factors of Production (4) Labour (2) Capital (2) Current Institutions (11) Households (7) Table 1: Disaggregation and Description of Bangladesh SAM Accounts Description of Elements Paddy; other crop; Livestock Rearing; Poultry Rearing; Fishing; and Forestry Rice Milling; Grain Milling; Food products; Leather Industry; Jute and Yarn Industry; Cloth Industry; Woven RMG; Knit RMG; Toiletries; Cigarette and Bidi Industry; Furniture Industry; Paper, Printing and Publishing industry; Pharmaceuticals; Fertiliser Industry; Petroleum; Chemical Industry; Glass Industry; Earth-ware Industry; Cement; Metal Industry; Miscellaneous Industry; Mining and Quarrying Construction; Electricity and Water Generation; Gas Extraction and Distribution; Wholesale and Retail Trade; Transport; Health Service; Education Service; Public Administration and Defence; Bank Insurance and Real estate; Hotel and Restaurant; Communication; Information Technology and E-Communication; and Other Services Labour Unskilled, and Labour Skilled Capital and Land Rural: landless, Agricultural marginal, Agricultural small, Agricultural large, Non-farm Urban: Households with low educated heads, and households with high educated heads Government, Corporation and Rest of the World Others (3) Capital Institution (1) Consolidated Capital Account Source: Social accounting matrix of Bangladesh for Page 18 of 88