News Article

Tax on CO2 Emissions: Mitigate, Reduce and Collect

Wed, 02/19/2014 - 11:40

The Kyoto Protocol in 1997 set the guidelines for many international policies taken to fight climate change. One of the international components aimed at mitigating greenhouse gas emissions was the idea of a tax on carbon dioxide (CO2) emissions, colloquially known as the carbon tax. Although Mexico is not among the world’s largest emitters of carbon dioxide, its emissions went from 264 million tonnes in 1990 to 490 million tonnes in 2012, the year with the highest recorded CO2 emissions. The transportation sector is responsible for 151.4 million tonnes of greenhouse gases from burning fuels, mainly gasoline and diesel. Electricity production accounts to 123.2 million tonnes of CO2 due to the prominent role hydrocarbons play in the energy mix.

A tax on carbon dioxide emissions was included in the 2013 modifications to the Law for Special Tax on Production and Services (LSTPS). It is estimated that this tax will collect approximately MX$21 billion (US$1.57 billion) during its first effective fiscal year. The Mexican Institute of Competitiveness has identified those sectors that will be most affected by the new tax. The transportation sector is expected to pay MX$8.62 billion (US$647 million) through this tax annually while CFE alone will contribute a further MX$4.38 billion (US$329 million). Items taxed under the LSTPS include propane, butane, gasoline, kerosene, diesel, fuel oil, and mineral carbon. The amounts taxed are determined according to each fuel’s CO2 content, considering fees per unit of measure. The most expensive fee in the CO2 section of the LSTPS goes for almost MX$40 (US$3) per tonne of carbon, while gasoline is taxed at MX¢10.38 per liter.

The LSTPS allows the use of carbon credits as long as these comply with UN standards and come from projects carried out exclusively in Mexico. Each carbon credit is worth a tonne of carbon dioxide that is not released into the atmosphere. Under this model, companies that release moderate amounts of CO2 benefit while the more polluting enterprises are penalized. Additionally, projects that mitigate pollution, such as renewable energy generation, improvements in energy efficiency, reforestation, or the restoration of water bodies, are also eligible to generate carbon credits. These can be sold to other companies or countries as greenhouse gas reductions, to compensate for emissions elsewhere.

Mexico’s carbon tax is meant to discourage environmentally detrimental practices and promote investments in clean technology. As a result, the participation of private parties in renewable energy generation has the advantage of not paying carbon emission taxes, thereby increasing the

scheme’s appeal and promoting the fulfillment of climate change mitigation strategies. The law also provides an incentive for the transition towards a cleaner power generation sector since methane, the main component of natural gas, is not taxed by the LSTPS. Greenhouse emissions can be greatly reduced while the industrial sector is encouraged to help make the country’s energy transition a reality. However, some critics have pointed out the lack of transparency in the government’s objectives regarding green technologies. But aside from such issues, the scientific community and other players are predominantly positive about this mitigation strategy.

According to representatives of the Mario Molina Center, the CO2 tax is an opportunity to incentivize the energy transition towards renewable and clean energy sources because the energy market is not internalizing the externalities of the environmental deterioration industries cause. The institute’s spokespeople claim that the short- term goal is to avoid 7.5 million tonnes of CO2 from being released into the Mexican atmosphere in 2014 and that if the money from this tax is invested in energy efficiency, the number of CO2 tonnes could then exponentially decrease in subsequent years. For instance, an estimated US$1.14 billion dollars collected from this tax could be used to build more innovative public transportation infrastructure in Mexico City, which will prevent 135,000 tonnes of CO2 from being released annually.

Despite its heralded benefits, the Mexican carbon tax has not had a warm reception for several reasons. First, it has not received enough coverage for the general public to understand its scope and objectives. Second, critics in the industrial sector claim that carbon taxes would increase the production and importation costs of refined petrochemicals and natural gas due to their carbon contents. Not only would PEMEX and CFE find themselves at a disadvantage, but this tax would also hinder the national goal of decreasing electricity prices by making production costs higher. Some argue that the penalty fees set for the carbon tax in Mexico fell short in terms of their punitive and correctional objectives. The development of this tax in hand with the Energy Reform will soon show if it is the successful policy that other countries praise or if it needs further enforcement or legislative adjustments. The carbon tax itself remains a contentious case because Mexico has not yet been able to separate its development from environmentally harmful practices. The initiative can be a great source of revenue as long as the government facilitates alternative energy production methods that foster the energy transition as well as the country’s industrial development.