Carbon Taxes to Balance Sustainability, Competitiveness: MEXICO2

Industrial and commercial activities contribute substantially to greenhouse gas emissions, exacerbating global warming. Carbon pricing, which refers to the practice of putting a price on carbon emissions and using it to incentivize enterprises to reduce their emissions, is emerging as a viable solution to strike a balance between economic activities and environmental responsibility. 

In the Carbon Taxes in Mexico: Development and Trends 2023 report, the Mexican Carbon Platform (MEXICO2), UK PACT Mexico, and the Mexican Stock Exchange (BMV) present the outcomes of implementing carbon taxes in the country. 

MEXICO2 is a subsidiary of BMV that focuses on incentivizing green markets and carbon markets in Mexico and abroad. Carbon markets are trading systems in which credits are sold and bought. Companies or individuals can use these systems to compensate for their greenhouse gas emissions by purchasing from entities that remove or reduce emissions. 

Mexico was the first country in Latin America to establish a carbon market in 2020, known as the Mexican Emission Trading System. According to MEXICO2, since the first tax introduced in Zacatecas in 2017, the use of these regulatory instruments has grown in the country. Six Mexican states currently have carbon taxes: Queretaro, Guanajuato, Zacatecas, Yucatan, Durango, and the State of Mexico. Two more states, Tamaulipas and Colima, are discussing their implementation.

Queretaro has the highest carbon price at MX$580 (US$33.5) per ton of CO2 equivalents. Baja California has an inactive tax, Tamaulipas’ carbon tax is under review, and Jalisco’s is under consideration. Queretaro has generated MX$267 million and offset 364,142 tons of CO2 through the State Low Carbon Emissions Seal. Overall, carbon taxes in Mexico have directly offset 346,142 tons of CO2, said experts during the presentation of the report.

Eduardo Piquero, Director General, MEXICO2, explains that carbon prices serve as an economic incentive to reduce emissions and enable the incorporation of climate change criteria into the decision-making processes of organizations. Carbon prices are determined through emissions trading systems, compensation mechanisms (carbon credits), or by the implementation of carbon taxes.

According to sustainability and tax representatives from different states, the carbon tax is based on a price that is set considering the environmental and economic cost of dealing with these emissions, thus holding companies accountable and incentivizing them to work in their emissions reduction targets. Net zero goals are increasingly being implemented around the world. As Mexico seeks to attract more investments, the country needs to have options to mitigate emissions as a matter of competitiveness. “With this economic incentive we also seek to increase the competitiveness of local companies by reducing their emissions,” says Marco Antonio del Prete, Minister of Sustainable Development of Queretaro.

Implementing this tax and holding companies responsible for their emissions is also a legal challenge, explains Sergio Daniel Espinosa, Deputy Director General of Revenue, Tax Administration Service of Guanajuato. Implementing these taxes requires an extensive analysis to set a price based on evidence that holds companies responsible for their emissions, motivating them to reduce carbon emissions while not significantly affecting their operations. “It is like taxes on tobacco, it seeks to discourage harmful practices and more than generating resources it is about discouraging behavior. It is not about generating a competitiveness problem,” says Espinosa.

Incentives must have flexible alternatives to encourage companies. “Imposing sanctions without knowing how it will impact companies economically is also irresponsible,” says Espinosa.

While the companies’ competitiveness has to be taken into account, it is also necessary to ponder the cost of repairing the damage made by emissions. “Unfortunately, the impact of climate change is becoming normalized. Extreme weather events and natural disasters are increasingly viewed as common, which is not the case. This shift will also impact companies and their operations. For example, in Tamaulipas, extreme heat waves halt industrial processes to cool machinery,” says Karl Heinz Becker, Undersecretary of Environment of Tamaulipas.

There are numerous difficulties in setting the price of carbon taxes and turning them into legislation. “Many factors are taken into account to determine the cost of dealing with those emissions and translate it into an economic price,” says Heinz. 

Francisco Castellón Sosa, Head of the Legal Affairs Unit, Institute for the Environment and Sustainable Development of Colima, explains that the state recognizes the importance of this instrument and shares that it expects to approve carbon taxes this year.

The funds obtained from these taxes should be used to address social problems, say experts. “Ultimately, the tax is based on the social impact of CO2 emissions,” says del Prete.

Mexico's climate commitments include an unconditional target to reduce greenhouse gas emissions by 35% and black carbon emissions by 51% by 2030. Additionally, there is a conditional commitment to achieve up to a 40% reduction in greenhouse gas emissions and a 70% reduction in black carbon by 2030.

The report Carbon Taxes in Mexico: Development and Trends 2023 was funded by the UK PACT Program of the UK Government. It summarizes all carbon pricing initiatives in Mexico, including carbon taxes in all states, and provides recommendations for those jurisdictions that are analyzing similar measures.

COP28 and Global Handshakes Will Not Solve the Climate Crisis; Improved Financial Markets Could

Amid scrutiny and disagreements during COP28 regarding the pathways and actors involved in negotiations toward decarbonization, financial markets can play a role in facilitating private investment to transform sustainable ambitions into physical investment, reports Brookings. 

According to experts, Mexico is leading regional countries advancing in carbon markets aimed at reducing greenhouse gas emissions. Developing carbon markets could be crucial for Mexico to achieve its sustainability goals over this decade.