Despite its detractors and the multiple attempts minimize its impact in climate change, awareness on global warming and its environmental consequences continues on the rise. Traditionally, developed countries (or states within them) have led the way in developing strategies to mitigate it.  But today, new policy initiatives are being put into place by developing countries to contribute to reduce the effect of greenhouse gas emissions.

Signed in 1992, the Kyoto protocol classified countries in different categories depending on their level of development and based on it defined and assigned objectives to reduce global warming.  The majority of the developed countries where classified in the first category and have committed to reduce emissions to specific levels while providing support to developing countries to reduce their emissions via the transfer of technology.[1]  To achieve these goals some developed countries have implemented strategies such as greenhouse gas taxes, cap and trade systems and sets of incentives for their industry to reduce their greenhouse gas emissions.

Although most developing countries are not required by the Kyoto Protocol to reduce their emissions, some are already defining reduction strategies and incorporating specific measures to achieve those objectives in their environmental policies.   A good example of this case is México, a fast growing economy composed of more than 114 million people accounting 1.42% of the world CO2 emissions according to the World Bank.[2]

Less than two years ago, in June 2012, former Mexican President Felipe Calderón signed the “General Law of Climate Change” which has the objective of “guaranteeing a healthy environment and establishing faculties for federal, state and municipal authorities to develop and enforce public policies focused on mitigating climate change effects trough regulating greenhouse gas emissions”.  Through this law, the Mexican government is seeking to reduce the vulnerability of its population to the adverse effects of climate change and to promote education, research, development and technology transfer that generates a transition to a sustainable and competitive economy[3].  It establishes the goal to reduce its CO2 emission 30% by 2020 and 50% by 2050 with respect to 2000 levels.

Since the approval of this law there have been political transitions and a new federal administration is in place, however, the base the law set seems to be working as new policy has recently emerged both at the federal and local levels.  The new administration commanded by president Enrique Peña Nieto has been drafting and approving reforms to Mexico’s’ legal framework in a magnitude not seen in the country for decades.  In the past few months, radical reforms dealing with taxes, telecommunications and energy have taken place.  Although one could assume the energy reform might be relevant to our topic, it is actually the tax reform the one that brings interesting news regarding climate change.

In accordance to the National Strategy for Climate Change[4] introduced by Mr. Peña Nieto in 2013, Mexico’s’ tax reform has included a provision to tax activities contributing to climate change, in particular those dealing with greenhouse gas emissions.  The federal government proposes to tax CO2 emission per emitted ton with the intention of disincentivicing the use of fossil fuels.  According to the reform proposal a carbon tax is the most efficient and less costly way to achieve this goal and motivate the development of technologies that induce energy efficiency and promote alternative forms of energy.[5]

As a reference to calculate the price of carbon emissions that will be set as tax level, the Mexican government developed an index of different international carbon markets, obtaining an average price of US $5.70 per ton.   Furthermore the carbon content of different fuels was determined to establish a per-unit of volume tax, which resulted in $70.68 pesos per ton.  Fuels that will be subjected to this tax are natural gas, coal, propane, butane, gasoline, jet fuel, turbosine, kerosene and oil and coal clinker.   The calculated taxable emissions are around 376 million tons, which would signify a tax revenue of $26,600 million pesos or 2,000 million dollars.

With the purpose of controlling collection and simplifying its enforcement the tax was designed in a way that producers and importers are the ones responsible to pay and it and establishes that any transaction done by third parties will not be subjected to any tax.  As a payment mechanism the law also contemplate that this tax can be paid by the delivery of carbon bonds obtained from projects that have been developed in México and are approved by the United Nations Convention on Climate Change.

The Mexican government has reiterated this tax is meant to make those who pollute pay, therefore that the tax is applied to fossil fuels per unit of emission.  Every industry or household that makes use of fossil fuels will indirectly pay for a proportion of the tax.  It is expected that 52% of the tax burden on gasoline falls on 20% of the Mexican household with the highest incomes since this household segment is the one that relies more heavily on private transportation.

Transportation is also expected to be an industry that will indirectly absorb a heavy part of the tax burden.  The lack of efficient urban transport in most cities makes citizens rely heavily on small commuter trucks instead of efficient modern city buses.  A similar situation is experienced in long-range transportation.  Mexico lacks and extended network or suburban trains and long-range passenger train transportation is inexistent.  A fleet of millions of passenger buses fulfills the role of transporting millions of Mexicans from city to city and therefore prices of transportation are expected to reflect an increase given the tax.

I believe the Mexican experiment of taxing carbon can set a precedent for developing countries to start disincentivizing the use of carbon emitting fuels and shift towards energy efficient technologies.  Latin American countries like Brazil and Colombia are in the process of developing carbon taxes and could highly benefit from the results obtained by Mexico.  However, it is extremely important that the government actively contributes to this shift by investing in quality public transportation and providing the means for the private energy sector to thrive.  As mentioned previously, important energy and telecommunications reforms are also in progress in Mexico.  These changes in policy will provide strong economic incentives for growth by reducing the power of state and private monopolies.  The energy sector in particular will suffer a profound transformation, as private enterprises will be allowed to participate in exploration, production, distributions and commercialization of oil, gas and energy.  The degree in which this parallel reform contributes to the modernization of Mexico’s` energy sector will highly contribute to the success of Mexico’s climate change law and carbon tax policy in reducing carbon emissions.