Since the signature of the Climate Agreement of Paris[1] adopted on December 15, 2015, an increasing number of countries have approved laws with the aim of reducing their greenhouse gas (GHG) emissions. A new study by researchers and staff of the United Nations Framework Convention on climate change, the UNFCCC, shows a clear increase in the number of countries that have introduced legislation to support the Nationally Determined Contribution (NDC) that countries have committed in the framework of the Paris agreement on Climate Change.

The NDCs list the emissions reductions that each country intend to carry out in order to achieve the objective of maintaining the increase in global temperature below 2 degrees Celsius during this century. A consortium of three scientific organizations, the “Climate action Tracker” follows up on the contributions of each country and evaluates if the policies are adapted to the goals. For example, Costa Rica is a country considered to be very efficient in its planning for implementing the NDC objectives.[2]

This article’s purpose is to describe the current trends in the field of tax legislation on carbon emissions and some follow-up studies.[3]

Antecedents: Overview of climate legislations

According to an analysis by the Grantham Research Institute on climate change and the environment at the school of Economics and political sciences in London, “14 new laws and 33 new Executive policies related to climate change have been introduced since the Paris Summit in December 2015. Of these new laws and policies, 18 mainly focus is climate change, while four referred specifically to the NDC.” [4]

The analysis is based on a new online legislation database on global climate change. [5]

New laws are added to the more than 1,200 climate-related global laws enacted since 1997, in which currently 164 countries participate – including 93 of the 100 major emitters – compared with 99 countries in 2015.[6]

Many of these laws have tax dimensions. For example, when buying an air ticket, the international civil aviation organization the United UN considers a price on carbon emissions from air flights[7]

Today we present additional evidence of the formulation of policies that show how countries are starting to add and adapt existing legislative frameworks to fit within the goals and objectives of the agreement.

Current situation: Tax policies that are contributing to implementing the climate objectives.

The World Bank has a program on the taxation of carbon emissions.[8] According to this, in 2015 only, carbon pricing policies have generated $ 26 billion in revenue worldwide. Although this amount still represents only a very small percentage of the total global public revenue, it is growing in some jurisdictions. It is expected that revenues will increase as the coverage and pricing levels increase.

A carbon price helps to transfer the burden of climate damage to those who are responsible for it, and who can reduce it. Rather than dictating who should cut emissions, and how, the carbon pricing provides an economic signal and the polluters themselves decide if they discontinue their polluting activity, reducing emissions, or if they keep polluting and pay for it (this type of tax is called pigovian tax[9]). In this way, the overall environmental objective is accomplished in a manner more flexible and less costly for society. The price of carbon also stimulate clean technologies and market innovation in the market, fueling new growth, with low carbon emissions.

We can consider that report on the best practices of these fiscal policies is part of the CIAT Mission, to develop actions of cooperation to facilitate compliance and promote fiscal citizenship.

“Pricing carbon” reminds that “there are two major forms of carbon taxation: Emissions Trading systems (ETS) and taxes on carbon emissions.

An ETS – also referred to as a Cap and Trade system limits the total level of greenhouse gas emissions and allows those with industries with lower emission to sell additional emission rights to industries with larger emissions. Through the creation of the supply and demand, an ETS sets a market price for the emission of greenhouse gases. Capping emissions helps to ensure that the required emissions reductions will take place to keep the emitters (in total) within the pre-assigned carbon budgets.

A carbon tax sets directly a price to carbon emissions through the definition of a type of price on the greenhouse gas emissions, or – more usually – on the carbon content of fossil fuels. A carbon tax is different from the ETS system in the sense that the result in terms of emission reduction is not predefined, but the price to the carbon emissions is defined by a tax law.

The choice of the instrument depends on the national and economic circumstances.” Most countries have systems combining the two approaches. The country with the highest carbon tax is currently Sweden, where it may reach $150 per ton of emissions. [10] It is generally considered that such a price is effective from $50 per ton. [11]

There are indirect ways to put a price on carbon with higher accuracy in the prices, for example, through taxes on fuels, the elimination of subsidies to fossil fuels, and regulations that can incorporate a “social cost of carbon.” Greenhouse gas emissions can also be priced through payments for reducing emissions. Private entities can also buy emission reductions to offset their own emissions or supporting mitigation activities through results-based financing.[12]

Economic Perspectives of carbon taxation

Around 40 countries and more than 20 cities, provinces and States already use the mechanisms of pricing carbon, with plans to increase its implementation in the future. Together, the already deployed now carbon pricing schemes cover approximately around 13 percent of annual emissions of greenhouse gases.[13]

Seven of the G-20 members, including the EU as a whole, France, Germany, United Kingdom, Japan, Mexico and South Africa, have emission reduction targets included in their national policies or legislation that is consistent with their promises in the Paris agreement.

The analysis of new data detail progresses made by Canada, Argentina and China, who have published a new five-year plan that sets emission ceilings targets and energy efficiency targets.[14]

On May 23, 2017, The OECD International Conference, together with the Petersberg Climate Dialogue presented the results of the OECD report presented in the context of the German presidency of the G 20, entitled “Investing in the climate, investing in growth”. The report presents the economic benefits of the action combined for growth and climate.[15] “On average, in the G20, the net positive impact on the GDP of a decisive energy transition production is 1% in 2021, reaching 2.8% in 2050. If we include the benefit of avoiding the damage caused by climate change, the impact will rise to 4.7% in 2050. In a more ambitious scenario, the long-term growth prospects are also positive: a net positive impact on the GDP of 2.5% in the G20, which rises to 4.6% when including the avoided damages” [16]

LAC countries and carbon taxation

In Latin America, some countries have introduced a carbon tax: Mexico, Chile and Colombia, among others. In Mexico, according to the Ministry of environment and Natural Resources[17], the carbon price is fixed between 10.38 MXN/ton (gasoline) and 27.54 MXN per ton (coal)

In Chile, the tax was introduced in 2014 to enter into force in 2018 will cover about 55 percent of the carbon emissions of the country. At approximately USD $5 per ton of emitted carbon dioxide, the Chilean tax is less than $8 per metric ton of the carbon price in the European Union carbon trading system, which has often been criticized as too lax. But it is slightly higher than the tax on carbon introduced in Mexico.[18]. In Colombia, the carbon price is similar to Chile: Approximately USD $5/ton of carbon emission, at the current exchange rate[19]. We could anticipate that since European countries adopt these laws with the view of increasing the rate annually, Latin American countries will adopt a similar perspective. The detailed study of the carbon legislation in LAC countries will be the object of further articles.

[1] https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf approved by 195 countries as of June 2017, 148 of which have ratified it.

[2] http://climateactiontracker.org/

[3] The recent announcement by the U.S. to withdraw from the Paris agreement Government does not take effect before 2020, and the other countries party to the agreement have reiterated their willingness to move forward with its implementation.

[4] Grantham Institute for Climate Change and the environment, Imperial College, London. https://www.imperial.ac.uk/grantham/

[5] developed by Sabin and the Grantham Centre for the climate change at the Columbia School of law, United States

[6] Kirby, Alex. See http://climatenewsnetwork.net/climate-change-legislation-huge-increase/

[7] “Airlines emissions and the case for carbon tax on flight tickets” see: http://theconversation.com/airline-emissions-and-the-case-for-a-carbon-tax-on-flight-tickets-56598

[8] “Pricing carbon”. See http://www.worldbank.org/en/programs/pricing-carbon

[9] “A Pigovian tax (also spelled Pigouvian tax) is a tax levied on any market activity that generates negative externalities (costs not internalized in the market price). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. An often-cited example of such an externality is environmental pollution” https://en.wikipedia.org/wiki/Pigovian_tax

[10] See “Where carbon has price”: https://www.carbontax.org/where-carbon-is-taxed/#Sweden

[11] See Carbon Pricing Coalition: https://www.carbonpricingleadership.org/

[12] Pricing carbón”. See http://www.worldbank.org/en/programs/pricing-carbon

[13] World Bank, “Carbon Pricing is expanding http://www.worldbank.org/en/news/feature/2015/05/26/carbon-pricing-initiatives-nearly-50-billion

[14] See: http://www.lse.ac.uk/GranthamInstitute/research-theme/governance-and-legislation/

[15] “Taking action on climate change will boost economic growth” see: http://www.oecd.org/newsroom/taking-action-on-climate-change-will-boost-economic-growth.htm

[16] Ibid, “Taking action on climate change will boost economic growth”.

[17] See https://www.thepmr.org/system/files/documents/Carbon%20Tax%20in%20Mexico.pdf

[18] Where Carbon is Taxed: https://www.carbontax.org/where-carbon-is-taxed/

[19] The exact fees are stated in local currencies.

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