Climate-related financial and tax
policies in 2023
By André Dumoulin
After presenting the guidelines of climate
policies in the G-7 countries, we dedicate this second part[1]
to the policy instruments of developing countries, particularly Latin America.
In the developing countries, the landscape
of tax measures related to climate change is changing rapidly, however,
sometimes states take urgent and specific measures to face environmental and
climate challenges, and state-level policies have little multilateral
coordination: There is often a competition between short-term energy
investments and national policies with environmental policy frameworks of
energy transition and biodiversity preservation.
Multilateral financial organizations, MDB, IMF, World Bank, IDB, continue to
take measures to link financing and investments to developing countries with
the implementation of measures to limit carbon emissions and preserve biodiversity.[2]
On the other hand, the high prices of fossil energies continue to invite
maintaining or increasing their production in the countries that export
them. More internal coordination of each
state is needed to avoid clashes of priorities in development financing
policies, especially since, as a result of the global COVID pandemic, the
climate crisis affecting agriculture, and wars, extreme poverty has increased
in recent years.
At the tax level, in some aspects TA databases
should be updated to integrate climate change data: If a region of a state
suffers from an acute drought or a more intense period of floods than in the
past, the programs should be able to anticipate these situations, facilitate
the temporary reduction or suspension of taxes of the affected areas, for
example real estate taxes and/or the agricultural sector. It is not desirable to wait for situations of
total tragedy such as the floods in Pakistan in 2022, in order to integrate the
dimension of the climate emergency into state planning.
Latin
America
A recent study by the Thomson Reuters Foundation
analyzes and compares the environmental frameworks related to climate change in
Latin America.
"Latin America is expected to be one of the regions of the world where the effects and impacts of climate change will be most intense."(Nationally Determined Contributions). However, only 7 countries have a framework law on climate change (CCFL) in LAC. An CCFL law, as defined by the International Energy Agency, establishes the principles and main aspects of climate change policy. Its objective is to coordinate and support the comprehensive management, in a participatory and transparent way, of climate mitigation and adaptation strategies, complying with the international commitments of the United Nations Framework Convention on Climate Change and contributing to low-carbon development opportunities. The introduction of climate policy in the framework law helps to reduce the possibility of setbacks in this area and provides a mandate to policy makers to move forward with action.
With regard to the seven countries mentioned in the graph, which already have their CCFL, they must continue to promote more ambitious initiatives and in line with the reality that the Intergovernmental Panel on Climate Change points out to us more starkly year after year. [3] The existence of a CCFL allows for more coherence in national policies, although it does not protect against abrupt political changes, as happened in Brazil in recent years. Brazil being the first LAC country that had adopted a framework law on climate change.
It should be noted that some countries such as
Ecuador, despite not appearing on this list, have important articles on
environmental policy in their political constitution, which could easily be
translated into an CCFL.
THE C-PIMA
The IMF has developed a tool for the Evaluation of
public investment management in relation to climate (C-PIMA, Climate-Public
Investment Management Assessment)[4].
C-PIMA involves an evaluation of the five public investment management
institutions that are key to a climate-friendly infrastructure: C1.
Climate-friendly planning. C2 Coordination between entities. C3 Evaluation and
selection of projects. C4 Budgeting and portfolio management. C5 Risk
management Each institution is further analyzed according to three dimensions
that reflect the key characteristics of the institution.
Tax administrations are not directly responsible for a country's public
investment, but they must include climate-related risks among their
projections.
A beneficial investment trend for international trade
is the "Nearshoring”[5],
which, unlike "offshoring", consists, for multinational groups, in
favoring production in countries close to the main consumer markets of the
products, avoiding the costs of emissions and environmental cost associated
with long transports. In AL, Mexico and Colombia benefit from this trend. [6]
The pricing of carbon emissions in developing
countries
A progressive source of income in many developing
countries[7]
In the absence of effective global cooperation,
developing countries need to take a serious look at carbon pricing and, in
particular, carbon taxes. It can prevent
individuals and companies from making investments in technologies that are then
wasted. For example, power companies will invest in new power plants that use
high-carbon technologies. But later they will have to discard them, wasting the
investment. A carbon price now provides a strong signal that should help avoid
these "lock-in" effects. A second aspect is the importance of sending
the message that the authorities are taking climate change seriously.
As a measure of public will to tackle the climate crisis, carbon taxes offer a
potentially significant and administratively viable source of revenue.
Increasing tax revenues is an important part of the development agendas, and
the COVID-19 pandemic has accentuated this need while increasing concern about
the sustainability of public finances in some countries. Applying carbon prices
in the form of taxes on fossil fuels - as has been done in Colombia and South
Africa - is feasible in most countries, since these goods are usually already
taxed (or subsidized) to some extent. In contexts where the informal economy
accounts for a large part of economic activity, carbon taxes can be less costly
administratively than other types of taxes and offer a way to reduce the fiscal
gap between the formal and informal sectors.
Some country data:
Brazil
In December 2022, the World Bank announced the Brazil Climate Finance
project (Brazil Climate Finance. [8])
The Brazilian Climate Finance Project is a financial intermediation project
that aims to encourage companies to reduce their carbon footprint. To this end,
the project adopts an innovative results-based financing approach that
encourages companies to adopt and implement significant greenhouse gas (GHG)
emissions reduction plans. The project would also increase the access of these
companies to high-quality carbon markets. The project proposes to leverage
private financing to increase the impact in support of the Brazilian net zero
emissions target, including the agricultural and terrestrial sectors. Brazil's
greenhouse gas (GHG) emissions profile is dominated by agriculture, forestry
and land use (AFOLU). In collaboration with Banco do Brasil, the largest bank
in Brazil and the market leader in loans to agriculture and land-use-based
sectors, the project aims to leverage 1,400 million dollars in private capital
and additional CO2 emission reductions by 2030 in a number of sectors, of which
the AFOLU sectors are expected to represent an important part.
Mexico
At the beginning of February 2023, Mexico will inaugurate the largest solar
project in Latin America, in the state of Sonora and welcomes the investment of
all countries in its clean energy projects, its foreign minister said on
Thursday, launching a diplomatic charm offensive amid international concern
over controversial energy reforms that increase the role of the state in energy
production, which according to its detractors favors fossil fuels. [9]
Colombia:
A comprehensive Tax Reform Law will be applied from January 1, 2023.
This reform expands the scope of the carbon tax to
include the sale, self-consumption and import of coal (certain exemptions will
apply, including coal intended for export). The rates will increase while
remaining specific values per ton, gallon or cubic square. It takes a phased
approach to the increase in coal rates from 2023 to 2027. The carbon tax will
be deductible for Corporate Income Tax (CIT) purposes. [10]
In conclusion, at COP26, held in Glasgow in 2021, countries agreed to
progressively reduce the use of coal, the most polluting fossil fuel. India's
proposal at COP27 to extend this commitment to all fossil fuels won the support
of more than 80 governments, including those of the EU, but was opposed by
Saudi Arabia and other oil and gas-rich countries.
The final agreement of COP27 repeated the
commitment to progressively reduce coal-fired energy, but did not mention oil
and gas.
There are concerns about the possibility of a
similar dynamic occurring this year at COP28, which will be held in the United
Arab Emirates, the OPEC oil producing country. According to UN scientists, the
world must substantially reduce the use of fossil fuels in this decade to avoid
the most devastating effects of climate change.
The EU also plans to update its 2030 emissions
reduction target under the Paris climate agreement, and set a new one by 2040,
in order to guide countries towards the goal of reaching net zero emissions by
2050.
[1] See: https://www.ciat.org/ciatblog-repaso-de-politicas-climaticas-con-aspectos-tributarios-para-2023-primera-parte/
[2] https://www.worldbank.org/en/news/statement/2023/01/13/world-bank-group-statement-on-evolution-roadmap
[3] https://prensariotila.com/informe-sobre-la-legislacion-de-cambio-climatica-en-latinoamerica/ With link to the study
[5] https://www.nextu.com/blog/que-es-el-nearshoring-y-por-que-es-importante-para-america-latina-rc22/
[8] https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099800011302228261/p1788880aa8da5060b6c205df5e2d32150
