From Negative to Positive Carbon Pricing in Mexico

Abstract

Over the course of a decade, Mexico transitioned from a peak of 1.8% of GDP given as fuel subsidies in 2008 to generating positive fuel tax revenues equivalent to 1.6% of its GDP in 2018. In this paper, we analyze Mexico’s carbon pricing experience and its effects on the country’s carbon emissions. The policy changes that were embedded in its mid 2010s energy and fiscal reforms have been described as containing “valuable lessons for other emerging countries wishing to carry out a broad-based reform of the energy sector” (OECD 2017; OECD/IEA 2021). Yet, scholarly work on Mexico’s experience with graduality, fiscal innovation, and market structural changes in the transition from negative to positive carbon pricing, is scarce, especially the one linking it to their effects on reducing greenhouse gas emissions and advancing its Climate Change goals and commitments. This paper seeks to find out what are precisely those lessons that can help other countries overcome their fuel subsidy challenges, using politically feasible and resilient strategies, and then transition to a robust positive carbon pricing policy that supports a decoupling of GHG emissions from economic growth. This paper contributes to the literature in three ways: First, it describes a subsidy reform that was followed by a strong positive carbon pricing in an emerging economy in Latin America. Given that the success of reforms elsewhere has been mixed (Clements, et al. 2019), Mexico stands out as a relevant example of how to circumvent its challenges (OECD 2017; OECD/IEA 2021). Second, uses an institutional economics lens to analyzes the features that are thought to have made the Mexican strategy successful; among them are its graduality, its ability to generate a long-term price signal, and its capacity to weave the momentum of the final stage of its subsidy phase-out into the strategy for structural change that made explicit and implicit carbon taxing a resilient element of Mexico’s fiscal and environmental policy. Finally, this paper searches for the evidence of the outcomes of this transition. The substantial and sustained price increase experienced over the period analyzed was, theoretically, enough to alter significatively the carbon intensity of the Mexican economy through changes in its consumption of gasoline and diesel, and that needed to be documented.