The Price of Carbon: Making Low-carbon Development a Reality
Lessons Learned from Mexico and South Africa
As nations begin to implement the details of the historic climate deal made in Paris almost a year ago, poor and rich nations alike will need to address issues of transition, growth, and equity. Indeed, many developing nations are taking this charge seriously, presenting leaders with choices on how they can achieve their targets. Through the employment of evidence-based policymaking and engagement of diverse stakeholders, these leaders can find options that work, particularly when the climate policy is designed to assist their poorest citizens. Such policies not only result in decreases in carbon dioxide (CO2) emissions, but also promote equality and GDP growth.
In the suite of policy options, clean energy subsidies, emissions trading schemes, regulations, and others, one of the most popular options among governments and businesses is a carbon tax. Over 13 countries have passed carbon tax legislation since 1990, including two surprising adopters: Mexico and South Africa.
Lessons Learned
The process of passing carbon taxes in Mexico and South Africa’s taxes demonstrates the opportunities and challenges of instituting climate change legislation. To understand this process, there are four key points:
- Carbon taxes reduce carbon emissions because they increase the cost of burning carbon fuels.
- Poorer people spend a greater percent of their income on the taxes; however, the wealthy contribute more of the overall revenue of carbon taxes, due to their greater carbon emissions.
- As argued by Jan van Heerden in South Africa and Fidel Gonzalez in Mexico, if the revenues of a carbon tax are targeted towards helping the poor through food assistance, inequality and carbon emissions can decrease and gross domestic product can increase.
- Van Heerden and Gonzalez found the opposite results (increase in carbon emissions, increase in inequality, and decrease in GDP) when revenues were used to protect business interests.
While well off compared to others in the Global South, both countries face significant challenges with poverty and inequality. This inequality will only increase as the planet warms because the likely local manifestations of climate change—which include desertification of farmland, sea level rise, and more frequent and intense extreme weather events—affect vulnerable populations most severely.
However, there are upfront costs in the transition to a low carbon economy. Economic instability might make these countries seem like unlikely climate change mitigation leaders, and the most likely to benefit from wealthier countries taking the first step. Yet, South Africa and Mexico were early implementers of a politically difficult climate mitigation policy—the national carbon tax.
How Did We Get Here?
It is important to note that the initial push for carbon taxation did not come from protests or civil society, but rather from behind closed doors. Environmental officials in South Africa and Mexico, in favor of climate mitigation policies, did not get political traction for a carbon tax until both countries hosted a United Nations Framework Convention on Climate Change.
With involved parties sufficiently inspired by the international convention, these officials in South Africa and Mexico teamed up with colleagues in their national treasuries to devise a plan for a carbon tax. Eager for new sources of revenues, the treasuries made the numbers work and submitted the tax to congress, buried in large treasury legislation.
This is where things get complicated.
Large businesses in heavy industry had a lot to lose in the short term with an increase in fuel prices. So they aggressively lobbied to soften the impact to their bottom line. In South Africa, export-oriented or heavy-industry businesses were given rebates of 80 percent on their carbon tax burdens. In Mexico, businesses were able to lobby the carbon taxation rates of industrial fossil fuels to near zero.
Environmental groups had limited involvement in both countries, and mostly advocated for the carbon tax revenues to fund rebates for renewable energy. With the exception of Oxfam in South Africa, organizations focused on poverty issues in either country did not politically engage with the carbon tax issue.
Moving Forward
How can other governments use the lessons learned from Mexico and South Africa to gain insight into managing poverty and reducing emissions at the same time? If developing countries can pass what is widely considered to be the most divisive climate mitigation measure (a carbon tax), surely we learn from them to help make policies like this more widespread.
Carbon taxes are popular among world leaders as simple and effective carbon emission-reduction instruments. When properly designed, carbon taxes can achieve economic development, social, and environmental goals. Unfortunately, in Mexico and South Africa, heavy industry successfully lobbied their political leaders. Their false logic implied that reducing carbon emissions will stagnate economic progress. Without a significant push from environmental and social equity groups, legislators were convinced that protecting large polluters was equivalent to protecting the economy despite evidence that protecting the poor will both reduce emissions and increase GDP.
Of course, politicians of South Africa and Mexico should be commended for their leadership on climate change. Moving forward, it is critical that governments and civil society in developing countries considering carbon taxation understand the options at their disposal. For the policy to meaningfully encourage low-carbon development, the poor and most vulnerable, not heavy industry, need to be the direct beneficiaries of the tax revenues.
To make this happen, poverty-focused civil society groups should collaborate with environmentalists and businesses to advocate for policies that help the poor, reduce emissions, and achieve economic growth. Using evidence-based policy making, progressive institutions can influence decision makers to implement the economically and socially smart climate mitigation measures they need to make good on their Paris promises.
