Accounting, Edition 45

Essential Issues about Carbon Taxes in Mexico City

By: Jesús Rodolfo Jiménez
and Annapaola Llanas

Much has been said about sustainability and the environmental issues facing the planet. Governments, non-governmental organizations, participants in the economy, and the population in general have gradually incorporated into their activities of daily living an honest concern about the negative effects of climate change, overexploitation of natural resources, pollution of aquifers and overpopulation, to mention some of these phenomena.

The environmental cost of problems that have been converted, defined, studied and assessed as negative externalities within economic theory has actually been transferred from those who pollute to others. As a result, governments have had to respond by promoting measures to mitigate or encourage society to participate in actions related to environmental impact, when those players do not participate voluntarily with strategies focused on sustainability.

Generally, governments, through regulations, make use of certain types of inhibiting mechanisms focused on punishment, restoration and prevention of environmental damage.

From a legal perspective, the inhibitory and restoration mechanism, par excellence, is the sanction, because it seeks to assess a specific damage, compensation for the damage, and in some cases, creates an exemplary way of preventing future damage. However, essentially the sanction has important weaknesses: 1) it derives from the existence of a regulatory framework (if it is not prohibited, it is permitted); 2) the assessed damage may not always reflect the real impact; 3) it is difficult to speak of compensation because of the complexity of the impact.

Carbon credits between several countries affiliated to the Kyoto Protocol and the trade between them were another mechanism that gained important momentum in the 1990s. Unfortunately, the research that analyzed and studied the effects of the carbon emissions trading focuses more on the difficulties and failures than on the real successes that were achieved.

Today, the mechanisms that have generated the most significant and best results have been specific policies developed in a domestic/regional manner. Together they have developed a kind of international race with regard to innovation and efficiency, stressing those achievements that locally generate sustained optimal results. With the passage of time, these results develop patterns, which in turn generate models that are replicated in other cities. This creates a kind of implicit competition or race between cities in relation to innovation of environmental policies, whose result is mainly positive. That is to say, when an environmental policy is successful in one region, other regions seek to imitate and refine it, because the region, which implemented the policy for the first time, has already absorbed the highest level of uncertainty – the risk of innovation.

The phenomenon of absorption of a replicated risk in a systematic manner has managed to bring down the risk of innovation and promote its emulation in different regions. In an intrinsic way, an implemented policy that is not successful, or whose benefits fall short of expectation, is not replicated and is usually discarded.

Here are some significant examples:

  1. Bus Rapid Transit (BRT).This is a land transportation system that consists of allocating exclusive lanes to passenger buses going from one point to another. The first approximation of this type of transportation was in the city of Chicago during the thirties, where they sought to replace railway lines with express bus lanes. Since then, various cities have attempted to improve the quality of this transportation system through replication. However, it was not until 1970, in the city of Curitiba, Brazil, where the system was formally called BRT. Since that time, this system has been imitated and improved in cities such as Runcorn (UK), Ottawa (Canada), Bogotá (Colombia), Mexico City (Mexico), Buenos Aires (Argentina), among others, where it has been successful.In Mexico City alone, the impact of this system consists in a direct reduction of 110,000 tons of carbon dioxide emissions into the atmosphere per year. (Metrobus, Mexico City).
  2. Bicycle Program System (BPS).This system provides the free or economic use of bicycles to travel for short distances in urban areas and usually works as a connection between other transport systems. This system began in Amsterdam, Holland, in 1965. It consisted of a system, entirely free of charge and without additional controls, which was replicated in several cities. However, this transportation system eventually evolved into an intelligent system of controls with bicycle racks after the theft of bicycles in Manchester, UK. Today, there are BPS programs in 165 cities with a total of approximately 237,000 bicycles (Susan Shaheen, 2011).In 2012, Mexico City implemented multiple expansion programs, both in the number of bicycles as in the number of stations, which earned the city the Sustainable Transport Award given by the Institute for Transportation & Development Policy on January 15, 2013.

In Mexico City alone, the projected impact of this system consists in the direct reduction of 3,645 tons of carbon dioxide in 2010-2020, according to a study submitted by the Environmental Secretariat of the Mexico City government. (2012)

Today, Mexico is in the process of removing a tax that was efficient in terms of revenue purposes, but not in its environmental impact. The annual vehicle registration tax (“tenencia”) in Mexico is gradually disappearing, not only because it was a tax created to finance the Olympic Games in 1968, but because the amount of the tax paid is essentially based on the value of the vehicle. This meant that the most expensive vehicle paid a higher tax, and the most economical one paid a lower tax. Ironically, in environmental terms, the most efficient vehicles in the emission of carbon dioxide consistently had to pay more than the less efficient ones. That is to say, an electric or hybrid vehicle with certain features, which costs more than a vehicle with similar characteristics that uses fossil fuel, will pay a higher tax (“tenencia”) than a vehicle that generates more emissions and is less expensive. In terms of economic efficiency, if there is no real savings, naturally it is more efficient to buy a more economical vehicle – even though it may not comply with such high environmental standards.

According to the latest data published by the World Bank, the volume of carbon dioxide emissions in Mexico increased to 446 million tons in 2009, putting the country in 13th place in carbon dioxide emissions worldwide. In 2012, it is was estimated that the emissions in the Metropolitan Area in the Valley of Mexico would range between 59 and 80 million tons, of which between 22 and 27 million tons would relate to transportation, according to the Mexico City Environmental Secretariat.

At the same time, as part of the direct environmental spending from public resources, the Mexico City Environmental Secretary (the authority responsible for the environmental programs in Mexico City) was given a budget of approximately 970 million pesos in the 2012 financial year, according to the Financial Code of the Federal District. However, the Mexican Social Security Institute reports that the average cost of respiratory diseases is up to 15,000 pesos. With an approximate number of 270,000 patients, the total amount spent on respiratory diseases is about 4 billion pesos.

With this information, it is possible to estimate that the direct environmental cost (of carbon dioxide emissions) in the metropolitan area is nearly 5 billion pesos.

If we prorate the cost per ton of carbon dioxide emission by automobiles, it is possible to divide the total emissions by the amount spent. The result obtained by prorating the amount ranges between 185 and 227 pesos per ton emitted by each car.

Taking as a framework the theory of efficiency in public policies through the origin-aplication of resources, and the elements of the contributions to redistribute the environmental cost among the affected population and the polluter, it is possible to establish the following items for a possible carbon tax:

  • Subjects: All owners of vehicles in the Metropolitan Area of the Valley of Mexico that emit carbon dioxide.
  • Object: The emission of carbon dioxide.
  • Base: Average volume of carbon dioxide emissions.
  • Average: Between 185 and 227 pesos per emission of a ton of carbon dioxide.

It should be noted that the feasibiity of assessing this tax in Mexico City is huge. That is because Mexico City has a vehicle emissions control system called the “Vehicle Inspection Program,” that assesses the volume of emissions of each vehicle in order to penalize those whose emissions exceed a maximum number.

While it is true that climate change is a phenomenon of study and its implications, origins and causes – in terms of both health and the environment – are still being debated, the general consensus is that there is a real emission of greenhouse gases into the atmosphere that must be slowed down. There are many policies that have been attempted, some with surprising results and others that are questionable. The remarkable thing is the readiness and willingness demonstrated by the participants of the economy that have generated a collective consciousness of the importance of combating the causes that are damaging the environment in the modern world.

It is important not to lose sight of the fact that each suggestion that promotes and minimizes this deterioraton must not be easily discarded – the costs and benefits of implementing each alternative must be analyzed and assessed, like the one alternative that is described here.

Today, carbon taxes are gaining strength as a feasible measure that could be developed, but the efforts that have been made are not significant enough to be able to assess an immediate benefit. Measures such as the BRT and BPS were not either, but the attitude of the cities that absorbed the risk of innovation has gone beyond this in a historical way.

In conclusion, it is very important to consider that the success or failure of any public policy not only stems from the origin or intent of the rule, but on a comprehensive plan from which it is developed. Therefore, if accepted, the participation and observation of all parties involved will be required, as we have seen in the success of the previous policies described here.


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