Green Taxes and Environmental Fiscal Reform: Opportunities and Challenges in Latin America

Climate change has completely transformed how we perceive the world. For its mitigation, over the past few decades, humans have had to rethink how we consume and produce daily. In this context, states have had to make important decisions in their policies, placing environmental issues at the forefront. One example of this is environmental fiscal reform, defined as a range of tax or pricing instruments that can increase revenue while also promoting environmental goals (OCDE, 2017)More specifically, there is also the concept of green taxes, which are defined as levies whose tax base is a physical unit (or a substitute for it) that has a specific and proven negative impact on the environment (CIAT, 2024).

When addressing these concepts, it is essential not to fall into the error of thinking that environmental taxation is merely an additional tax burden on taxpayers. Although taxes play an important role, there are also incentives that can reduce the tax burden or even reward activities beneficial to the environment. This article aims to show the different instruments that have emerged in the Latin American region, as well as their impact on economic activities, offering a perspective on both the opportunities and challenges these instruments present.

Since the beginning of the 21st century, various countries have implemented mechanisms of environmental fiscal policy. A notable case is Brazil, which adopted a tax incentive scheme based on the "polluter pays" principle. According to the *Inventory of Green Fiscal Instruments in Latin America*, this scheme applies specific taxes to activities that do not meet environmental quality standards. In addition to taxes, fees have been created to finance environmental control and oversight activities, such as those applied by the Brazilian Institute of Environment and Renewable Natural Resources (CEPAL, 2016). These fees not only tax polluting activities but also promote the sustainable use of natural resources.

Following this same line of environmental protection, Costa Rica has adopted similar measures for the efficient use of water resources. According to the United Nations Environment Programme, the country implemented a fee that reflects the true value of water, with differentiated rates for surface and groundwater. Prior to this measure, the cost of water was negligible; however, it has now been adjusted to encourage conservation and responsible use (PNUMA, 2010)

Although this type of policy has had a significant impact in some countries, its relevance varies across the region. For example, in the Dominican Republic, Honduras, Costa Rica, and Uruguay, environmental taxes accounted for between 1.7% and 2.2% of Gross Domestic Product (GDP) in 2021. In contrast, in countries like Ecuador, Panama, Peru, and El Salvador, these taxes are much less significant in terms of GDP (CIAT, 2024)This contrast highlights the need to adapt environmental fiscal policies according to the conditions and priorities of each jurisdiction.

Regarding the types of environmental taxes that have been implemented, the Inter-American Center of Tax Administrations notes that these are primarily directed at energy, affecting the generation, distribution, and use of fossil fuels, as well as the consumption of carbon and other greenhouse gases. Additionally, motor vehicle taxes have been a significant trend, not only in the import and export of vehicles but also in delivery services, which are already being taxed in some jurisdictions. Finally, in the residual category of "Other," we find specific taxes for products with significant environmental impacts, such as fertilizers, plastic waste, and waste management (CIAT, 2024)

Although green taxes do not play a predominant role in fiscal policy in Latin America, the global trend toward their implementation is increasingly strong. Companies must consider this aspect for the future, especially regarding how they conduct their economic activities and the impact these have on the environment. The trend is clear: industries that do not align with the fight against climate change are being disincentivized with higher tax burdens due to the pollution they generate.

A clear example of an industry that is heavily taxed due to the damage it causes to the environment is the extractive industry. For these types of companies, there are two types of taxes: the first is on the exercise of extractive activities, whose generated income is taxed, sometimes even in the form of royalties to the state. The second method targets selective taxes on the products resulting from these activities, with taxes on fossil fuels being the main example.

As mentioned at the beginning, environmental taxation is not limited to taxes, nor is it solely aimed at discouraging activities that worsen climate change. There are also actions that can lead to significant tax exemptions. One example is Costa Rica, which, to promote the use of renewable energy and sustainable transportation, has established significant incentives, such as the *Law on the Rational Use of Energy*, which authorizes exemptions on various taxes for energy-efficient equipment, and the *Law on Incentives and Promotion of Electric Transportation*, which provides tax benefits for the purchase of these vehicles, increasingly used by companies in their productive activities. Costa Rica has taken significant leadership in clean energy production, achieving 99% sustainable production (ICT, 2019), and has seen a remarkable increase in the number of electric vehicles, which rose from 3,300 in 2020 to 19,005 in August 2024 (MINAE, 2024).

However, efforts in other jurisdictions should not be overlooked. In Colombia, for example, an exemption from VAT was created for the purchase of equipment and elements, both domestic and imported, used in the construction, installation, assembly, and operation of environmental control and monitoring systems, which is useful for companies interested in more conscious consumption. In Ecuador, despite being one of the countries with the least environmental taxation policy, an additional 100% deduction of the annual depreciation of machinery, equipment, and technologies destined for clean production and the use of renewable energy is allowed.

From all the above, a clear trend is observed in the Latin American region to include environmental matters in fiscal policy. This can directly affect various sectors, or indirectly, influencing the products and machinery used in the development of economic activities. Although it poses significant challenges for many companies, it also represents an opportunity to begin a transition toward a more compassionate and collaborative world in the fight against climate change, considering the significant tax incentives in various countries in the region. It is essential that sectors remain alert to green fiscal reforms, remembering that any decision in the field of environmental taxation should have as its main objective environmental benefits, not merely increasing revenue or benefiting specific sectors without adequate justification. The ultimate goal should be the pursuit of more sustainable and environmentally responsible societies.