Mexico's carbon tax faces headwinds from energy revamp


By David Alire Garcia and Adriana Barrera

MEXICO CITY, Oct 7 (Reuters) - Mexico's plan to become thefirst major oil-producing emerging economy to introduce a carbontax has a problem: It clashes head-on with the government'sambitions to lower the cost of electricity and boost energyoutput.

Aiming to raise up to $2 billion, the carbon tax is part ofa fiscal reform floated by President Enrique Pena Nieto just ashe pushes an energy plan to encourage billions of dollars ofinvestment in Mexico's flagging oil and gas industry.

Presented within one month of each other, Pena Nieto'senergy and fiscal bills seek to lower the huge tax burdenshouldered by state oil and gas company Pemex, whichis also Mexico's biggest producer of carbon emissions.

The carbon tax would affect Pemex's production and itsimports of refined products and natural gas, as well asindustrial end-users of fossil fuels. Passing on the cost islikely to reach Mexicans in the form of higher prices.

"I think the government should find an alternative," saidJorge Villalobos, a tax expert in Mexico's lower house ofCongress for the opposition conservative National Action Party."It's obvious that our competitiveness would take a hit."

Even officials in the ruling coalition of the InstitutionalRevolutionary Party and the Green Party say privately the tax isunlikely to survive as it is and might be cut back when Congressstarts to discuss the fiscal reform this week.

After Pemex and national electricity utility CFE, heavyindustry and the transportation sector are the biggest consumersof fossil fuels in Latin America's second biggest economy.

Backers of the so-called "green tax" say it will encourageinvestment in renewables, creating a more favorable regime forcompanies tapping Mexico's abundant clean energy potential.

"The tax will indirectly make renewable energy, especiallywind power, more competitive relative to traditional fossil fuelsources," said Adrian Escofet, director of Zapoteca de Energia,a company building a 70 megawatt wind park in southern Mexico.

More than 30 countries have adopted a carbon tax, and theCCE business lobby projects new revenues from the proposedcarbon taxes in Mexico at about 26.6 billion pesos ($2 billion),while the government puts the figure at around $1.67 billion.

If it generated $2 billion, the tax would be equivalent to0.17 percent of Mexico's gross domestic product last year. Thatcompares with about 0.05 percent of GDP for Britain's carbon taxand 0.70 percent of GDP for the comparable Swedish measure.

Mexico's proposed levy would be based on the carbon dioxide(CO2) content in 10 fossil fuels that power the country'seconomy, which is more dependent than most on oil. The dirtierthe fuel, the higher the carbon tax.

In 2012, $69 billion in taxes levied on Pemex funded morethan a third of total federal government spending.


Pena Nieto campaigned for office last year pledging to cutthe cost of electricity, but the tax is unlikely to help.

Peak power costs for industrial users have risen 7.4 percentover the past year, according to CFE data, and would riseanother four percent as a result of the new taxes, according toan estimate from the Mexico's main business lobby, CCE.

In the electricity sector, the government's energy reformwould update the constitution to allow private sectorcompetition and investment in power generation. But the fiscalreform would apply the highest carbon tax on fuel oil, whichaccounts for about 16 percent of current power generation.

"There's a sort of schizophrenia here from the government,"said Rafael Ch, an economist at think tank CIDAC.

Another contradictory aspect to the carbon tax is thatMexico still spends more to subsidize car drivers and powerconsumers than the new levy is forecast to raise.

After factoring in existing taxes levied on fuels, Mexico'ssubsidy for gasoline is worth around $3.5 billion net annually,even though the government is cutting it back sharply.

Miriam Grunstein, an energy specialist with the CIDEresearch institute, said it made no sense for the government tolevy carbon taxes and to control prices at the same time. Plusthe gas market was taking a serious hit, she added.

"It would make sense in the United States where you have anincredible oversupply of fuels, but in Mexico you have ascarcity of natural gas," said Grunstein.

About half of Mexico's electricity is currently generatedfrom natural gas, which will account for about 10 percent oftotal expected carbon tax revenues, according to Jose RamonArdavin, head of private sector research for business lobby CCE.

Even before Congress has started to debate the fiscal plan,major industries are talking down the tax.

"No other developing country has successfully implementedtaxes on CO2 emissions and there's no reason for Mexico to jumpout front," said C.P. Abel Ayala, finance chief for the miningarm of top steelmaker Altos Hornos de Mexico.

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