Countries in Latin America are studying and implementing different carbon pricing mechanisms ahead of the implementation of the EU's carbon adjustment mechanism (CBAM) so they can be attractive locations for companies looking to reduce costs when exporting goods to the EU.
The EU'S CBAM aims to put a price on the carbon emitted during the production of carbon-intensive goods entering the EU. It is also intended to encourage producers from countries trading with the EU to use technologies that are more efficient and generate fewer greenhouse gas emissions.
Even though the mechanism is in the transition phase until 2025, it is expected to launch in 2026 in a gradual phase. Companies will pay 2.5pc of emissions under CBAM in the first year and up to 100pc by 2034.
CBAM covers the steel and iron, aluminum, cement, fertilizer, electricity and hydrogen sectors. A review of the mechanism in 2025 could add more sectors, such as agriculture.
But companies will have the option to reduce their CBAM payment obligations if they have proof of effective payment of a carbon price in the country of origin. They could also be exempt of payment if there is proof that the production process of a good is carbon-free.
The implementation of carbon pricing mechanisms in Latin America has been slow, with only a handful of countries having a carbon tax or emissions trading scheme (ETS) in force. Paraguay, Uruguay, Argentina, Chile and Colombia have a carbon tax — the last two also offer a carbon compensation system. Mexico has a carbon tax at the national and subnational levels and an ETS in a pilot phase.
Argentina, Brazil, Chile, Colombia and Paraguay are considering the implementation of an ETS, according to the World Bank. Central American countries such as Panama are also studying potential carbon pricing systems.
"Latin American companies are interested in learning more about CBAM," said Amanda Luna Mera, clean energy lead for Latin America at Carbon Trust. "We have seen corporates interested in implementing their own carbon price as a way to offset extra payment when they want to export goods to the EU."
Apart from mitigation of emissions and revenue generation, CBAM cost management is one of the key drivers to create a carbon pricing mechanism.
"We are creating a favorable ecosystem for European companies in which they could reduce their emissions and be more competitive under CBAM," said Ricardo Torres, undersecretary of environment in the Mexican state of Queretaro.
Queretaro has a carbon tax in force with an offset mechanism that covers direct emissions generated during the production process of a product. Companies can pay a carbon tax of $30/t for 50pc of the emissions produced and offset the other 50pc.
Queretaro's government hopes its carbon pricing mechanism makes the region attractive for companies who look at reducing their emissions and lower their costs by reducing their payment obligations under CBAM.
"If a German automotive company is looking for an opportunity in Mexico, it will look at Queretaro because, on one hand, our mechanism will facilitate the integration with CBAM and, on the other hand, possibly lower the cost," Torres said.
Financing decarbonization
The EU'S CBAM and the implementation of domestic carbon pricing mechanisms in Latin America give the latter the possibility of raising revenues that can be reinvested domestically, potentially supporting their regional decarbonisation.
"Our purpose is to be able to finance the decarbonisation in every sector of the state with the revenues obtained through our carbon pricing mechanisms," Torres said.
Failing to adopt carbon pricing could sacrifice fiscal revenue in Latin America, potentially reducing opportunities to invest in low-emission technologies, a study by Columbia University's Center on Global Energy Policy said.
Focusing early carbon pricing efforts on products covered by the CBAM would allow Latin American economies to start strategically scaling up their climate policy and technology transition, while mitigating affordability challenges, it added.
