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Carbon Taxes

Challenges to investment 

In Colombia's strategic plan to fulfill its climate commitments under the Paris Agreement, the nation aimed to reduce its greenhouse gas (GHG) emissions by approximately 90% by 2050, relative to the levels recorded in 2015. Additionally, Colombia would also need to offset the remaining 10% through proportional national removals to achieve a net zero balance (reducing GHG emissions by 100%) from 2050 onwards. To achieve its net zero goal, Colombia needed an economic and financial tool incentivizing emission avoidance, potentially through renewable energy (RE) generation.  

 

Approach 

In 2016, Law 1819 established the National Carbon Tax in Colombia as part of a broad tax reform package, with the tax coming into force on1 January 2017. This upstream tax applied to producers of fossil fuels for the domestic market and direct importers of fossil fuels, excluding coal and domestic use of natural gas. Specifically, the tax covered fuels such as gasoline, kerosene, diesel, fuel oil, industrial usage of natural gas for refining hydrocarbons and petrochemicals, and industrial liquefied petroleum gas. Initially, the tax targeted 24% of total GHG emissions (resulting from the covered fuels) at this time and was levied by producers and importers. Under the law's initial plan, revenues from the tax would be channeled to the Sustainable Colombia Fund, which is earmarked for initiatives like combating coastal erosion, preserving water sources, and protecting ecosystems. Moreover, one crucial aspect of the carbon tax was the promotion of RE, especially wind and hydroelectric power as thedeployment of these technologies would lead to reduce carbon dioxide emissions (CO2e). 

 

Key Enabling Conditions 

The introduction and implementation of the carbon tax in Colombia partly contributed to catalyse the country's nomination to the Organisation for Economic Cooperation and Development (OECD) and eligibility for various sustainable financing initiatives. For instance, around 5% of the carbon tax revenues were directed towards programmes such as the Heritage Colombia programme, which aimed to protect and conserve 20 million hectares of Colombia's natural areas. Finally, the United States Agency for International Development (USAID) supported Colombia’s sustainable development and climate priorities through several programs for instance designing RE auctions. 


Impact / Outcomes 

The carbon tax rate commenced at USD 5 per ton of CO2e, with an annual increase of 1% plus inflation until reaching USD 10. In 2017, revenues amounted to USD 159 million, followed by USD 98 million in 2018 and USD 95 million until July 2019. Initially, these revenues were directed to the Sustainable Colombia Fund, which was later renamed into the Colombia Peace Fund after the peace agreement in 2016. By 2021, the carbon tax covered 19.4% of total GHG emissions in CO2e caused by targeted fuels. The electricity generation from wind increased substantially from 2017 with 3 GWh to 60 GWh in 2022, while hydroelectricity generation remained on the same level over these years with around 61,000 GWh. 


Additional Sources

Locations
Latin America, Colombia
Year published
01 January 2016
Policy type
Climate policy
Policy lever
Pricing carbon
Risk category
Social acceptance, Permits risk, Policy and regulatory risk

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