A Comprehensive Climate Mitigation Strategy for Mexico

IMF Working Papers, October 18, 2021

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Authors: Simon Black, Koralai Kirabaeva, Ian W.H. Parry, Mehdi Raissi, Karlygash Zhunussova
Published: October 18, 2021
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781513599847.001

Progressive carbon price path from current levels of US$3 per ton to US$75 per ton by 2030 would achieve Mexico’s mitigation pledges.
Annual revenues from the carbon price: 1.8 percent of GDP.
Cumulative local air pollution deaths averted: 11,600.
Average household burden from higher fossil fuel and electricity prices: 2.7 percent of consumption.
Economic efficiency costs of carbon pricing: 0.3 percent of GDP in 2030.
Mexico would need a more ambitious 2030 target to align with many countries adopting midcentury ‘net-zero’ emissions targets.

Carbon price trajectory: US$3 per ton (current) → US$75 per ton (by 2030).
Fiscal impacts:
- Annual revenues: 1.8 percent of GDP.
Health and environmental benefits:
- Cumulative deaths from local air pollution averted: 11,600.
- Domestic environmental and local air pollution benefits more than offset the economic efficiency costs (0.3 percent of GDP in 2030) before counting climate benefits.
Distributional impacts:
- Direct burden on the average Mexican household: 2.7 percent of consumption from higher fossil fuel and electricity prices.
- Revenue recycling can offset most of this burden.
- Targeted transfers can make the reform pro-poor and pro-equity.

Core instrument:
- Implement progressively increasing carbon pricing consistent with the US$3 → US$75 per ton path to meet mitigation pledges.
Revenue use:
- Recycle carbon pricing revenues to offset household burdens and implement targeted transfers to protect low-income and vulnerable groups.
Complementary measures:
- Reinforce carbon pricing with sectoral instruments (see below).
- Support public investment in the clean energy transition through complementary policies.

Mexico’s 2030 emissions target would need to be more ambitious to be consistent with a midcentury ‘net-zero’ objective followed by many other countries.
Combining carbon pricing with sectoral instruments and public investment support increases effectiveness of mitigation strategy.