Decarbonize: Incentives or prohibition?

In recent weeks, clamors have emerged urging more drastic action against climate change. Congresswoman Alexandria Ocasio-Cortez in the US, with her proposal for the Green New Deal, the young Swedish woman Greta Thunberg and the Youth for Climate movement in Europe are waging the environmental war of the Y/Z generations.

In Mexico, where environmental concern continues to grow, all alarms have sounded because of the pollution produced by such sources as cars, gas emissions from certain companies, quarries, and cargo and passenger transportation, particularly in the state of Nuevo León.

Despite the programs that have been implemented to promote the use of electric vehicles, it is clear that the problem continues to exist. In Europe, several countries have launched plans to de-carbonize transportation by deadlines between 2025 and 2040, often through incentives for electric automobiles combined with bans on automobiles that use fossil fuels. However, these measures have been questioned by the European Commission because of their potential to distort the European market.

In Mexico, little has been explored with regard to using environmental tax incentives as a possible way to improve air quality, rewarding, to a certain extent, those taxpayers who apply tax provisions for the benefit of the environment.

The implementation of concepts such as environmental accounting and green taxation has been limited to very few tax regulations and has not been able to engage Mexican people and companies. Some of the federal tax incentives that are in force and are aimed at those who adopt new technologies in favor of the environment, such as electric cars, are shown below:

• The Income Tax (ISR) Law allows a deduction of up to MX$ 250,000 pesos of the original investment amount (OIA) for automobiles that use rechargeable electric batteries, an amount that exceeds the MX$ 175,000 pesos that may be deducted for conventional vehicles.
• With regard to leasing automobiles that use electric batteries and are strictly indispensable for the taxpayer’s activity, the Income Tax Law allows a daily deduction of MX$ 285 pesos, more than the MX$ 200 pesos a day that can be deducted if the lease corresponds to a traditional automobile.
• There is no tax (ISAN) on the sale or permanent import of new automobiles (ISAN) that use rechargeable electric batteries, electric automobiles with an internal combustion engine or a hydrogen-powered engine.
• With regard to Mexico’s General Import Tax (IGI), electric automobiles do not pay any import tariffs.

However, according to Esteban Vázquez (2019), in places such as California, the state provides much greater incentives for those who choose to buy electric or hybrid cars:

• Important discounts from insurers for private drivers.
• Parking and use of a free recharge station in participating hotels.
• A “Green Sticker” which allows drivers to use exclusive high-occupancy lanes and gives free passage on certain urban toll roads.
• Cash refunds (or the equivalent in credit) of up to US$ 5,000 when initiating or completing the payment of a green car.
• Up to US$ 1,500 refund when the automobile is finally delivered to a salvage yard for recycling and the reuse of parts.
• Discounts, loans and preferential rates on the cost of electricity when it is used specifically to charge an electric vehicle.

Some Mexican states have adopted additional incentives for electric vehicles, such as: exemption from environmental verification, preferential parking with a charging station and non-participation in the Hoy no Circula (specific days when given automobiles may not be used) program. The Federal Electricity Commission (CFE) has also added support for those who adopt this technology, through the installation of an independent meter in owners’ homes to avoid users passing to the High Consumption Domestic Rate and giving them access to a differentiated rate.

Of course, there are other actions that point in the same direction. The Mexican Supreme Court of Justice (SCJN) approved on February 11th the right for the state of Zacatecas to charge environmental taxes on companies that do not comply with the regulations for environmental protection, emit polluting gases into the atmosphere, or damage the soil, subsoil or water supply through the storage and treatment of waste materials. This measure was applauded by the rating agency Moody's, which stressed that the measure will contribute to strengthening state finances.

On February 19th, Senator Samuel Garcia Sepulveda presented an initiative through which he proposes the creation of a Federal Tax on Fixed Source Emissions, which would apply to all individuals with business activities, legally-constituted businesses and any other economic entity whose purpose is to carry out industrial, commercial or service operations or activities, or any other activity that generates or may generate polluting emissions into the atmosphere in excess of the parameters established by the Ministry of the Environment and Natural Resources.

In the initiative in question, those who use sustainable technologies and green energy in all their activities would be exempt from paying the tax, as well as those who implement actions aimed at protecting and preserving the environment in the long term.

The case of Nuevo León

The Nuevo Leon State Government monitors air quality in the metropolitan area of Monterrey, using a website to publish IMECA (Metropolitan Index of Air Quality) point ratings at different locations in the state. Table 1 shows the values that make up each pollution phase.

When air quality is “Very bad” or “Extremely bad” according to the IMECA count, Pre-contingency (165-184), Phase I (185-279) and Phase II (>279) measures are implemented.

According to a map published by the State Government, the areas that, at the end of February and the beginning of March, had faced the greatest problems in air quality, showing "bad" or "regular", were: Southwest 2 (San Pedro Garza García station), North 2 (University station), Northwest (San Bernabé station), Northwest 2 (García station) and Southwest (Santa Catarina station).

How to improve environmental tax incentives

The purpose of environmental taxation is both fiscal (tax collection) and para-fiscal (to incentivize) as a way of encouraging changes in taxpayer behavior to promote sustainability.

In the framework of the Paris Summit, Mexico signed a commitment to establish a functional emissions trading system in 2018, as well as a joint declaration with other countries and regions of the American continent to put a price on carbon. The nation proposed that in 2018 it would formally start a pilot phase, although the Mexican carbon market will not officially start until 2021, when the Paris Agreement comes into effect.

According to the Institute for Competitiveness (IMCO), Mexico’s original proposal had a cost per ton of carbon emissions of US$ 5.7 (renegotiated to US$ 3.7). It is important to note that natural gas and jet fuel will be exempt from the new tax, a posture criticized by IMCO.

According to the Business Coordinating Council (CCE, 2013), "the convergence between sustainability and production chains or supply chains is critical to improve the environmental impact of companies. Initially, strategies focused exclusively on reducing the environmental impact of the operations themselves, however, as a result of more accurate measurements, inventory development, risk analysis and other initiatives, the vision has had to be broadened to propose strategies and lines of action in each and every one of the stages of the chain." Therefore, new business models and financing plans are being sought, as well as interaction and collaboration schemes between companies.

New tax proposals

I propose the following tax initiatives be included in the environmental tax incentives introduced to improve air quality in Nuevo León:

Federal

ISR

• Eliminate the cap that exists on the OIA or increase it to MX$ 600,000 pesos, so that taxpayers can deduct a higher amount for the purchase of automobiles that use rechargeable electric batteries and/or electric automobiles that also have an internal combustion engine or a hydrogen-powered engine. The investment amount of MX$ 250,000 pesos that may currently be deducted is not sufficient, given that these vehicles are currently more expensive, but their cost should eventually decrease, so it is currently recommendable to eliminate or increase the cap.
• Deduction of 100% of the amount of the investment in the same year in which vehicles with electric rechargeable batteries are purchased. This would also apply to electric automobiles that have an internal combustion engine or a hydrogen-powered engine. Currently, only 25% may be deducted per year.
• Increase to MX$ 600 pesos per day the amount that may be deducted for the use or temporary enjoyment (lease) of automobiles that use rechargeable electric batteries, as well as electric automobiles that also have an internal combustion engine or a hydrogen-powered engine. Currently, only MXP$ 285 pesos per day may be deducted.
• Deduction of 100% of investments in machinery and equipment for electric charging stations for automobiles that operate with rechargeable electric batteries, and electric automobiles that also have an internal combustion engine or hydrogen-powered engine.
• Deduction of 100% of adaptations made to facilities that involve additions or improvements to fixed assets in the case when such adaptations are for the installation of electric charging stations for automobiles that use rechargeable electric batteries, and electric automobiles that also have an internal combustion engine or hydrogen-powered engine.
• Increase in the annual depreciation rate to 100% for the replacement of installed machinery in order to reduce polluting emissions.

Value-Added Tax

Introduce a 100% exemption from the value-added tax (VAT) on imports and/or transfers of vehicles powered by rechargeable electric batteries, as well as electric automobiles that also have an internal combustion engine or hydrogen-powered engine.

Other actions

Promote the increased use in the vehicle population of green passenger and cargo transport vehicles.

Renew the Decree of October 30th, 2003 that included the "Scrap Program." According to the Mexican Association of Automotive Distributors, A.C., (AMDA, 2018) "between March 2015 and December 2017, approximately 13,000 vehicles of the federal transport fleet were replaced. However, the decree providing a tax incentive issued by the Ministry of Finance and Public Credit (SHCP) was only in effect until December 31, 2017, so a major initiative to improve the vehicle population in Mexico has been interrupted." Due to the above, reactivating this decree and thereby increasing incentives for vehicle renewal would be advantageous.

State

Annual state road tax

Eliminate payment of the annual road tax for the next eight years for automobiles that use rechargeable batteries and for electric automobiles that also have an internal combustion engine or a hydrogen-powered engine.

Municipal

Property Tax

Eliminate 100% of the property tax for the next 10 years on buildings where equipment is installed to recharge automobiles that use rechargeable electric batteries and electric automobiles that also have an internal combustion engine or hydrogen-powered engine.

Just as taxpayers who carry out actions for the benefit of the environment are rewarded, those who reduce the quality of the environment should be punished. One proposal would be to impose fines, with an extra-fiscal objective, where the actions to be carried out are aimed at compensating for the damage caused.

As a society, we must become aware of the air quality problem that we are facing and the adverse effects that bad air quality has on our health. Our leaders must implement measures to reduce the pollution problems that we face.

Environmental tax incentives should have an "extra-fiscal" objective, where implementation would support all levels of the production chains, including: the producer, the marketer and the end consumer. This will enhance the demand for clean technologies, so that there is a greater offer of clean products in Mexico and the cost of such products is reduced in the last link of the chain.

Although there have been some reforms in Mexico in recent years and some interesting initiatives are being implemented to trigger the change that is sought in environmental matters, we still have a long way to go in comparison with other countries or even with states such as California in the United States. Although implementing changes and reforms at the federal, state or municipal levels may look complicated, with the bases of good will, social conscience, doing things well and, above all, implementing the necessary changes, improving the quality of life for all of us is achievable, especially considering the opportunity cost of not doing so and the social pressures that are being applied due to the excessive pollution levels that currently exist.

Finally, it is important to note that the changes made today to improve environmental quality will help future generations receive a better world, helping them to reduce the costs that would result from the effects of pollution. The proposals indicated here should be reviewed on an ongoing basis in order to evaluate their effectiveness and thus establish the extent to which they should be modified in the short, medium and long term, and complemented with other measures directed at other segments of the economy, such as the environmental pollution resulting from industrial activities.

Bibliography

AMDA (2018). Programa de renovación vehicular: la chatarrización suspendida. Available at: https://www.amda.mx/programa-de-renovacion-vehicular-la-chatarrizacion-suspendida/ [consulted March 3, 2019].

ChargeNow (2019). Beneficios para los vehículos eléctricos en México. Available at: http://www.chargenow.mx/incentivos-para-vehiculos-electricos-en-mexico/                 [consulted March 2, 2019].

CCE (2013). Oportunidades de financiamiento para el crecimiento verde en México. Available at: http://cce.org.mx/sites/default/files/CESPEDES2013/new/taller/Cadenas%20Productivas%20Sustentables_MG.pdf [consulted March 2, 2019].

DECREE that modifies the diverse rulings to support the competitiveness of the terminal automotive industry and drive the development of the internal automobile market, February 2, 2017.

Flores, D. (2006). Calidad y Concentración de Mercado en la Banca Comercial. Ensayos Revista de Economía [on line], XXV (1), 21-30. Available at: http://www.economia.uanl.mx/revistaensayos/xxv/1/C ... acion_de_Mercado.pdf, [consulted February 8, 2019].

Nuevo León State Government (2019). Mapa de la calidad del aire [en línea]. Available at: http://www.nl.gob.mx/servicios/mapa-de-la-calidad-del-aire                                      [consulted February 10, 2019].

IMCO (2018). Poner un precio al carbono en México [en línea]. Available at: https://imco.org.mx/wp-content/uploads/2018/04/ICM-IMCO-WRI-QUINTO-DESAYUNO_D.pdf [consulted February11, 2019].

Manufactura (2019). Moody’s ve con “buenos ojos” el impuesto ecológico de Zacatecas a las empresas. Available at: https://manufactura.mx/industrias/2019/02/13/moodys-ve-positivo-el-cobro-de-impuestos-ecologicos [consulted February 10, 2019].

Murrieta, N.,Ricárdez, J, and Vega, C. (2017). Ausencia de una normativa contable y fiscal como bases de revisión en materia ambiental en México. Hitos de Ciencias Económico Administrativas, Year 24 (No.70). Available at: http://revistas.ujat.mx/index.php/hitos/article/view/2429 [consulted February 10, 2019].

SEMARNAT (2019). México y su mercado de Carbono: Avances que ponen el ejemplo [en línea]. Available at: https://www.gob.mx/semarnat/articulos/mexico-y-su-mercado-de-carbono-avances-que-ponen-el-ejemploaire [consulted February 11, 2019].

Senate (2019). Gazette of the Initiative of Senator Samuel Alejandro García Sepúlveda, Law for the Federal Tax on Emissions from Fixed Sources. February, 19, 2019. Available at: http://www.senado.gob.mx/64/gaceta_del_senado/documento/89493 [consulted February 25, 2019]

The Guardian (2019). Harrison Ford: leaders who deny climate change are on the wrong side of history [en línea]. Available at: https://www.theguardian.com/film/2019/feb/12/harrison-ford-world-government-summit-climate-change-trump [consulted February 13, 2019].

Vázquez, E.. (2019). Incentivos gubernamentales para coches híbridos o eléctricos México; ¿es suficiente lo que se gana al optar por un auto verde?. Available at: https://www.xataka.com.mx/automovil/incentivos-gubernamentales-para-coches-hibridos-electricos-mexico-suficiente-que-se-gana-al-optar-auto-verde, [consulted March 4, 2019].