Effective Carbon Tax Design: Key Considerations from Latin America

This study documents the experiences of Chile, Colombia, and Mexico in the design and implementation of carbon taxes, with the aim of drawing lessons and recommendations to improve the development of these instruments and support countries seeking to adopt them. The publication is led by the member countries of the Regional Climate Change Platform of Ministries of Economy and Finance (MEF Climate Change Platform). Drawing on economic theory, evidence, and the experiences of these three countries, the document identifies and elaborates on five key considerations to take into account when designing and implementing a carbon tax: (i) defining the objectives of the tax and analyzing policy options; (ii) specifying the design of the tax, including coverage, rate, and institutional arrangements; (iii) managing public acceptance; (iv) strengthening carbon pricing interventions; and (v) integrating carbon taxes and carbon credits. Broadly speaking, the study highlights that, while carbon taxes are popular public policy tools for climate change mitigation and revenue generation, their effectiveness is often constrained by political feasibility and socioeconomic challenges, underscoring the need for complementary policies.