Exploring Carbon Taxes as a Solution to Latin America’s Climate Finance Challenges
Amid rising temperatures, Latin America and the Caribbean confront economic slowdowns. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) has reported a forecasted GDP growth of just 2.2% in 2025 and 2.3% in 2026, reflecting a prolonged period of economic stagnation (source).
A recent technical paper from the Task Force on Climate, Development and the International Financial Architecture examines whether carbon taxes could drive the investments needed to mitigate the economic impacts of climate change in the region.
Climate Change and Economic Impacts
The study offers two scenarios to assess climate change’s economic impact: a moderate 2.4°C increase and a severe 4.9°C rise by 2100. These scenarios predict declines in total factor productivity (TFP) for six climate-vulnerable countries in the region, significantly affecting economic growth.
Under these scenarios, GDP growth could drop to 1% in the moderate case and as low as 0.2% in the severe case by 2050, with per-capita income potentially falling by 14% to 22%. The study emphasizes the nonlinear damage of rising temperatures, highlighting the escalating costs of delayed action.
To bridge the GDP growth gap between these scenarios, the study suggests a substantial increase in investment, potentially reaching 14% of GDP annually by 2050, a figure that far exceeds current capabilities of both public budgets and private financing.
The Role of Carbon Taxes
Carbon taxes are often viewed as a dual tool for reducing emissions and generating revenue. However, in Latin America, only a few countries have implemented them, and their fiscal contribution remains minimal, at below 0.05% of GDP.
The study estimates that even with an ambitious carbon pricing of $50 per ton, revenues would cover only about 1.4% of GDP, a fraction of the investment needed to counteract productivity and growth losses from climate change.
A Comprehensive Approach: The Green Fiscal Compact
Addressing the climate finance gap requires a multifaceted strategy, including a “Green Fiscal Compact” built on domestic tax reform, reducing capital costs through international cooperation, and debt relief initiatives like debt-for-nature swaps.
Enhancing domestic tax systems could involve broadening tax bases and increasing progressivity, while international support in the form of concessional finance could help lower the costs of climate projects. Debt relief, particularly for Caribbean nations, is also crucial to breaking the cycle of climate shocks and economic distress.
Fiscal Strategy in a Warming Climate
The analysis underscores the necessity for expanded fiscal capacity to fund essential climate investments. While carbon taxes are a component of the solution, they must be part of a broader fiscal reform that integrates growth, debt sustainability, and climate resilience.
Policymakers in Latin America face the challenge of investing in climate resilience while managing fiscal sustainability. The region’s response to the climate crisis will test its fiscal strategies as much as its environmental resilience.
Original Story at www.bu.edu