In past years, the Kyoto Protocol was created under the United Nations Convention on Climate Change (protocol) to reduce greenhouse gas (GHG) emissions to prevent global warming. The protocol was initially adopted in December 1997, and entered into force in 2005. Mexico ratified this international instrument in the year 2000.
Since then, more than 170 countries including Mexico have assumed different commitments to tackle climate change and seek the reduction of GHG emissions, one of the most relevant being the Paris Agreement signed on December 2015, which constitutes an action plan to limit the increase in global temperature.
One of the main tools to mitigate and combat high GHG emissions is the establishment of diverse ‘green taxes’ on those who, among other things, surpass a certain threshold of emissions in their activities, emit certain substances into the atmosphere, extract some resources from the earth or carry out other economic practices that are likely to cause a negative ecologic impact. These green taxes pursue not only a financial remedy to the negative impact caused by the corresponding parties, but also serve as an incentive to improve polluting production processes.
Mexico has a federal tax system, mainly governed by a so-called ‘residual clause’ which distributes the taxing rights among the different levels of government, essentially establishing that the powers that are not expressly reserved to the Federation, should be understood to belong to the States within the scope of their respective competencies, which is the case of the green taxes, that may be imposed by the Federation and/or the States.
In line with the above, in 2020 the Supreme Court of Justice pronounced itself regarding the constitutionality of green taxes, confirming that the states have the power to do so in their respective territories. This analysis was derived from several appeals filed by the Federation and taxpayers against state-issued green taxes (i.e. the Finance Law of the State of Zacatecas which established a tax for the emission of certain gasses into the atmosphere).
Considering the above, in its analysis, the Supreme Court arrived at the conclusions below regarding green taxes.
Destination to public expenditure
When imposing a green tax, the legislative shall establish certain items to which the income obtained from their collection will be destined as a priority, taking into consideration the duty of environmental protection. In addition, green taxes must seek to motivate the taxpayer to invest in the development of technology that reduces the degradation of environmental goods and the pollution caused by its activity or production, with the intention that the more effective the green tax is, the less it will be collected, until tax neutrality is reached.
In conclusion, the Supreme Court pointed out that this type of tax seeks the recognition of the expense that must be incurred by the State to remedy the negative effects that originate in a productive process of the taxpayer that pollutes or has a negative ecologic impact, making it accountable for the damage caused in the pursuit of an economic benefit.
Fairness and proportionality
As mentioned, green taxes seek to recognise the expenses that must be incurred to remedy the negative effects that originate in a production process that pollutes or has an environmental impact, whose author transfers the economic burden to the state instead of incorporating them to its expenditures.
Such transfer of costs constitutes the economic benefit obtained by the polluting productive process, since the polluting agent should be responsible for those expenses; however, the profits derived from the polluting process are not reduced by those expenses, since, as stated, they are not internalised.
The aforementioned recognition is, precisely, the reason the Supreme Court considers green taxes to be fair and proportional, since the taxpayers have the obligation to pay a reasonable proportion of the earnings obtained through their polluting production processes to repair the effects of the environmental deterioration caused for their profits.
Legality
The Supreme Court pointed out that, to verify if a certain contribution violates the legality principle, it must be analysed whether the text of the law allows the taxpayer to have clear knowledge of its elements: (i) whether the bases and essential elements of the tax are set forth in the text of the law; and (ii) whether the international guidelines and definitions, particularly those provided in the Kyoto Protocol were duly adopted and incorporated within the national legislation, mainly through specialised technical standards with full validity, that is, within the so-called Mexican Official Standards (NOMS).
Final considerations
It is a duty and a necessity for all countries to take the initiative in fighting climate change and its adverse effects, promoting the establishment of measures and policies that allow not only its prevention but also ones that seek to remedy the damage already made.
In Mexico, the Constitution extends such responsibility to everyone through the obligation to contribute to public expenditure, which in a posterior moment takes the form of green taxes for the private sector to chip in on environmental conservation.
The referred taxes constitute a mechanism to influence the behaviour of both consumers and producers, discouraging the consumption or elaboration of products that deteriorate the environment, and at the same time, they contribute to the development of new technologies and better practices.
Although green taxes are in their initial stages in Mexico, it is undoubtedly an issue that should be a priority for the entire Mexican state, being a power that could be exercised by Federal and State alike in order to comply with the various pacts and positions that have been adopted at the international level and contribute mainly in the fight against climate change.
Ángel Escalante Carpio
Founding partner, Escalante & Asociados
Juan Manuel Morán
Senior associate, Escalante & Asociados
Gabriel Rojas
Attorney, Escalante & Asociados
