Carbon taxes and climate action: Lessons from Mexico, Colombia, and Argentina

Abstract

In this paper, we evaluate the emissions impacts of three national carbon tax policies implemented in Latin America: in Mexico (2014), Colombia (2017), and Argentina (2018). Using the Synthetic Control Method and a panel of 30 Latin American countries from 2000 to 2019, we construct data-driven counterfactual trajectories of per capita CO₂ emissions from energy and transport for each treated country. We find no evidence that carbon taxation significantly reduced emissions in Argentina or Colombia: although post-reform energy emissions fall relative to their synthetic controls, these differences do not survive placebo tests, and no significant effects are detected for transport emissions. In contrast, Mexico’s reform is associated with statistically significant reductions of approximately 7.9% in per capita energy emissions and 12% in per capita transport emissions in the post-tax period. These effects likely reflect not only the carbon tax itself, which was set at modest rates (up to about USD 3.5/tCO₂), but also the simultaneous removal of fuel subsidies and broader fuel tax adjustments that increased effective energy prices. We use an evaluation of carbon taxes in developing economies to show the importance of policy design, complementary reforms, and institutional context for the effectiveness of carbon pricing. We do this by providing a cross-country analysis using (data-driven) country-specific synthetic counterfactuals that preserve heterogeneity in policy design and institutional context. Together, the results help reconcile mixed evidence in the literature and underscore that an effective policy requires broader coverage and higher prices over longer adjustment windows.