Can Carbon Taxes Shut Latin America and the Caribbean’s Local weather Finance Hole?
As temperatures in Latin America and the Caribbean (LAC) warmth up, economies within the area are cooling down. In August 2025, the United Nations Financial Fee for Latin America and the Caribbean (ECLAC) launched a brand new version of its Financial Survey of Latin America and the Caribbean 2025, discovering that LAC faces a “extended interval of low progress,” with gross home product (GDP) progress on observe to common 2.2 % in 2025 and a pair of.3 % in 2026.
A new technical paper from the Job Pressure on Local weather, Growth and the Worldwide Monetary Structure, “Is Carbon Tax the Reply to Local weather Change Funding Wants in Latin America and the Caribbean?”, reveals that intensifying local weather shocks threaten to sink the area’s already tepid progress and weak productiveness into deeper stagnation. Countering these results, the authors argue, would require a rare surge in each private and non-private funding—and an equally extraordinary effort to mobilize private and non-private financing. The authors particularly look at the position of carbon taxes in driving the required funding surge to fight financial losses from local weather shocks.
Hotter Local weather, Slower Development
To light up the consequences of local weather change on financial progress, the authors make use of two situations: a “reasonable” state of affairs, the place common temperatures throughout the area by 2.4 levels Celsius by 2100 (2.4°C state of affairs). Their second state of affairs initiatives a extra extreme enhance of 4.9°C by 2100 (4.9°C state of affairs). The authors estimate the financial fallout for six climate-vulnerable LAC nations: Dominican Republic, Guatemala, Honduras, Jamaica, Paraguay and Peru.
Utilizing a progress mannequin that hyperlinks rising temperatures to complete issue productiveness (TFP)—the effectivity with which labor and capital mix—the authors discover that warming temperature might trigger TFP progress throughout the six nations to fall from the current common of -0.2 % throughout 2004-2023 to -0.6 % beneath a 2.4°C international temperature enhance and -0.8 % beneath a 4.9°C state of affairs.
In the meantime, by 2050, GDP progress might sink to 1 % beneath the reasonable state of affairs and 0.2 % within the extreme one—a pointy decline from present regional averages above 2 %. Per-capita revenue might fall by 14 % and 22 %, respectively. And the injury, the research warns, is non-linear—every diploma of warming inflicts exponentially bigger losses. The price of delayed motion, subsequently, rises yearly.
Altering these trajectories calls for breaking away from enterprise as normal. In accordance with the authors’ estimates, to shut the GDP progress hole between the 4.9°C and a pair of.4°C situations, nations would wish to extend funding by roughly 14 % of GDP yearly by 2050, lifting complete funding to almost double present charges. This echoes international estimates suggesting that closing Latin America’s twin growth and local weather gaps requires spending between 3 and 16 % of GDP annually, properly past each what governments can fund from present budgets and the personal sector’s capability to mobilize financing.
Carbon Taxes: Not the Silver Bullet
What choices does LAC have to boost the funding wanted to compensate for local weather change-induced financial losses?
Fiscal fragility within the area predates the local weather disaster. Years of weak progress, low tax burdens, tax evasion and the COVID-19 pandemic’s legacy have left public debt averaging 59 % of GDP, up from 33 % in 2008. Servicing that debt now consumes round 16 % of tax revenues, and greater than 30 % in fiscally fragile economies. Many nations’ curiosity funds already exceed 185 % of complete public funding—an astonishing imbalance.
Behind these numbers lies a slender tax base. The area’s common tax take, at 21.5 % of GDP, lags far behind the Group for Financial Co-operation and Growth’s (OECD) 2022 common of 34 %, whereas tax evasion drains one other 6.7 % and ill-targeted exemptions sap 3.8 % extra. This leaves valuable little fiscal room for the inexperienced investments the area urgently wants.
Economists have lengthy seen carbon taxes as a key instrument: they cut back emissions whereas producing income. But LAC’s expertise has been underwhelming. Solely 5 nations—Argentina, Chile, Colombia, Mexico and Uruguay—have them, and their fiscal yield is low: lower than 0.05 % of GDP. Carbon costs are too low—usually $3–7 per ton of CO₂, besides Uruguay’s unusually excessive $167—and canopy on common solely 29 % of complete emissions.
Even beneath an formidable regional carbon value of $50 per ton utilized throughout the electrical energy, transport and manufacturing sectors, the authors estimate revenues would attain only one.4 % of GDP (Determine 1)—barely 12 % of the funding wanted to offset the local weather change-induced productiveness and progress losses. Briefly, carbon taxes are a useful gizmo, however removed from adequate.
Determine 1: Latin America and the Caribbean: Estimated Carbon Tax Revenues as Proportion of GDP with a Carbon Worth of $50 per Ton of CO2e Emissions
Be aware: Carbon tax revenues in US greenback phrases are estimated by making use of the carbon value to emissions generated within the electrical energy, transport and manufacturing sectors in 2019. The carbon-tax-to-GDP ratio is then calculated utilizing knowledge on GDP in US {dollars} at present costs from the World Financial Outlook, October 2023 (IMF 2023).
A Inexperienced Fiscal Compact
Whereas carbon taxes alone can’t fill LAC’s local weather finance hole, a complete response requires a “Inexperienced Fiscal Compact” constructed on three pillars.
The primary pillar is home tax reform, a course of involving broadening the tax base, closing loopholes and making programs extra progressive. Consolidating private revenue and wealth taxes—yielding barely 2 % of GDP throughout LAC in comparison with 8 % in OECD economies—presents clear potential.
The second pillar is lowering the price of capital: worldwide cooperation and growth banks should increase concessional and blended finance to decrease capital prices for local weather initiatives. In 2023, multilateral local weather lending to the area amounted to a paltry 0.2 % of GDP.
The third pillar is debt aid, notably for small Caribbean states the place local weather shocks and debt misery mix in a vicious cycle. Whereas institutionalized debt restructuring mechanisms have been lackluster up to now, these states additionally stand to achieve from debt-for-nature swaps, such because the settlement between The Nature Conservancy and the Authorities of Belize that lowered the nation’s debt burden in change for marine conservation commitments.
Fiscal Survival in a Warming World
The message is stark. With out a sustained enlargement of fiscal house, Latin America can not finance the local weather funding it wants. Extra taxes shall be essential—however smarter ones. So will extra debt—however cheaper and longer-term. A carbon tax may help, however solely as a part of a wider fiscal re-engineering linking progress, debt sustainability and local weather resilience.
For Latin America’s policymakers, the maths is unforgiving: nations should make investments to forestall local weather disaster and revive progress and productiveness whereas concurrently struggling to maintain budgets afloat. In the end, the local weather disaster shall be a check of fiscal structure no less than as a lot as planetary endurance.
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