New Paper: Colombia’s Carbon Market Revolutionizing Rural Development
As part of Colombia’s tax reform, the country passed a carbon fuel tax on December 29, 2016 to encourage compliance with their greenhouse gas mitigation goals. Colombia’s Nationally Determined Contribution (NDC), committed under the Paris Agreement, is a 20% reduction in emissions by 2030. This carbon tax supports this and is based on the carbon content of each fuel distributed and includes all petroleum products and natural gas used for combustion (other than coal). The details of the carbon fuel tax, part of a larger tax overhaul, are defined in Decreto 926 de 2017, which went into effect on June 1, 2017. The carbon fuel tax rate was initially COP$15,000 (USD $5) per ton of CO2. As of January 2020, the carbon tax is COP$17,211 (USD $5.73) per ton of CO2, reflecting the annual inflation adjustment plus 1%.
The provisions of the law are clearly intended to stimulate implementation of mitigation activities that generate emissions reductions/removals that can be used in exchange for not paying the carbon fuel tax, similar to a tax and credit system. The ability to use emission reductions/removals to meet the tax obligation provides taxable entities the opportunity to reduce their compliance costs and it creates demand for domestic verified emission reductions/removals.
On August 1, 2018, the government passed Resolution 1447 in order to regulate public or private entities seeking “payment for results” and other form of compensation for actions that produce emission reductions/removals. The resolution applies to those seeking to sell emissions reductions/removals for carbon neutralization. This resolution specifies that the monitoring, reporting, and subsequent verification of GHG mitigation actions will be managed at a national level by the Institute of Hydrology, Meteorology and Environmental Studies (IDEAM), and will follow the guidelines of the Director for Climate Change and Risk Management from the Ministry of Environment and Development.
This paper examines the climate finance and rural development opportunities that Colombia’s carbon fuel tax has created through the Colombian carbon credit market, focusing on REDD+ and other land-use projects. It covers the current supply and demand for credits, the opportunities for rural communities, the evolution of the market, and expectations in 2020 and beyond.