Emerging Markets: Developing Country Systems
Carbon pricing is no longer just a developed country phenomenon. From Colombia to Indonesia, developing economies are implementing carbon taxes and ETS systems adapted to their circumstances. These systems face unique challenges but offer valuable lessons.
The Developing Country Context
Developing countries face distinct considerations:
Development priorities: Economic growth and poverty reduction remain primary goals. Carbon pricing must be compatible with development.
Limited administrative capacity: Sophisticated MRV systems take time to build. Simpler approaches may be necessary initially.
Different emissions profiles: Agriculture and land use may be larger shares of emissions than in developed economies.
International competitiveness: Many compete on cost with producers in countries without carbon pricing.
Climate finance: International support can help build capacity and ease transition.
Developing countries are not simply copying developed country systems. They are adapting carbon pricing to their own circumstances, often with innovative approaches.
Latin America
Mexico:
| Feature | Details |
|---|---|
| Carbon tax | Launched 2014, ~$3-4/ton |
| Pilot ETS | Launched 2020 |
| Coverage | Fossil fuels (tax), large emitters (ETS) |
| Unique feature | Hybrid approach with both instruments |
Mexico's carbon tax is modest but provides revenue and experience. The pilot ETS is developing capacity for future trading.
Colombia:
| Feature | Details |
|---|---|
| Carbon tax | Launched 2017, ~$5/ton |
| Coverage | Fossil fuels (with exemptions) |
| Offset provision | Can use offsets to reduce tax liability |
| Revenue use | Environmental programs |
Colombia's innovation is allowing carbon tax liability to be met with domestic offsets, supporting its forest conservation efforts.
Chile:
| Feature | Details |
|---|---|
| Carbon tax | Launched 2017, ~$5/ton |
| Coverage | Large thermal power plants |
| Unique feature | Narrow scope, focused implementation |
Chile started with a narrow scope (power plants above 50 MW) to build experience before potential expansion.
Asia
Singapore:
| Feature | Details |
|---|---|
| Carbon tax | Launched 2019 |
| Rate | SGD $25/ton (~$19), rising to $50-80 by 2030 |
| Coverage | Facilities >25,000 tons/year |
| No exemptions | All covered facilities pay full rate |
Singapore chose a carbon tax over ETS due to its small number of large emitters and limited trading potential. No exemptions maintains a clean price signal.
Indonesia:
Indonesia is developing a carbon pricing roadmap:
- Voluntary carbon market operational
- Cap-and-trade for power sector in development
- Carbon tax legislation passed (implementation ongoing)
Vietnam:
Vietnam has committed to implementing a carbon market by 2028:
- Pilot ETS being developed
- International support from PMI and others
- Aligned with net-zero by 2050 commitment
South Africa's carbon tax (launched 2019) has a unique design:
The structure:
- Headline rate: ~$10/ton
- But extensive allowances reduce effective rate
- Trade exposure allowance: up to 10%
- Process emissions allowance: up to 10%
- Performance allowance: up to 5%
- Carbon budget allowance: up to 5%
Effective rate: After allowances, many companies pay only 10-40% of the headline rate.
Rationale: The high allowances reflect concerns about competitiveness and transition. They phase down over time.
Criticism: Environmental groups argue the effective rate is too low to drive change.
Lesson: Allowances can address competitiveness concerns but may undermine environmental effectiveness if too generous.
Common Themes
Starting simple:
Most developing country systems start with limited scope and simpler designs:
- Carbon taxes rather than ETS initially
- Narrow sectoral coverage
- Lower rates
- Simplified MRV
Capacity building priority:
Systems often include pilot phases focused on building MRV capacity before real compliance obligations.
International support:
World Bank, bilateral donors, and others provide significant support for system development.
Integration with climate finance:
Some systems are designed to leverage international carbon markets through Article 6.
Challenges
Administrative capacity:
Building MRV systems, training verifiers, and developing registries takes years and significant resources.
Political economy:
Fossil fuel subsidies often coexist with carbon pricing attempts, creating contradictory signals.
Industry opposition:
Industries cite competitiveness concerns more intensively when trading partners lack carbon pricing.
Data availability:
Emissions data may be incomplete or unreliable, complicating system design.
Enforcement:
Ensuring compliance requires institutional capacity that may be limited.
Opportunities
Learning from experience:
Developing countries can learn from developed country mistakes and successes.
Technology leapfrogging:
Modern digital systems can support MRV more efficiently than legacy approaches.
Article 6 integration:
Carbon pricing creates foundation for participating in international carbon markets.
Development co-benefits:
Well-designed systems can generate revenue for development priorities while addressing climate.
The CBAM Effect
The EU's Carbon Border Adjustment Mechanism is influencing developing country decisions:
Pressure to price carbon:
Countries exporting to the EU face incentives to implement domestic carbon pricing so that carbon revenue stays home.
Capacity building:
Meeting CBAM reporting requirements builds MRV capacity useful for domestic systems.
Accelerated timelines:
Some countries are advancing carbon pricing plans to align with CBAM implementation.
Developing country carbon pricing is not just about domestic climate policy. International pressures (CBAM, climate finance, Article 6) are increasingly shaping decisions about if and how to implement carbon pricing.
Looking Ahead
Having surveyed the global landscape, the next module turns to advanced topics: linking carbon markets, Article 6 of the Paris Agreement, internal corporate carbon pricing, and continuous improvement of carbon pricing systems.