One of the reforms contemplated as part of the agreement between the government of Santiago Peña (Cartista ANR) and the International Monetary Fund (IMF) is the implementation of a carbon tax.
The tax is part of the Paraguayan government's “Resilience and Sustainability Service” program, agreed with the IMF.
Once fully implemented, the country will be able to access a total loan of US$400 million, of which the first US$100 million was disbursed last June.
In July, the government submitted a bill to approve a line of financing in Special Drawing Rights within the framework of the International Monetary Fund's 'Resilience and Sustainability Facility' program.
The bill is accompanied by an annex listing the reform package promised, which includes 13 measures to be implemented so that the country can receive all available credit to maintain the country's macroeconomic stability and continue to advance the structural reform agenda.
Also to build greater socioeconomic resilience and mobilize financial resources to support efforts to contain climate risks for the financial sector, preserve and expand the country's clean electricity matrix and conserve forests, the Executive's message states.
Carbon tax The list of reforms accompanies the bill and one of them is the “carbon tax on liquid fuels”.
The summary explains that the Executive Branch, through the Ministry of Economy and Finance (MEF) and the National Directorate of Tax Revenue (DNIT), “will promote and encourage the implementation of a carbon tax, replacing the selective consumption tax that currently taxes the import of petroleum-derived fuels.”
The Selective Consumption Tax is an indirect tax that taxes not only the import of fuels, but also tobacco, cigarettes, essences and similar, beverages, high-calorie products and other goods, as well as the first sale of any of the aforementioned goods, when they are of national production, says the DNIT.
Regarding the agreement with the IMF, only fuels are mentioned, so it is assumed that the other products will not be modified. It is not known how it would be carried out and what the change would entail, but in this context it is worth remembering that President Peña had promised that during his government he would not increase or create taxes.
Background in 2023
They do not give further details of the aforementioned tax, but as background it can be mentioned that last year, when the government of Mario Abdo Benítez (ANR) was ending, there was already general talk of something similar, but the then Minister of Finance, Óscar Llamosas, ruled out its application.
The report on fiscal risks, in its chapter on “Climate Change and Natural Disasters”, presented an analysis of the potential impacts and risks arising from changes in Paraguay’s climatic conditions and natural disasters, especially considering the exposure of the economy through the agricultural sector.
As mitigation and risk management measures, the report prepared by the then Ministry of Finance, now the Ministry of Economy and Finance, and the Inter-American Development Bank (IDB), indicated that it is a priority for the Paraguayan government to reduce its exposure and vulnerability to natural disasters associated with climate change.
In this context, he said that in the process of mitigating the effects of climate change and meeting agreed commitments, the role of the tax authority should aim to increase the price of carbon emissions to encourage people and companies to reduce their use and switch to clean energy sources.
On this point, he mentioned that in this line of action there are some tools available that the IMF had published in 2019. He then pointed out that taxes on carbon emissions are the most powerful and efficient instruments if they can be applied in an equitable and growth-friendly manner.
