Mexico Subsidies

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Mexico–220 billion Mexican pesos spent in subsidies in 2012, 1.4% of Mexico’s GDP

For a long time, talks against fossil fuel subsidies in Mexico were common in political and academic circles, as well as in several newspapers. For many, subsidies symbolized a national budgetary expenditure that could be better used for other social programs (according to official sources, 220 billion Mexican pesos were spent in fossil fuel subsidies in 2012, 1.4% of Mexico’s GDP); and for a few, they also meant a continuous promotion of greenhouse-gas emission and atmospheric pollution.

With the Energy Reform of 2012, a ray of hope emerged as the Reform promised not only increased market competition and efficiency with the introduction of private enterprises, but also, the gradual elimination of fossil fuel subsidies. With this plan, fuel prices were to be fixed by the government and subsidies were to be liberalized during 2017.

Nevertheless, this has meant a new type of subsidy, as the federal government, in an effort to quickly establish a competitive environment, allowed tax deductions to those new companies entering the oil and gas sector, ranging from 10% to even a 100% tax exemption for exploration expenditures. Moreover, although subsidies for consumers have been gradually reduced in recent years, the intention to liberalize the price of fuel have been deferred until 2018. The Secretary of Finance had to reduce taxes for gasoline and diesel by 20% at the beginning of the year when the price of fuel skyrocketed to its highest levels in 20 years. This led to unrest from the population in the form of protests, blockage of roads, and confrontations.

As some authors highlight, this is part of an underlying political issue that relates to the way subsidies affect the population. Every time the national government has tried to eliminate fossil fuel subsidies, the decision has caused backlash and unpopularity for those authorities. That is because subsidies have helped those with lower incomes by regulating the slowly increasing prices of food and public transport, while wages remain significantly low. As a result, Mexico is the second country in the world with the highest percentage of worker’s salary used for fuel.

Low wages are a trademark for Mexico. In 2016, the average monthly income of a US worker was $3,328 USD, while in Mexico it was only $318 USD. With the North American Free Trade Agreement (NAFTA) renegotiations taking place, representatives from Canada and United States have highlighted the huge contrast between the salary of Mexican workers and their counterparts from the North, pressuring Mexican authorities to establish fairer conditions for all the members of the treaty. If Mexico agrees to incorporate measures that increase wages for Mexican workers, it could also mean a reduction of the dependence on fossil fuels subsidies, allowing the national government to finally get rid of them.

Learn More

Fossil fuel subsidies in Mexico:

G20 subsidies to oil, gas and coal production:
https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/9967.pdf
Fossil Fuel Subsidy Reform in Mexico and Indonesia-International Energy Agency:
https://www.iea.org/publications/freepublications/publication/PartnerCountrySeriesFossil_Fuel_Subsidy_Reform_Mexico_Indonesia_2016_WEB.pdf
How subsidies work in Mexico (Spanish):
http://www.animalpolitico.com/blogueros-inteligencia-publica/2013/06/13/lo-barato-nos-sale-muy-caro-los-subsidios-a-los-energeticos/
“Myths” around fuel subsidies (Spanish):
http://imco.org.mx/articulo_es/mitos-sobre-el-subsidio-la-gasolina/
Environmental perspective about fuel taxes (Spanish):
http://bibliodigitalibd.senado.gob.mx/bitstream/handle/123456789/3496/1%20reporte_45.pdf?sequence=1&isAllowed=y
Gradual increase of fuel prices in Mexico and subsidies (Spanish):
http://www.dw.com/es/m%C3%A9xico-de-la-reforma-energ%C3%A9tica-al-gasolinazo/a-37082680

Wages in Mexico

Relationship between food and fuel prices and wages in Mexico (Spanish):
http://web.uaemex.mx/feconomia/Publicaciones/e402/EA13-Reyna-Miguel.pdf
“Canada PM talks wages on Mexico visit, amid NAFTA talks”-ABC News
http://abcnews.go.com/International/wireStory/canada-pm-talks-wages-mexico-visit-amid-nafta-50469679
Renegotiation of NAFTA, wages and income distribution in Mexico (Spanish):
http://www.cronica.com.mx/notas/2017/1034635.html