Fossil fuel subsidies have significantly contributed to Mexico’s environmental degradation, exacerbating climate change and worsening air pollution levels, among other detrimental effects. For example, According to a study by the International Institute for Sustainable Development (IISD), Mexico provided $16.6 billion in direct and indirect subsidies to the fossil fuel industry in 2018. Direct subsidies are financial transfers from the government to the fossil fuel industry. In contrast, indirect subsidies are the industry’s economic benefits from government policies, such as tax exemptions or reduced fees.
The study further indicates that direct subsidies amounted to $2.6 billion in 2018, while indirect subsidies were $14 billion. Indirect subsidies accounted for most of the subsidies due to the government’s low tax rates, reduced fees for permits, and other incentives for the fossil fuel industry. Mexico is a significant oil producer, and the state-owned company Petróleos Mexicanos (Pemex) dominates the market. As a result, Pemex is highly dependent on government subsidies to keep the company profitable.
The government has subsidized Pemex for decades to keep fuel prices low and support the domestic market. However, this has contributed to the company’s debt and prevented it from investing in renewable energy sources, which would reduce the country’s dependence on fossil fuels. Moreover, these subsidies do not benefit the poorest sections of society, as only 12% go towards fuel consumption by low-income households. The rest of the subsidies benefit the wealthiest segments of the population, who consume more fuel.
Mexico’s current administration has pledged to reduce fossil fuel subsidies and increase investment in renewable energy sources. However, progress has been slow, and the country continues subsidizing the fossil fuel industry. Per the IISD, the government provided $8.1 billion in fossil fuel subsidies in 2019, a significant reduction from the previous year. Still, the subsidies remain high, and much work remains to be done to phase them out completely. Below is a list of Mexico’s leading fossil fuel subsidies.
- Direct Subsidies to Oil and Gas Companies: Mexico’s state-owned oil and gas company, Petróleos Mexicanos (Pemex), receives significant direct subsidies from the government to keep the company profitable. In 2020, the Mexican government gave Pemex a $6.6 billion bailout to help the company pay off its debt and invest in new oil projects. This direct subsidy is just one example of the government’s oil and gas sector support.
- Fossil Fuel-Supported Home Energy Efforts The Mexican government provides subsidies to help low-income households pay for energy. Still, most of these subsidies go towards fossil fuel-supported home energy efforts. For example, the government’s energy program, Progresa, provides financial support to help households purchase liquefied petroleum gas (LPG) for cooking and heating. However, LPG is a fossil fuel, and its use contributes to air pollution and climate change.
- Subsidies of Fossil Fuel Imports and Exports: Mexico also provides subsidies to support the import and export of fossil fuels. For example, the government provides tax incentives for companies to import gasoline and diesel fuel, which helps keep prices low for consumers. In addition, Mexico’s government-owned electricity company, the Federal Electricity Commission (CFE), also exports subsidized natural gas to the United States, where it is used to generate electricity. These fossil fuel exports generate revenue for the country but also contribute to global greenhouse gas emissions.
- Other examples of Fossil Fuels Subsidies: In addition to the examples listed above, Mexico also provides indirect subsidies to support the fossil fuel industry. These include tax exemptions, reduced fees for permits, and other incentives that make it easier and cheaper for companies to operate in the sector. These subsidies can have significant economic impacts, contribute to environmental degradation, and exacerbate climate change.
While these subsidies may have some economic benefits, they also have significant environmental costs and contribute to global greenhouse gas emissions. As such, it is crucial that Mexico work towards phasing out these subsidies and investing in renewable energy sources to create a sustainable future for the country.
Submitted by Climate Scorecard Mexico Country Manager Pablo David Necoechea Porras