Innovations in Carbon Pricing: Latin America's Carbon Markets

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Latin America is emerging as a global leader in carbon pricing. From innovative policy instruments to thriving local and internationally connected carbon markets, the region has a deep commitment to ambitious climate action and is helping shape the future of carbon pricing initiatives (CPIs). In this article, we explore Latin America's carbon pricing journey, including the key drivers behind the region's innovations, the current state of play, and the implications for the future of the global carbon market. We examine how countries like Mexico, Colombia, and Chile leverage a mix of carbon taxes, emissions trading systems (ETS), and other tools to drive decarbonization and support sustainable development. We also shed light on the role of voluntary carbon markets (VCMs) in the region, highlighting how Latin America has become a major source of carbon credits, particularly in the forestry sector.

Through this exploration, we aim to provide valuable insights into the challenges, opportunities, and best practices emerging from Latin America's diverse CPI landscape. By understanding the region's experiences and lessons learned, we can better understand how Latin America sets the stage for the future of global carbon markets and how other regions can learn from its example.

The Role of Regional Climate Policy

The region has ambitious climate commitments that are underscored by the Paris Declaration on Carbon Pricing in the Americas, a pledge by government leaders from several countries and subnational jurisdictions across the Americas. The declaration, which was signed in December 2017, affirms a shared vision of regional cooperation on carbon pricing, recognizing it as a "central economic and environmental policy instrument for ambitious climate change action." The signatories pledged to collaborate on strengthening measurement, reporting, and verification (MRV) systems, exploring common standards to ensure environmental integrity, and sharing lessons learned to build technical capacity throughout the region. 

Globally, 74 government-mandated CPIs are in force, covering 23% of global emissions. In Latin America, Argentina, Chile, Colombia, Mexico, and Uruguay all have national-level carbon taxes, with Mexico contributing four subnational carbon tax programs and a national Emissions Trading Scheme (ETS). In the voluntary domain, the region has been the world's second-largest supplier of carbon credits for a number of years, consistently producing around one-fifth of the global supply.

Among the CPIs being implemented in Latin America are a range of innovative and sometimes hybrid approaches adapted to domestic political contexts and economic circumstances. Across the region, the carbon taxes now in place have been introduced as part of broader tax reform efforts rather than as standalone policies. While integrated into larger fiscal strategies, these taxes are designed to achieve specific policy objectives that vary depending on the country's context and priorities. One common goal is establishing a price signal for carbon emissions, making polluting activities more expensive and thus incentivizing companies and individuals to reduce their greenhouse gas (GHG) emissions by adopting cleaner technologies and practices, in line with the "polluter pays" principle. Some of the countries frame carbon taxes as environmental taxes aimed at internalizing the external costs of emissions and promoting sustainable development, with co-benefits like improved air quality. Revenue generation is another key objective of the various carbon taxes. By taxing carbon-intensive fuels or activities, Latin American governments can raise funds to support various public initiatives, such as health and education programs, achieving both environmental and social goals.

Additionally, Latin American countries increasingly view market instruments such as ETSs as complementary to carbon taxes rather than replacements. Mexico has implemented carbon taxes and an ETS as part of its carbon pricing strategy. Using both instruments in tandem results in a more comprehensive carbon pricing approach, with taxes providing a stable price signal and ETSs offering flexibility and cost-effective emission reductions. Together, they can cover different sectors and drive decarbonization. Moreover, auctioning ETS allowances can generate revenue to support green investments and transition efforts.

To better understand how these carbon pricing trends are unfolding across Latin America, let’s examine how four countries in the region are leveraging a mix of carbon taxes, ETSs, and other tools to drive decarbonization and support sustainable development. 

How Climate Policy Plays Out on the Ground

Brazil has been at the forefront of carbon market development in Latin America, with efforts dating back to 2009 when the country introduced the concept of a “Brazilian Market for Emission Reduction” in its National Climate Change Policy, just four years after the establishment of the European Union’s ETS (see our earlier article for more on this pioneering instrument). In 2017, the National Policy for Biofuels (RenovaBio) was established, which includes a mechanism for trading emissions reduction units, providing a precedent for trading carbon credits in Brazil. The country has also made significant progress toward its Nationally Determined Contributions (NDCs), which commit to reducing GHG emissions by 37% in 2025 and 43% in 2030, compared to 2005 levels. Much of this success can be attributed to the reduction of emissions from land use, land-use change, and forestry, traditionally the largest contributor to Brazil's emissions.

In 2024, Brazil's CPIs are expanding under the administration of President Lula da Silva, with growing expectations for increased scope in both compliance and voluntary markets. The government has laid the groundwork for an ETS and carbon tax to cost-effectively meet Brazil's mitigation targets. The Ministry of Economy is working on a regulatory impact assessment of a national mandatory GHG emissions/removals registry in order to implement a robust CPI. 

In the VCM, Brazil is Latin America's leading carbon credit supplier, with over 5 million Gold Standard and Verra credits issued in 2023. The majority of these come from REDD+ projects. The government has been instrumental in structuring the VCM through initiatives like the national Foresta+ program, which incentivizes payments for ecosystem services and ensures returns on investments in these projects. As Brazil holds 50% of the world's potential for REDD+ and restoration projects, it will likely remain a primary supplier in the coming decades.

Mexico, in its 2020 updated NDC, committed to unconditionally reduce its emissions by 22% below a business-as-usual (BAU) scenario by 2030. As noted earlier, the country is already home to a national-level carbon tax, four subnational carbon taxes, and a national ETS, making it a clear leader in terms of concrete CPI experience. The legislative foundation for these schemes is the General Law on Climate Change of 2012, which was updated in 2018 to bring the country’s emissions reduction targets in line with the Paris Agreement. Since 2014, an excise tax has been in place at a rate of USD 3.5/tCO2, which is applied to CO2 emissions from all sectors. Taxpayers can choose to pay this tax through the delivery of carbon credits, but these must originate from projects developed in Mexico that are endorsed by the UNFCCC. Revenues are allocated to the country’s general budget, and no specific uses are defined. In addition, Mexico’s subnational carbon taxes cover the states of Queretaro, Mexico State, Yucatan, and Durango, which were implemented in 2022.

The Mexican ETS was launched in January 2020. It covers direct CO2 emissions from fixed sources in the energy and industry sectors that emit at least 100,000 tCO2 per year, accounting for approximately 40% of national GHG emissions and 90% of emissions reported in the National Emissions Registry. It began with a Pilot Program consisting of two phases: the pilot phase from 2020 to 2021 and a transition phase in 2022. Full implementation has been delayed to later this year due to political wrangling over the wording of final regulations. 

Colombia, in its NDC, committed to limit emissions to 169.44 MtCO2e in 2030 (equivalent to a 51% reduction compared to BAU levels), and to achieve carbon neutrality by mid-century. The Colombian national carbon tax, which was launched in 2017 as part of a more general structural tax reform, is a tax on the carbon content of liquid and gaseous fossil fuels, with some exemptions for solid fuels like coal and natural gas used outside refineries or the petrochemical industry. The tax applies at various points in the fossil fuel distribution chain and allows companies to meet their obligations through domestic offsetting credits. As of 2023, 80% of the tax revenues are being used for climate change-related issues, while the remaining 20% fund the substitution of illicit use crops. In December 2022, the Colombian Congress approved reforms to the carbon tax, increasing the tax rate to approximately USD 4.43/tCO2e for petroleum derivatives and fossil gas used for combustion. The reform also expands the taxable base to include thermal coal, with a gradual implementation until 2028. The tax covers GHG emissions from all sectors with minor exemptions, and the government sets the price at a fixed rate except for coal, which will increase gradually. Sellers and importers of covered fossil fuels are liable for the bimonthly payment of the tax, but emitters can avoid payment by achieving carbon neutrality through the retirement of carbon credits generated by projects in Colombia.

Colombia’s ETS has been under development since 2016. In 2018, the country adopted a law that outlines provisions for establishing the "National Program of Tradable Greenhouse Gas Emission Quotas" (PNCTE). The Ministry of Environment and Sustainable Development is leading on this CPI, and is charged with determining the number of allowances (in line with national mitigation targets) and overseeing their allocation, primarily through auctions. The law includes crediting provisions for voluntary actions by non-regulated entities, and the PNCTE is intended to complement the carbon tax. The ETS design is currently being analyzed, with the goal of full implementation by 2030, as set by the "Climate Action Law" that came into force in December 2021. This law also mandates reporting direct and indirect GHG emissions and appoints an independent group of experts to generate recommendations for developing the Colombian carbon market.

Chile laid the groundwork for its carbon tax in 2014 as part of broader tax reforms to increase taxes for big businesses and lower them for individuals. It came into effect in 2017 and was amended in 2020. Throughout its lifetime, the tax has been levied at a rate of USD 5.00/tCO2e, which, in Chile, is widely considered too low to have a meaningful impact. In December 2021, the Chilean government recommended a CO2 price of at least USD35/tCO2as part of its updated long-term energy policy. Gabriel Boric, the country’s current and youngest-ever president, is prioritizing confronting the climate crisis and has proposed a ‘Green Tax Reform’ that includes a gradual increase of the carbon tax up to USD 40/tCO2, although no timeframe for this has been specified. In parallel, the 2022–2026 Energy Agenda published by the previous government in August 2022 stipulated that a pilot ETS project for the energy sector be developed. This has the backing of the current administration but is still a work in progress.

Shortly after Boric’s party took power, Chile passed the Climate Change Framework Law in June 2022. This legally binding legislation establishes a framework for implementing policies to mitigate and adapt to climate change and transition to a low-carbon economy. The Law sets a target for Chile to achieve carbon neutrality by 2050 and enshrines the country's NDC target. It represents a significant shift in Chile's approach to environmental policy, as it distributes the responsibility for climate action across 17 national ministries, regional governments, municipalities, and even the private sector, rather than solely relying on top-down missives from the Ministry of the Environment.

Drivers of Latin American Carbon Markets

Chile’s multi-stakeholder strategy dovetails with the increasingly cooperative approach being taken by the international community in relation to climate change, particularly in relation to affected countries in the Global South. One of the key financing instruments used to progress CPIs across Latin America is the World Bank’s Partnership for Market Implementation (PMI), which is funded by various governments in the Global North. The PMI is the successor program to the Partnership for Market Readiness (PMR) effort that, from 2011 onwards, has supported emerging economies and developing countries to design and deploy carbon pricing and market instruments facilitating the reduction of emissions. Through its provision of funding, expertise, and a platform for knowledge sharing, the PMI assists countries in designing and implementing ETSs, carbon taxes, and new market mechanisms. The PMI also facilitates the creation of robust MRV systems, which are widely acknowledged as essential for ensuring the integrity and effectiveness of carbon markets.

Since its inception, the PMI/PMR has provided technical assistance to 23 countries worldwide to design and deploy CPIs, including direct support to Argentina, Brazil, Chile, Colombia, Costa Rica, Peru, and Mexico. In addition to hands-on technical assistance, the PMR has conducted country-specific studies to guide governments on successful strategies for carbon market implementation. These studies offer insights into best practices and potential pitfalls, enabling Latin American policymakers to make informed decisions when designing and rolling out their CPIs. In Colombia, for example, PMR conducted an evaluation of ETS system design, an impact assessment of an ETS on sectoral competitiveness, and a study on design options for a mandatory GHG reporting program.

In addition to international initiatives, country-level economic incentives in the form of tax revenues serve as another clear driver of CPI adoption. Allocation methodologies vary across Latin America, with some countries earmarking funds for specific purposes. For example, Argentina has chosen to distribute its carbon tax revenues across multiple sectors: most of the funds are channeled into the social security system, while the remaining revenues are allocated to transport infrastructure investments, the national housing fund, and sub-national development projects. In Colombia, the "Sustainable Colombia Fund," which supports sustainable practices and projects in areas affected by the nation's long-standing armed conflict, receives some of the funds. In addition, the country has started channeling some of the revenues toward a new “Fund for Life and Biodiversity", which will help protect ecosystems in the country and is administered by an independent trust rather than a government ministry:

Beyond tax revenues, countries’ ambitions to join international bodies drive CPI adoption: Both Argentina and Colombia are seeking to join the OECD and have had to introduce environmental taxes as a prerequisite to membership. These efforts to align with international standards and best practices have, therefore, also contributed to the growth of CPIs in the region.

Another factor shaping the carbon market landscape in Latin America is the region's extensive—though threatened—forest cover, which has made the region a significant source of forestry-sector credits in the VCM. Countries like Brazil, Colombia, and Peru, which are home to large portions of the Amazon rainforest, have been at the forefront of implementing REDD+ projects. Of the 79 projects issuing REDD+ credits globally, 60% are in Latin America. These initiatives have attracted criticism in recent years, but according to Sylvera’s State of Carbon Credits 2023 report, there remain many mid- and high-quality projects under this umbrella, such as the highly rated Tambopata in Peru. Such initiatives contribute to global climate change mitigation efforts and support local communities that depend on forest resources for their livelihoods. By engaging these communities in project design, implementation, and monitoring, REDD+ projects can continue to deliver a range of social and economic co-benefits, such as job creation and the preservation of traditional knowledge. 

REDD+ projects are long established in the region and, as noted, are expected to continue to represent a high proportion of Latin American carbon credits going forward, but a more recent noteworthy trend is the growing engagement on CPIs from the region’s powerful oil and gas sector. As these companies face increasing pressure to decarbonize their operations and offset their emissions, they become both key consumers of carbon credits and influential players in shaping the market's future. For example, Colombia's Ecopetrol has announced ambitious net-zero goals, signaling a growing demand for carbon credits from the industry

Moreover, the region's existing oil and gas infrastructure, including reservoirs that offer geological carbon storage potential, presents opportunities for developing Carbon Capture, Utilization, and Storage (CCUS) projects. Petrobras currently oversees the world’s largest CO2 injection project, which sequestered 10 million tonnes in 2022 alone and has cumulatively removed over 40 million tonnes. As these projects expand and new ones emerge, there is a growing need for robust market infrastructure to support the integration of these cutting-edge CCUS-derived carbon credits into the broader carbon market ecosystem.

Regional infrastructure driving regional growth

Recognizing the growth and potential of Latin American carbon markets, regional carbon standards and registries, such as Cercarbono and EcoRegistry, emerged to meet market demand. Juan Duran, CEO of Ecoregistry, explains that:

When EcoRegistry and Cercarbono started, we responded to a specific need in the Colombian market and later we recognized that the specific need was in other markets as well. From EcoRegistry's perspective we focused on developing a platform that collects all the information, documentation and data that backs up the issuance of any environmental asset ... From Cercarbono's perspective it was important to identify the realities on the field and address the solution as a bottom up developed standard, like the purpose of the Paris agreement. They are also very effective, answer with speed and are implementing new technologies to scale their proposal.

When discussing the interplay between the regional voluntary and compliance markets, Juan emphasizes that:

In Latin America we have a mixture of compensation markets that are evolving and accept units form the voluntary carbon market for that compensation. We have the examples in Colombia, Querétaro in México, Chile and others that are coming. This solution leverages the knowledge acquired from the voluntary carbon market and allows the governments to engage faster. We see an evolution with coming regulation that will focus on enhancing integrity and quality in the project implementation, together with more regulation in the traceability of the compensation. We think that this combination between the public and private sector can be very efficient and boost the development of the ecosystem in LATAM.

Moving forward Juan says there are a few areas to be excited about in Latin American carbon markets:

There are big markets that we are expecting to come, like the Brazilian market, and more states in Mexico being involved in the carbon markets. You also have other countries like Peru, Ecuador, Panamá and Costa Rica willing to participate in such markets. I believe that each country will find the best way of implementing a carbon market, and afterwards there should be some kind of integration between all of them. Those times will be very exciting.

Future Developments

Looking to the future, another significant trend we believe will reshape carbon markets in Latin America is a gradual shift away from crediting opportunities in the power sector, which had previously been the region’s second-largest sector behind REDD+. As renewable energy technologies become increasingly cost-competitive, deploying clean energy solutions becomes the new BAU. This transition necessitates reorientating carbon market investments toward other sectors and technologies that require additional support to scale up their mitigation efforts. There is, therefore, an increasing amount of direct investment into emerging technologies and gigatonne-scale nature-based solutions (NBS). As well as CCUS, Direct Air Capture (DAC) can play a crucial role in achieving net-zero emissions in Latin America (for more on DAC, see our article on emerging CDR technologies). By supporting the development and deployment of these technologies through carbon market mechanisms, the region's countries will position themselves at the forefront of the global low-carbon transition.

Similarly, investing in NBS, such as reforestation, agroforestry, and ecosystem restoration projects, can deliver significant climate benefits while supporting biodiversity conservation, water resource management, and sustainable livelihoods for local communities. However, as the media controversies surrounding the quantification of the benefits of NBS showed, improving and assuring market integrity will be critical in this space. A recent study by the Development Bank of Latin America and the Caribbean (CAF), the ICVCM, the VCMI, and the Institute of International Finance highlights the need for new regulations in the region. The study, presented at COP28, proposes recommendations to create VCMs with high-integrity criteria in Latin America and the Caribbean. Challenges such as double-counting, the risk of non-permanence in NBS projects, and the need for robust MRV systems are all topics being addressed to maintain the credibility and effectiveness of the market.

That said, the emerging solutions touched on above offer other promising avenues for enhancing market integrity. Once implemented, they should result in further investments flowing into the region. At Neutral, we’re excited about what the future will bring in that region - and are committed to bolstering Latin American carbon markets by working with the most innovative players from across the continent—including EcoRegistry and Cercarbono—to help them scale.

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Note

This article draws extensively on data contained in the following report:

Sullivan, K. et al. (2021) Status and trends of compliance and voluntary carbon markets in Latin America. ICAP and IETA. Available here.

In the many cases where the situation has evolved in the three years since its publication, we cite the up-to-date figures from the World Bank ‘State and Trends of Carbon Pricing Dashboard here

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