Carbon tax reform in Colombia, a 2023 update

Colombian Context, Tax and Climate Proposal

Let us review Colombia’s strategic vision for achieving the goal of implementing climate commitments to reduce emissions under the Paris Agreement.

By 2050 Colombia needs to reduce its GHG emissions by about 90% compared to 2015 emissions. It must also balance the remaining 10% with proportional national removals (10%). This is aimed towards achieving a net zero balance between GHG emissions and removals (carbon-equivalent) from 2050 onwards¹.

Colombia currently has a robust legal structure of economic and financial tools designed to support various climate change related goals. Among these instruments, the focus is on the implementation of the National Carbon Tax, the second most influential in terms of priority according to Econometría S.A². This tax is part of a comprehensive tax reform in Colombia, based on the following key aspects³:

Tax due as of January 1, 2017.

Presented for the year 2017 a value of $15,000 COP for each ton of CO2 generated by the burning of fuels, according to the CO2 emission factors that each of these has. To put it more simply, it is a payment to be made for impact to the environment caused by the gases coming from the combustion of gasoline, ACPM, kerosene, Jet Fuel, Fuel Oil and Natural Gas.

To date, liquefied petroleum gas has been incorporated into the regulatory framework, while as of 2024 a progressive regulation process on the use of coal will begin.

Colombia has a tax proposal with environmental and climate implications, which can be considered a significant opportunity in the sectors subject to taxation. This proposal not only has the potential to generate economic resources, but also to generate positive impacts in the social, climate and economic sectors of the country.

Tax framework

Now, in accordance with the Mexico2 platform and with an outsider’s perspective, this tax is constituted as a levy on the carbon content of the fossil fuels described in the standard. Similarly, it includes petroleum derivatives and types of fossil gas used for energy purposes, provided they are used in some type of combustion/emission⁴.

With respect to liquefied petroleum gas, the tax is only imposed on sales to industrial users. On the other hand, in the case of natural gas, the tax is only levied on sales to the hydrocarbon refining and petrochemical industries. It should be noted that the tax is not charged on individuals or legal entities obliged to pay the tax that certify that they are carbon neutral, i.e., those that offset all GHG emissions generated by using fossil fuels on which the national carbon tax is levied⁵.

Additionally, and as a current matter, in the case of coal, the tax is generated upon sale to the final consumer, on the date the invoice is issued. It is also applied whenever coal is withdrawn for own consumption, on the date of withdrawal, or when it is imported for personal use, on the date of its nationalization.

Carbon tax graduation

Also, in the case of coal, the tax rate will be applied under the following graduality:

For 2023 and 2024: 0%.
For 2025: 25 % of the full rate value
For 2026: 50 % of the value of the full rate
For 2027: 75 % of the full rate value
From 2028: full rate⁶

It results in a tax applied to the purchase of fossil fuels from the producer or importer. The tax rate is defined by the State and is in accordance with the emission factor of each fuel.

It is levied at the beginning of the distribution chain of liquid fossil fuels and fuel gas for industrial use. In the years it has been operating, the tax has managed to boost the market of verified/certified emission reductions (carbon credits) due to the possibility that law 1819/16 gave when creating it, of not causing the tax. (Ibid., 2).

Non-causation of the carbon tax

On the other hand, as mentioned on Portafolio, the non-causation of the carbon tax is a mechanism that was regulated through Decree 926 of 2017 in Colombia, which allows the carbon tax not to be activated in exchange for the compensation of greenhouse gas emissions that would be generated by the burning of taxed fossil fuels being sold, imported, or consumed.

This compensation is generated through the acquisition of emission reduction certificates or GHG removals that comply with certain conditions and eligibility characteristics to cause the tax⁷.

It is necessary to recognize that this compensation alternative has opened the doors to the development and execution of high impact socio-environmental projects, which allow the conservation of countless hectares of native forests as well as the appropriation and technological promotion, and thus be a means of financing for the improvement of the quality of life of various communities in Colombia. Francisco Ocampo mentioned this by stating that:

“The farmers, afro descendants and Indigenous people who work in the reduction of deforestation, or in reforestation, are the ones who have the possibility of establishing umbrella projects, through associative processes it is possible to generate the seed of strategic alliances with investors, complement each other and promote this type of projects” ⁸.

Finally, the blog La República recognizes the advantages to the project developers, where the money goes directly to the owners of the areas or to those who are implementing projects in the communities. Since the existence of this figure, more than 60 million credits have been moved in this market⁹, an important number for a market in consolidation and a positive reaction to it.

Business impact

Let us then look at the following statements of great relevance in business impact. As mentioned, and highlighted from the article by Aristizábal Alzate, C. E., & González Manosalva, J. L. (2019) where they argue the following:

“The imposition of this carbon tax opens the door to the monetization of carbon certificates, since there are companies that need them to mitigate and make an economic compensation for the negative environmental impacts they generate. In addition, they can be purchased from Colombian initiatives that seek to reduce emissions caused by forest degradation and deforestation (REDD+), with projects proposed in the Clean Development Mechanism (CDM) or reforestation programs; all these developed in the national territory “¹⁰.

“The carbon tax is a tax mechanism that can encourage the development of alternative and clean energy projects that seek the diversification of the energy matrix, the technological reconversion of the automotive fleet and at the industrial level, the increase in the supply of green energy and that, for example, companies invest in Research, Development and Innovation (R&D&I) activities, industrial energy management and in better logistics planning to optimize the use of fuels, whether in the transportation of food, raw materials, products for export and imports, etc.” (Ibid. 10).

“Therefore, it is important that all sectors of the economy begin to develop and implement R+D+I activities in areas related to the rational and efficient consumption of fuels hand in hand with the competent public and private entities, to achieve a possible tax deduction via income tax returns, reduction in the operational costs of companies that have processes involving the combustion of taxed fossil resources or a sale of carbon credits (companies with boilers, transportation and logistics, etc.), with mitigation-oriented measures in the emission of GHGs, energy efficiency, technological reconversion and all those in favor of environmental and economic sustainability, thus applying the double benefit theory” (Ibid. 10).

From this perspective, it is crucial to recognize that carbon credits are an important source of climate finance. Through the trading of these credits, collective councils and Indigenous reserves obtain resources for a variety of purposes: strengthening their governance structures, developing, and implementing sustainable business initiatives, overseeing both deforestation and reforestation, and facilitating access to improved housing and health care. According to Ana Milena Plata Fajardo, Executive Director of BIOFIX, more than 20 councils are currently active in this funding system.

In the future, it is expected that more conservation projects will be implemented in different areas of Colombia, in order to contribute to the compensation of emissions that by law must be complied with by companies, as well as to improve the quality of life of thousands of people throughout the country and protect hundreds of faunae and flora species¹¹.

Conclusion and current affairs on Colombia’s Carbon Tax in 2023

In 2023, we have had important developments in the regulatory framework related to the carbon tax and the application of the carbon tax exemption.

Article 2 of the DIAN decree, Resolution number 000012 of January 31, 2023, establishes that the carbon tax will be calculated as of February 1, 2023. This tax will be calculated according to the taxable bases and rates specified in the resolution. Specifically, the tax on regular gasoline will be $663.16 COP per gallon, while extra gasoline will be taxed at $1,258.66 COP per gallon.

On the other hand, ACPM will be taxed in the amount of $634.74 COP per gallon. In relation to Article 222 of Law 189 of 2016, as amended by Article 48 of Law 2277 of 2022, a rate of ($23,394.60 COP) per-ton of carbon equivalent is established, which will be effective as of 2024.

It is important to note that, within the framework of the tax on gasoline, ACPM and Natural Gas, the price established by Article 2 of Resolution 12 of 2023 of the DIAN indicates that the rates for ACPM, Gasoline and Natural Gas remain frozen at the 2022 values. The weighted price is calculated taking into consideration that 85% of liquid fuels will maintain the 2022 rate, i.e., $18,829 COP, according to ASOCARBONO.

It is also relevant to highlight that for 2023, the percentage of acceptance for the tax exemption goes from 100% of emissions in 2022 to 50% of emissions in 2023.

Regarding the moment when the restriction on the tax exemption due to carbon neutrality certification (where no more than 50 percent of the tax caused may be exempted, even if the neutralization of emissions supported by the verification statement and voluntary cancellation documents exceeds such percentage) comes into force, the Deputy Director of Regulations and Doctrine of the National Tax and Customs Directorate (DIAN) of Colombia explained that this provision is applicable from the date of enactment of Law 2277 of 2022, i.e., from December 13, 2022. It is important to highlight that the procedure to request the exemption from the national carbon tax remains as established in Decree 1625 of 2016, despite the new limitation of 50 percent of the tax caused¹².

At ALLCOT Trading, our mission is to promote additional sustainable impact with every transaction. If you want to achieve this in a fair, transparent, and win-win scenario, contact us and together we will make it happen.

An article by William Parra

References

Gobierno de Colombia. (2021). Estrategia climática de largo plazo de Colombia E2050 para cumplir con el Acuerdo de París. MinAmbiente, DNP, Cancillería, AFD, Expertise France, WRI: Bogotá. COL_LTS_Nov2021.pdf (unfccc.int)

Econometría S.A (2021) Instrumentos económicos y financieros de la estrategia climática de largo plazo de Colombia para cumplir con el acuerdo de parís E-2050. Estrategia Climática de Largo Plazo de Colombia (E2050). Ministerio de Ambiente y Desarrollo Sostenible.

Colombia Impuesto Nacional al Carbono, Estudio de Caso. Mayo de 2019. Link: https://ledslac.org/wp-content/uploads/2019/09/EdC-Impuesto-al-Carbono-Colombia-ago19-comentarios-RA-_VF-rev.pdf

NOTA TECNICA Impuesto al Carbono en Colombia. MEXICO2 Plataforma mexicana de carbono. 2021. Extracted from: COL2021.pdf (mexico2.com.mx)

ABC del impuesto al carbono. ANDI. Link: https://www.andi.com.co/Uploads/ABC%20del%20impuesto%20al%20carbono.pdf

Reforma tributaria Colombia: ¿cómo quedó el impuesto al carbono? Extracted from: https://www.valoraanalitik.com/2022/11/01/reforma-tributaria-colombia-asi-quedo-impuesto-carbono/

Cambios en impuesto al carbono: un riesgo – Extracted from: https://www.portafolio.co/opinion/otros-columnistas-1/cambios-en-impuesto-al-carbono-un-riesgo-574175

Mercado de carbono y tierras colectivas: habla Francisco Ocampo, director ejecutivo de Asocarbono. Extracted from: https://blogs.elespectador.com/actualidad/republica-de-colores/mercado-carbono-tierras-colectivas-habla-francisco-ocampo-director-ejecutivo-asocarbono

Impuesto al carbono recauda en promedio $425.000 millones cada año desde 2017. Extracted from: https://www.larepublica.co/economia/impuesto-al-carbono-recauda-en-promedio-425-000-millones-cada-ano-desde-2017-3261730

Aristizábal Alzate, C. E., & González Manosalva, J. L. (2019). Impuesto al carbono en Colombia: un mecanismo tributario contra el cambio climático. Semestre Económico, 22(52), 179-202. https://doi.org/10.22395/seec.v22n52a8