Mexico has substantial resources of oil and natural gas. In 2022, it was the world’s fifteenth-leading net exporter of oil with USD 31,8 billion in crude oil exports, though production has fallen sharply over the last decade as a result of declining output at the country’s main producing field, Cantarell in the Gulf of Mexico. Oil consumption of Mexico increased from 26.2 million tonnes in 1973 to 95.4 million tonnes in 2022 growing at an average annual rate of 2.88%. Natural gas production started a general trend of decline in 2011, driving up imports. After experiencing a sharp decline, national coal production picked up anew in 2010, only to go down again after a peak in 2011. It stood at 4.3 million tonnes of oil equivalent in 2021. Previously Mexico was a net energy exporter, with more than a quarter of the country’s total production of energy being exported mostly to the United States. However, with the increasing proportion of imports, the country became a net energy importer as of 2016.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
Mexico
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
In December 2013, Mexico’s Federal Government enacted constitutional reforms to restructure the country’s entire energy sector. Prior to these reforms, Pemex (Petroleos Mexicanos), the national oil and gas company, enjoyed a monopoly on hydrocarbon production, natural gas processing, oil refining, and the marketing of oil products. Under the new regime; Pemex must compete with other firms on new hydrocarbon projects. It is still, however, the largest company in Mexico, and one of the largest oil companies in the world. The 2013 energy reform also saw increased transparency within the sector in the establishment of the Fondo Mexicano del Petroleo (FMP) which now independently manages the country’s oil and gas income and redistributes it to the federal budget, oil producing regions and clean energy research and development, among others. To reverse the growing trend of energy imports and increase the refining capacity of Pemex, the current government has enacted a series of measures to incentivise production, rehabilitate the six refineries that make up the National Refining System, build a new Dos Bocas refinery in the state of Tabasco and acquire the Deer Park refinery based in the United States.
The structure of the coal-mining industry in Mexico has undergone tremendous change over the past 50 years. The 1961 mining code, which placed control of capital in the coal-mining industry exclusively in Mexican hands, was followed in 1992 by the Mexican Mining Law allowing control of coal-mining assets by both domestic and overseas mining companies, the latter if they are legally constituted in conformity to Mexican laws. Major players in the industry today comprise a mix of Mexican and foreign invested companies, along with subsidiaries of diversified mining conglomerates.
Changes brought by the 2013 energy reform unbundled the Comisión Federal de Electricidad (CFE) and subsequently allowed private parties to fully participate in the generation, transmission, and distribution of electricity even if the latter two are still heavily dominated by the state. The creation of Mexico’s first investment energy trust, FIBRA E, was one important instrument to increase private sector investment in transmission infrastructure by offering tax breaks to investors. CFE stock certificates were issued in July 2018 representing the first Initial Public Offering (IPO) of a CFE subsidiary, raising almost MXN 22 billion, or over 12% of the total transmission investment needs over 15 years.
Energy prices and taxes
Fuel prices in Mexico are determined by market forces. Prices for gasoline and diesel are set by the market since December 2017 and without a maximum price limitation. LPG, that has had full market prices since January 2017, got a price limitation in 2022. At the same time, the Federal Government sets excise taxes on the sale of gasoline and diesel (Impuesto Especial sobre Producción y Servicios por Enajenación de Gasolinas y Diesel or IEPS). However, with the advent of rising energy prices seen from late 2021 and early 2022, the government has introduced a series of measures to contain the rise in energy prices for consumers. This includes a cap on the price of LPG sold in the residential sector to households to ensure the price of LPG does not go above a certain price level. The government has also created in 2021 Gas Bienestar, a state-owned company to enter in the LPG retail market. Gas Bienestar was also developed after anti-competitive concerns were raised for some of the country’s LPG distributors and due to rising LPG prices for households.
All electricity tariffs were approved by the Secretaría de Hacienda y Crédito Público (SHCP) until the Energy Reform switched this responsibility to the Energy Regulatory Commission (CRE) for all cases, except household consumption and agricultural use. As a result of a policy of subsidies for these two sectors, average electricity tariffs for agricultural users and households have been held well below average costs. However, in 2016, there were also cross-subsidies from the top 1% household consumers, which face a rate above costs for all their consumption units. In 2020, at least in part due to the effects of the COVID-19 crisis, electricity subsidies increased from 2019 levels. Households consuming more electricity were not subject to a Domestic High Consumption Tariff (DAC) due to the impacts of increased home working on electricity consumption during the pandemic.
There is also fuel-tax stimulus (fiscal expenditure) available for the agriculture and fisheries sectors, and excise tax credits against the income tax for general machinery, commercial vessels, to support the private and public transportation of passengers or freight, as well as tourism, and for diesel used in the industry for purposes other than fuelling vehicles.
In 2012, as part of its General Climate Change Law, Mexico implemented a carbon tax as a fiscal instrument to reduce its carbon emissions and to put a price on the negative environmental externalities of fossil fuels. It was legislated as a component of the IEPS in 2013 and came into full force in 2014. Like other jurisdictions with a carbon tax, the tax is applied to fossil fuels based on their carbon emission content with a standard rate in 2020 of MXN 50.32/tonne of CO2 equivalent (tCO2e). However, there are certain exemptions to the application of this tax. Among these are natural gas, which receives a carbon tax price of zero as well as fuels used in production processes other than for combustion, and all aviation kerosene and aviation fuels.
Figure 2. Total tax rebates and support for fossil fuels in Mexico
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
In late 2014, Mexico eliminated the direct support it provided for the consumption of gasoline and diesel fuel through the IEPS, the country’s floating excise tax. Previously, variable rates of IEPS were set by the government based on international prices for the country’s two grades of gasoline, Regular and Premium (low-octane and high-octane gasoline, respectively), and diesel fuel. When international reference prices for these fuels were above (below) the national set prices, IEPS rates would turn negative (positive), thereby generating a tax expenditure (tax revenue). As part of the reform, the Federal Government steadily increased retail prices monthly to reduce the support conferred to consumers.
Together with the lower international oil and fuel prices, these efforts contributed to reduce total consumer support in Mexico, from MXN 223 billion (USD 17 billion) in 2012 to MXN 34 billion (USD 2.6 billion) in 2014. Due to changes to both fiscal and tax regulatory frameworks since late 2014, the rates of IEPS have been positive, generating revenues of around 3.4 % of GDP in 2021. Since 2016, the tax rate is fixed. Also, a fiscal stimulus started to mitigate the variations in international references and the exchange rate, so as to reduce its impact on domestic prices. Since January 1st, 2019, the fiscal stimulus mechanism changed, to comply with the objective of keeping prices from increasing in real terms, and to mitigate their volatility; when the international price is lower than the internal price target, the stimulus for fuels is zero, as happened in late 2019, early 2020 and late 2022 for a brief period. The new mechanism, coupled with lower international prices, resulted in government revenues of MXN 299.5 billion in 2020, and MXN 222.9 billion in 2021. However, when international prices are increasing, as was the case in late 2021, this can result in certain subsidies being reintroduced, despite overall revenue gains for the government.
In 2020, with differences in fuel prices observable with the bordering state of Guatemala, subsidized VAT and IEPS rates for gasoline were also introduced at Mexico’s southern border in the states of Campeche, Tabasco, Chiapas, and Quintana Roo, similarly to existing fuel subsidies at its norther border with the United States. Due to the Covid-19 pandemic and its impact on oil prices and the finances of Pemex, the government has also introduced two important tax credits of MXN 65 billion in 2020 and MXN 73 billion in 2021 to the shared utility tax paid by Pemex, which is the highest share of revenue for the government, representing 85% of revenues for the FMP. To support the production and refining capacity of Pemex while reducing its fiscal burden the government had also introduced other support measures as of 2019 which were maintained during the pandemic including a tax rate reduction to the shared utility tax, which was lowered from a previous 65% to 58% in 2020, to 54% in 2021 and finally to 40% in 2022. The latter tax rate reduction resulted in revenue foregone of MXN 83 billion in 2021, the highest amount for any reported fossil fuel support measure in Mexico that year.
In January 2022, the Mexican government reduced the rate of the Special Tax on Production and Services paid by gasoline sellers and importers to shield domestic consumers from the effect of the global energy crisis. The rate reduction, which reached 100% of the tax from March for diesel and gasoline, is implemented through a dedicated subsidy. This support measure was confirmed and extended within the framework of the Package Against Inflation and Famine (PACIS) from May 2022 onwards. In addition, the government also subsidises electricity rates through a dedicated financial transfer to the Federal Electricity Commission (CFE).
The fiscal cost of support measures for fossil fuels in Mexico was estimated at MXN 923.31 billion in 2022 (Table 1). Sixty-one per cent (61%) was directed at end user beneficiaries, as opposed to 39% directed to firms. Support was mainly given out in the form of tax expenditures (MXN 734.15 billion) accounting for 80% of the total fiscal cost of support measures. Direct transfers amounted to MXN 189.16 billion.
The fiscal cost of support measures for fossil fuels has increased by 927% since 2017. Since last year, tax expenditures have increased by 309%, from MXN 282.25 billion to MXN 734.15 billion and direct transfers decreased by 75%, from MXN 268.74 billion to MXN 189.16 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
55.348 |
48.398 |
125.401 |
146.333 |
282.252 |
734.154 |
|
Direct transfers |
34.559 |
38.262 |
210.812 |
105.969 |
268.735 |
189.156 |
|
Total |
89.906 |
86.660 |
336.213 |
252.302 |
550.987 |
923.311 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
Reduction in the percentage of the excise tax of some fuels |
288.600 |
(Started 2022) |
288.600 |
|
|
Floating Excise Tax on Products and Services on Gasoline and Diesel |
262.460 |
0.000 |
262.460 |
|
|
Complementary fiscal stimulus to automotive fuels |
108.000 |
(Started 2022) |
108.000 |
|
|
Direct transfers |
||||
|
Investment by the federal government for the construction of the new Dos Bocas oil refinery |
129.818 |
(Started 2019) |
129.818 |
|
|
Direct transfer to CFE by the federal government to cover part of the electricity tariff |
54.793 |
32.417 |
22.376 |
|
|
Rehabilitation of the six refineries that make up the National Refining System |
4.063 |
(Started 2019) |
4.063 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Reduction in the percentage of the excise tax of some fuels |
Fiscal stimulus that reduces a specific percentage of the excise tax of gasoline, diesel, and non-fossil fuels. The beneficiaries are taxpayers that import and dispose those products. The percentage is weekly determined by the Ministry of Finance, based on market conditions. In 2022, the fuel stimulus cost (measures 462 and 464) was equivalent to 1.4% of GDP and it did not pressure public finances since it was practically offset by public sector oil revenues surpluses (395 billion pesos). |
|
Floating Excise Tax on Products and Services on Gasoline and Diesel |
Until 2015, the Excise Tax Impuesto Especial sobre Producción y Servicios por Enajenación de Gasolinas y Diesel (IEPS) was variable and used to provide for a price-setting mechanism that considered differences in the domestic price for petroleum products and an international reference price (i.e. the benchmark price). While the prices for gasoline and diesel varied almost daily in the international market, retail prices in Mexico for the country’s two grades of gasoline (Regular and Premium) and diesel fuel, were set by the federal government monthly. When international reference prices were greater than the domestic price, the rate for the country’s excise tax was negative, generating a tax expenditure. In this case, Pemex—the national oil company—obtained a compensatory tax credit equivalent to the price difference, which the company could credit against other taxes such as its own value-added tax or the “Ordinary Duty on Hydrocarbons Production” (Derecho Ordinario sobre Hidrocarburos, a tax on the extraction of hydrocarbon). Conversely, lower international prices triggered an increase in the variable rates of IEPS, which reduced the tax expenditure or resulted in a positive tax. Since 2016, the tax rate is fixed. Also, a fiscal stimulus started to mitigate the variations in international references and the exchange rate, so as to reduce its impact on domestic prices. Since 1 January 2019, the fiscal stimulus mechanism changed, in order to comply with the objective of keeping prices from increasing in real terms, and to mitigate their volatility. |
|
Complementary fiscal stimulus to automotive fuels |
On 4 March 2022, the “Decree establishing complementary fiscal stimulus for automotive fuels” was published in the Official Gazette of the Federation, which aims to protect the purchasing power of Mexican households by avoiding increases in prices of the automotive fuels, given the increases in international references for fuels and crude oil, as well as the exchange rate. This stimulus is complementary to the special tax on production and services (IEPS) and is aimed at taxpayers (producers and importers of fuels), when they sell first-hand in national territory; This stimulus will have an impact on all subsequent operations, benefiting the final consumer. From the operational and control point of view, the design of the stimulus and the rules issued by the Tax Administration Service (SAT) to facilitate its application, allow adequate supervision by the tax authorities and thus guarantee agile attention in the return procedures. Based on this, it is intended to maintain adequate control of first-hand sales, which will allow expedited returns and avoid increases in the price of automotive fuels. The measure came into force on 4 March 2022 and is scheduled until 31 December 2024 |
|
Investment by the federal government for the construction of the new Dos Bocas oil refinery |
In May 2019 the Mexican administration announced the cost of the building of the Dos Bocas new oil refinery in Tabasco. This refinery which is set to be operational as of 2022 will cost in total from 2019-2021 MXN 160 billion pesos, and MXN 50 billion pesos in 2019 alone. The costs in 2020 and 2021 were respectively MXN 41 billion and MXN 38 billion pesos. According to the government, the refinery will lead to the creation of 100 thousand new jobs. The development of the project will be governed by international quality and energy efficiency standards, which will also reduce the cost of the project by up to 40 percent. |
|
Direct transfer to CFE by the federal government to cover part of the electricity tariff |
This measure represents a payment from the Ministry of Finance and Public Credit (SHCP) to CFE to support covering tariffs that are lower than production costs. The figures reported constitutes part of the subsidy to electricity as formally declared in the federal budget. For 2019, MXN 52.086 billion were budgeted in the Presupuesto de Egresos de la Federación (PEF). This subsidy increased in 2020 to MXN 70 billion at least in part due to Covid-19. The government issued in April 2020 an Agreement where CFE would not consider electricity consumption during the health emergency to determine whether a household is subject to a High Consumption Tariff (DAC). This measure was seen as necessary given the higher domestic electricity consumption due to people working from home. This effectively enabled households to consume more electricity without paying a higher electricity tariff. |
|
Rehabilitation of the six refineries that make up the National Refining System |
This support measure is part of the current government's National Refining Program Programa Nacional de Refinación announced in 2018? which seeks to rehabilitate and increase the processing and refining capacity at the existing six oil refineries aside from Dos Bocas, namely the refineries of Salamanca, Madero, Minatitlan, Cadereyta, Tula and Salina Cruz. In doing so, the aim is to reduce dependency on imports of refined oil products. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.