OECD Environmental Performance Reviews: Costa Rica 2023

Executive summary

Costa Rica has made good environmental progress, but could better align itself with more advanced countries

Costa Rica is globally known as a green country and ecotourism destination. It should be commended for reversing deforestation, producing all of its electricity from renewables and committing to net zero by 2050. The country has made some progress in delinking environmental pressures from its economic growth over the last decade. However, energy use and related greenhouse gas (GHG) emissions rose. Air quality is of concern in major urban areas. Increasing population, urbanisation and tourism have strained the undersized water, waste and transport infrastructure and services. Pressures on the environment are likely to grow with rising living standards and climate change.

Zero net deforestation is a major achievement, but biodiversity pressures persist

A megadiverse country, Costa Rica hosts diverse ecosystems and about 6% of the world’s species. Its biodiversity supports the country’s florid nature-based tourism, agriculture and fisheries. However, these activities, along with infrastructure development, pollution and climate change, exert pressures on biodiversity. The country’s extensive protected area network and pioneering Programme of Payments for Environmental Services (PPSA) have helped curb biodiversity loss and extend forest cover to nearly 60% of land. However, land conversion to pastures, crops and urban areas has grown since the mid-2010s. Coastal areas, mangroves and other wetlands have deteriorated. Some marine resources are overexploited.

There is scope to strengthen coherence, implementation and effectiveness of biodiversity policy

Costa Rica has achieved or is on track to achieve most of the 100 targets of the National Biodiversity Strategy 2016-25. The planned update of the strategy is an opportunity to bring the multitude of biodiversity-related programmes and policy measures into a more consistent framework, reduce institutional fragmentation, and improve implementation and cost effectiveness. The strategy should also identify actions to mainstream biodiversity considerations in sectoral policies and reform harmful subsidies. Subsidies linked to production or use of inputs in agriculture and fishing could be replaced with time-bound payments targeted to vulnerable producers, as well as to further encourage sustainable farming and fishing practices. Pesticide use is high in Costa Rica. The recent regulation on agrochemical risk assessment is a step to better control its environmental and health impact.

The government acknowledges the urgent need to complete spatial planning and has taken initiatives to mainstream biodiversity in it. As of July 2021, less than half of municipalities had regulatory plans, with most of them outdated, partial and without an environmental assessment. The lack of land-use and marine spatial plans is an indirect driver of biodiversity loss. It exacerbates Costa Rica’s high vulnerability to climate-related natural hazards and pressures on coastal areas, which host much of the new tourism‑related developments.

Costa Rica has expanded its officially protected areas to cover 25% of land and 30% of marine areas, well above the respective OECD averages. An extensive network of biological corridors ensures connectivity. There is scope to improve the ecological representativeness, management and funding of protected areas. Entrance fees are a large source of finance, but they should be systematically reviewed to ensure cost recovery. The use of concessions for tourism-related services in protected areas should be extended and made more efficient, to provide additional revenues, improve quality of services and engage local communities.

The long-standing PPSA has largely contributed to restoring degraded forestlands. Building on this successful experience, Costa Rica should promptly establish a coherent framework for reinforcing the PPSA and extending it to non-forest ecosystems, in recognition of the valuable services they provide. Fuel tax revenue accounts for nearly 90% of the PPSA funds. The government should further broaden the sources of finance for the PPSA, with a view to delinking its financial viability from fuel tax revenue, which is expected to decline with the progressive shift to electric transport.

More investment in water and waste infrastructure and services is urgently needed

Water governance has advanced. However, the country needs to accelerate and scale up investment in water infrastructure to expand access to water and sanitation services, extend wastewater treatment and reduce water losses. In 2020, only 30% of the population had access to safely managed sanitation. Three‑quarters of households collected their wastewater with septic tanks, which are not regularly monitored. Much wastewater is untreated, resulting in contamination of soil and water bodies.

Costa Rica has made some progress in material recycling, including through several extended producer responsibility schemes. However, waste disposal relies on landfills, with only 7% of waste being recovered (in 2021). Less than half of households properly sort their waste – a major barrier to recycling. The quality of waste management services varies widely across municipalities. Collection fees often do not incentivise waste sorting or cover operating costs, let alone investment in treatment infrastructure. More waste prevention actions are also needed. While low in international comparison, generation of municipal waste has gradually increased since 2016. The ongoing development of the National Circular Economy Strategy aims to address these challenges.

Costa Rica needs to follow through on plans to meet its ambitious climate goals

Costa Rica developed a comprehensive National Decarbonisation Plan (PND) to achieve carbon neutrality by 2050 – one of the few Latin American countries to do so. It set a 2030 target in line with this goal. Further expanding and diversifying renewable electricity sources will be crucial to sustain the electrification of transport, industry and buildings, which is a pillar of the PND. This requires upgrading electricity grids and improving the operating efficiency of power systems. Costa Rica has advanced in rolling out smart meters. However, economic incentives and more stringent energy performance standards are needed to tackle energy use and GHG emissions from transport and buildings. GHG emissions from fuel combustion grew by 11% in 2010-21. Still, net GHG emissions declined (by 13% in 2010-17) thanks to increased carbon removals by forests.

Decarbonising transport is essential to meet climate mitigation goals and improve quality of life

Costa Rica heavily relies on road transport, which accounts for three-quarters of energy-related GHG emissions. GHG emissions from road transport grew by over 30% in the last decade. Road vehicles are also a major source of air pollutants. More than 88% of the population is exposed to harmful levels of air pollution. The vehicle fleet has grown rapidly in the last decade, but most vehicles are over ten years old. Vehicle emission standards are lenient and weakly enforced.

The PND aims to radically increase the role of public transport, cycling and walking in mobility patterns. This is welcome. Actions have been taken to better integrate land-use and transport planning, but progress has been slow. The Greater Metropolitan Area (GAM), where most people live, has no integrated public transport system.

Costa Rica has expanded the charging network for electric vehicles (EVs) and adopted regulations and fiscal incentives to encourage their purchase. The number of EVs has increased in the last few years, but it represents a negligible share of the fleet. EV purchase subsidies should be combined with stringent vehicle standards and higher taxation of conventional vehicles. As in other emerging economies, encouraging the use of electric two/three-wheelers and urban buses would be more cost effective. Investing in an extended, integrated and electricity-based public transport would help reduce car dependence and avoid exacerbating inequality.

The environmental governance system is well established, but implementation could be improved

Costa Rica has comprehensive environmental policy and legal framework and well-developed mechanisms of environmental democracy. It has shown continued commitment to aligning its legislation and practices with OECD standards. However, a fragmented governance, limited institutional capacity and resource constraints have hampered effective implementation. The country should build on the 2022 bill that strengthens the environment ministry’s purview to streamline environmental governance. The financial and administrative capacity of local governments should be strengthened so they can deliver quality environmental and mobility services. Costa Rica should swiftly complete and implement the reform of environmental assessment and permitting, which would bring it in line with OECD best practice. Collection and dissemination of environmental information have markedly improved. However, more work is needed to fill persistent information gaps – including on GHG emissions, waste, air and water quality, and oceans – to inform decision making and engage citizens.

Costa Rica should scale up finance for environment-related investment and improve efficiency of public spending

Public environment-related spending does not seem commensurate with Costa Rica’s goals. Human resources are insufficient to ensure adequate environmental planning, management and enforcement. There is a need to reallocate resources to address infrastructure gaps, ensure the climate resilience of physical assets and improve service delivery. The scale of investment needed to implement the PND 2018‑50 and achieve the Sustainable Development Goals is daunting. It calls for improving the quality and efficiency of public management and spending, engaging the private sector, mobilising alternative sources of finance, strictly enforcing regulations and providing adequate incentives. Costa Rica can build on its environmental reputation and experience with conservation trust funds, debt-for-nature swaps, green bonds and REDD+ to attract international green finance.

Implementing a green tax reform would help improve price signals and raise revenue for the green transition

At 10% of total tax revenue, environment-related taxes are an important source of fiscal revenue in Costa Rica, especially because of low proceeds from income taxes. Fuel taxes are higher than in many Latin American countries, while subsidies are lower. Still, less than half of the country’s GHG emissions face fuel taxation. Costa Rica should adopt a green tax reform and carbon pricing, as commendably outlined in the PND. It should review taxes on fuels and vehicles to better reflect the social costs of their use and encourage a shift towards cleaner vehicles and sustainable transport modes. It should also raise road tolls, which have been unchanged since 2002. Implementing congestion charges would help curb peak-time congestion in critical areas of the GAM in a cost-effective and socially fair manner.

The gradual removal of fuel tax concessions and other environmentally harmful subsidies should be a priority. Increasing allowances for poorer households is a preferable way to shield the population most affected by high energy prices. Costa Rica could build on the finance ministry’s regular stocktaking of tax expenditure to develop a subsidy reform plan. Revenues for environmental taxes and subsidy removal could help finance the transition to a greener economy. Well-targeted and transparent policies for using these additional revenues will be key to improve social acceptability of reforms.