Coasta Rica Carbon Tax

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Once the emission targets and trading mechanism were established under Kyoto Protocol participants were able to formalize potential strategies to reduce emissions. Also important, natural market mechanisms allow for initial pricing of credits. Base on information from Costa Rica’s government, the cost of switching farmers to forest is $10.00 tC. From 0-5,000,000 tC Costa Rica’s fixed cost is $10.00. The marginal cost increases slightly for an additional 1,5000,000 tC. To sequester more than 7,000,000 tC (total sequestration) the cost jumps significantly above $20.00 tC. As a result, beyond $20.00 tC Costa Rica will experience increase competition from U.S. and other sellers of reforestation credits. More important, not knowing the cost structures of competitors (who have significantly larger landmass) Costa Rica’s fixed cost may automatically price them out of the market.

One alternative is to go to market and distinguish itself from its competitors and maintain floor cost of $20.00. Costa Rica has a long history of an environmentalism and stability. Buy publicizing its economic growth and democratic government Costa Rica can offer buyers assurance of transparency and trust. Even with transparency and trust, it can be assume buyers of carbon credits are rational actors and are price sensitive. At $20.00 tC Costa Rica would be competing with U.S. (mostly likely price just under $20.00) and Bolivia (pricing $15.00-$20.00 tC).

Another alternative is for Costa Rica to wait for markets to mature more and come to market with alternative carbon credit products. Given Costa Rica’s small landmass and existing conservation and forest its capacity to generate ‘additional’ credits via reforestation is finite. Costa Rica infrastructure that supports electronic manufacturing that can transition over to emission reduction technologies. With the reducing in emissions Costa Rica would be able to provide a diversified portfolio to carbon credit buyers. The diverse portfolio would contain credits with different levels of abatement costs making them more attractive to a larger pool of buyers with varying abatement costs. This approach requires us to acknowledge the pricing for carbon credits is fluid in an open market with increase sellers and buyers. A more parties participant in a trading market, price direction becomes more sensitive to macroeconomic factors – number buyers, number sellers, cost of execution, regulations, etc. As Annex A countries seek to reduce their emissions by least costly means it should be acknowledge new technologies will become cost effective. With new technologies Annex A countries can invest in themselves and generate revenue from selling excess carbon credits.

Recommendation best course of action

Vice President and Minister Environment and Energy, Elizabeth Odio should sell carbon records sooner rather than later on CDM, and sell 4,000,000 reforestation carbon credits and set price at $14.00 tC.

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