Fossil fuel subsidy phase-out in Mexico

Student Group: 

Fossil fuel subsidy reform is a peculiar case for Mexico. Policies for the phase-out of fossil fuel subsidies (FFS) at a national level are complex. Their tackling involves work in the economic, social and environmental policy sectors. Their complexity is partially driven from the fact that Mexico is an oil producing country. The domestic oil refineries fall short in meeting the national fuel demands. Hence the need to import gasoline and diesel to fill the gap in fuel supply. Regardless of the difficulties, Mexico, has taken action in phasing out its perverse subsidies on fossil fuels.

The delegation of Mexico engaged in the side event convened by the “Friends of fossil-fuel subsidy reform”. This group is an alliance formed by Denmark, Sweden, Switzerland, Norway, Finland, New Zealand, Costa Rica, and Ethiopia. Mexico’s participation was about sharing the advances within the G20 process and the national policy actions.

Ambassador Socorro Flores stated that in the G20, the discussion was around how to phase out and rationalize the fossil fuel subsidies. In the leaders summit of the G20, ministers enhanced and maintained the work of the progress since the summit decision back in 2009. On this issue, she said, “The challenge is still present, some countries have moved forward some are lagging behind”.

For me a sign of progress is the ministerial agreement to a peer-review process to enhance the reinforcement of these policies. Also the different reports published by the IEA, OPEC and OECD, are an example of engagement from specialized agencies and political groups. Given the sensitivity of this issue, the mexican government has taken a cautious and transparent approach in the domestic and international levels. People in Mexico refer to this phase-out policy as the “gasolinazo”, a popular nickname for an unpopular policy. The public is not happy with the fiscal measures. They’re seeing the fuel prices increase one cent per month with no apparent ending.

The way Mexico is implementing its policy is by gradual elimination of the subsidy. The policy is set to eliminate cents off the fuel price on a periodic progressive manner until the subsidy is eliminated. This mechanism provides businesses with inputs for planning. The general public is not used to plan for the finances for the fuel price increase, thus creating public unrest on the issue.  It’s important to note that not everyone is happy, but it’s a first step towards a long-term path.

At the G20, the ministers found that FFS have consequences in reducing energy security and possibly impeding investment in the energy sector. Flores explained, “The first issue is to understand the reasons why governments subsidize in the first hand. Sometimes they are the result of public policy in social welfare, some others use it to foster domestic supply”. She pointed out that for developing countries, FFS imply a burden for the government and provide incentives for inefficient use of fuels.

Pointing out the challenges, Ambassador Flores explained the need to start engaging with the public and start creating awareness. We need to make the population understand the inefficiencies of these policies, she said. Governments need to include compensation mechanisms to start addressing the social issues brought by the phase out of FFS. Flores ended with a clear statement “the bottom line is that in the long term we’ll have more benefits than damages”.
