Costa Rica boasts a high standard of living, a well-developed system of social benefits and the lowest poverty rates in Latin America and the Caribbean. With a population of almost 5 million, Costa Rica has managed to rapidly decrease infant mortality and increase life expectancy with great strides in healthcare, sanitation, access to electricity, education and clean water [1].

Costa Rica’s GDP per capita has tripled since 1960, reaching an average growth of 4.5 percent between 2000 and 2013, compared to the regional average of 3.8 percent for the same period. In 2017, the services sector accounted for 73.9 percent of GDP while employing 64 percent of the labor force, followed by industry accounting for 20.6 per cent of GDP and employing 22 percent of the labour force and agriculture, forestry and fishing (5.5 percent of GDP and 14 per cent of the labour force) [2]. Costa Rica has expanded its economy to include strong technology and tourism industries.

The country’s main imports are raw materials, consumer goods, capital equipment, petroleum and construction materials while exports are dominated by agricultural commodities: bananas, pineapples, coffee, melons, ornamental plants, sugar; beef; seafood; electronic components, medical equipment.

Fossil fuels represented 18 percent of total installed capacity in 2016. In 2017, Costa Rica produced almost all of its electricity from renewable sources, with 80 percent from hydroelectric power [3]. The country aims to decarbonise its economy by 2050 and has launched an economy-wide plan in line with the Paris Climate Agreement and the 2030 Sustainable Development Agenda [4].

Overall Fiscal Profile

Over the past 25 years, Costa Rica has enjoyed strong and stable economic growth, with a rate of 3.8% in 2017. Except for the fall in GDP growth in 2009 when it dropped slightly below zero, but rapidly recovered to 4 percent the following year. This growth is mostly a result of an outward- oriented strategy, based on an openness to foreign investment and gradual trade liberalization [5].

The fiscal situation and persistent inequality are two remaining development challenges facing the country. Income inequality in Costa Rica is high by Latin America standards and has been rising in recent years according to the OECD [6] reflecting a weak system of redistribution through taxes and transfers due to their small size, low progressivity and poor targeting; and labour market conditions with high and rising unemployment and informality. In 2017, unemployment reached a rate of 20 percent among the youth (15-24 years) and a rate of around 9 percent for the total population. The OECD recommends strengthening efforts to enforce minimum wages and improve job-quality; labour market reforms together with anti-poverty policies; and the introduction of more effective taxes and transfers to compensate for growing disparities [7].

The 2017 OECD Tax Policy Review of Costa Rica [8] recommends various tax reforms to ensure the sustainable development of the economy which includes raising tax revenues primarily by broadening tax bases, tackling tax avoidance and evasion and bringing in more informal taxpayers within the formal economy [9]. In addition to raising more tax revenues to balance its budget, according to the OECD, Costa Rica should also address the distortive nature of its tax mix and enhance the redistributive role of its tax system, in particular, shifting taxation away from social security contributions (SSCs) towards less economically distortive taxes including environmentally-related taxes, as well as strengthening the role of the personal income tax (PIT) and harmonising the tax treatment of different types of labour income [10]. Furthermore, the OECD warns that sustained economic growth will hinge on restoring sustainability of public finances, as deficits rise, debt payments soar and the ratio of public debt to GDP has doubled in the past nine years [11]. According to estimates by CEPAL, between 2017 and 2018, gross public debt rose in 14 out of 18 Latin American countries, with the largest increases occurring in Argentina, Costa Rica and Brazil at 28.3, 3.8 and 2.7 percentage points of GDP, respectively [12]. Furthermore, capital spending was reduced in Costa Rica as part of a fiscal adjustments (0.6% of GDP), which had major impact on primary balances (central government primary balance went from -2.5 percentages of GDP in 2016, to -3.0 in 2017 and -2.4 in 2018). Nevertheless, Costa Rica’s debt increased close to 4 percentage points of GDP in 2018, leading central government gross public debt to reach 53 percent of GDP in 2018.

Policy and Legal Framework for a Green Economy

Costa Rica is a global leader for its environmental policies and accomplishments [13]. Costa Rica recognizes the aggregate value of the environmental services offered by its forest resources which also have enormous financial potential, particularly in terms of tourism. To protect its forests many innovative financing mechanisms have been introduced where smallholder owners of natural forests and forest plantations receive direct payments for the environmental services they provide [14]. The Forest Law 7575 [15] of 1996 provides the legal basis for environmental service payments, while the Biodiversity Law outlines Costa Rica’s contribution to safeguarding biodiversity conservation as a global common, in line with International agreements. The Forest Law states that a third of the funds collected annually from the tax on fuels and hydrocarbons are to be dedicated to the Payments for Environmental Services Programme (explained below). The budget of the Fund is formed mainly of contributions from the Ministry of Environment and Energy, donations from international and national organisations and entities, taxes, fines and revenues associated to forest activities, and forest bonds.

In 1996 the government also created the National Forestry Fund (Fonafifo), consolidating and institutionalizing financial incentives for environmental services. It stipulated that a share of internal revenues from fossil fuel taxation would be earmarked for the fund, to kick start the process. In addition, they implemented an innovative initiative whereby a bank issued debit cards that raised money for conservation, which was then donated to the Fonafifo to protect forest areas. The fund offered landowners per-acre financial incentives to conserve their land and prevent it from degrading, leading to improved land management and reforestation. Both individuals and entire communities benefit from the fund, that helped create 18,000 jobs and indirectly support another 30,000. It is financed from several sources, including foreign investment and loans [16]. In the 1940s, 75 percent of the country was covered in tropical rainforest, by 1983 only 26 percent of the country retained forest cover and deforestation rate had risen to 50,000 hectares per year [17]. In 1998, the deforestation rate had dropped to zero, and today forest cover has increased to 52 percent [18].

In 1997, Costa Rica created a programme of Payments for Environmental Services (PES) with the goal to ensure the provision of forest environmental services: biodiversity protection, carbon sequestration and storage, water protection and scenic beauty [19]. The PES scheme rewards landowners for maintaining their land and environmental services, bans deforestation and allows landowners to sell the environmental services that forests provided [20]. This pioneering program has been successful in promoting forest and biodiversity conservation; making Costa Rica the only tropical country in the world that has reversed deforestation.

Other innovative mechanisms are the Environmental Service Certificates, which are issued for voluntary contributions by the private sector, and the funds are used to finance the programme of payments for environmental services. The government has also signed agreement with hydro-electric companies for them to deliver payments to FONAFIFO for the protection of water resources.

In 2008 the National Biofuels Programme [21] was introduced to develop the national biofuels industry to improve energy security and efficiency by progressively replacing fossil fuels with renewable energy sources of national origin, mitigate climate change, reinvigorate the agricultural sector and foster socio-economic development. In 2009, a regulation to foster the development of the biofuel industry [22] was adopted which regulated the production, transportation, storage and trade of biofuels. The Decree also set up the National Research and Development Bioenergy Policy to enhance the environmental sustainability of biofuel production, increase production, and support research in new sources of biomass. Moreover, it included biofuels in the carbon markets and established the priority of food production over biofuels. In 2017, this regulation was superseded by the Regulation of liquid biofuels and their mixtures [23].

The 2010-2015 National Energy Strategy [24] sought to address major challenges in Costa Rica’s energy sector by shifting from a fossil fuel based energy system (mainly imported oil) towards locally harnessed renewable energy sources by increasing the use of biofuels, without competing with food production. The Strategy also sought to expand the country’s power generating capacity by prioritizing the construction of large renewable energy power plants installed by the national utility (ICE) to add at least 1400 MW during 2010-2020 and to increase the participation of other actors, including the private sector, in the development of new projects incorporating at least an additional 600 MW of capacity between 2010-2020. Figure 1, extracted from International Energy Agency (IEA), shows the different sources that supply energy, and Figure 2 shows a significant increase in supply of electricity from renewables between 2010-2015. The National Energy Plan [25], which came into force in 2015 and covers the period until 2030, focused even more on the development of renewable energy, embracing new technologies and optimizing technical criteria.

Figure 1:

Figure 2:

In 2010, law 8839 [26] was developed to improve waste management. Like many developing nations, Costa Rica also faces the challenge of deficient infrastructure and barriers to the development of efficient and sustainable waste management practices, such as lack of landfills that do not leak or leach into the water. To counter this issue the government is finding innovative mechanisms, such as the recent public-private partnership that has led to the creation of “ecolones”, a recycling incentive program where an individual receives virtual money for the recyclable materials he/she bring to the designated collection center [27].

Recently, the government adopted a decarbonization plan for 2050 that offers a roadmap to achieve “zero net emissions” while still allowing the country to grow economically [28]. The plan sets very ambitious goals such as ensuring all buses and taxis run on electricity by 2050, creating an electric train line connecting half of the neighborhoods in San Jose metropolitan area, cutting the number of cars circulating in urban areas by half by 2040. However, challenges to implementing the plan have been highlighted by government officials such as the dependence on oil revenue given that fuel taxes, vehicle import taxes and driving taxes account for an estimated 12 percent of government revenue. To facilitate the phase out of fossil fuels the government will have to push for green tax reform, increase research and investment into alternative fuels and help workers transition to clean energy jobs, said Costa Rica’s environment minister, Carlos Manuel Rodríguez [29].

Fiscal Measures for a Green Economy

Regulations on the efficient use of energy and tax incentives came into force in 1994 [30] which encourage the development and use of renewable energy sources, exempts equipment used for renewable energy from import duties and provides several tax exemptions (e.g. excise tax, ad valorem tax, general sales tax, specific customs tax) for renewable energy sources. Tax exemptions cover equipment including PV panels, solar water heaters, and wind and hydro equipment for private electricity generation. The Regulations also mandate large consumers (> 240 MWh/year) to develop energy plans that include energy efficiency and renewable energy options.

Following the 2008 National Climate Change Strategy, Costa Rica developed a national carbon market as part of its initiatives to reach carbon neutrality by 2021 [31]. Adopted in 2011, the National Norm of Carbon Neutrality defines the conditions in which businesses and organisations can receive a carbon neutral certification. The norm regulates measures to reduce carbon emissions, to be complemented by other programmes under the Clean Development Mechanism (CDM), and the Verified Carbon Standard (VCS). The Costa Rican Voluntary Domestic Carbon Market (not currently open to foreign traders) allows for issuance and exchange of carbon credits called Costa Rican Compensation Units (UCC). Those can be traded by companies for the right to release carbon dioxide into the air to compensate for emissions they cannot reduce. The compensation units are bound to reforestation projects and other conservation efforts aiming to sequester CO2.

The government has established various incentives for electric vehicles and integrated public transport. In 2017 the law on incentives and promotion of electric transportation [32] was passed, which created the regulatory framework for the promotion of electric transport with the aim to have 70 percent of public transport powered by electricity by 2035 and the whole fleet by 2050. In 2018, the government signed an executive decree to exempt all types of used electric vehicles from the payment of the excise tax when entering the country [33]. However, decrees were also signed to eliminate the tax exemption on hybrid vehicles. According to data by the Energy Directorate of the Ministry of Environment and Energy, between 2006 and 2018, only 1,844 hybrid vehicles applied for the tax exemption benefit, which do not exceed 0.1 percent of the circulating vehicle fleet, and therefore have generated a much lower impact in terms of improving air quality and emissions of greenhouse gases [34].

To reach the targets set by the recently adopted decarbonization plan for 2050 addressing existing and emerging environmental policy challenges will be key. The OECD highlights the key role tax policy can play, particularly in reaching environmental policy targets effectively and at minimal cost to society [35]. The OECD’s recommendations include the introduction of a uniform carbon price which would entail harmonizing tax rates across oil products used in different sectors; extending the fuel tax to coal and natural gas and extending VAT and import duties to fuel, harmonizing the tax treatment of public and private electricity producers and evaluating the cost-effectiveness of the Payments for Environmental Services Programme in providing environmental benefits. To facilitate the transition to cleaner means of transport, the OECD also suggests supplementing existing taxes on vehicle ownership and transfers with rate components based on average car emissions, evaluate tax exemptions and consider moving towards price-based measures (e.g. increasing fees for parking, or cordon fees).

Fossil Fuel Subsidy Reform

According to IMF estimates Costa Rica’s post tax fossil fuel subsidies in 2015 amounted to US$ 1billion representing 2.2 percent of GDP [36]. Costa Rica is part of the informal group of non-G20 countries, Friends of Fossil Fuel Subsidy Reform, that aims to build political consensus on the importance of this matter.

Costa Rica uses a mix of hydro, wind and geothermal to power the country, however the transportation sector is still quite gasoline-dependent [37]. The recent growth in private vehicles is causing pollution, with less than 2 percent of them being hybrid or electric and the capital is struggling with traffic. Of the GHG emissions from the energy sector (39% of total GHG), transport accounts for the largest share (68.7%), and continues to increase rapidly (number of private cars increased by 68% between 2003 and 2014). Private cars account for 41% of emissions from road transport, followed by heavy transport (22%) and two-wheelers (16%) [38]. Beyond the sector’s contribution to climate change, it also causes local air pollution, which in Costa Rica is concentrated around the San José Greater Metropolitan Area, where almost two-thirds of the population lives.  The OECD argues there is room to improve the environmental effectiveness of tax policy, particularly on fossil fuels [39]. The excise tax on fuels could be extended to cover all fossil fuels and rates could be aligned with external costs, and the sales and import tax exemptions for fuels should also be reconsidered. For example, cost of combusting other fossil fuels such as coal is unpriced, and even if it accounts for a small share of total carbon emissions from energy use in the country (around 2percent) reforming the tax to extend it to all fossil fuels would prevent the industry from growing if hydro energy decreases in the future, which could push people to find alternatives. Electricity is predominantly generated from hydro (up to 80%), followed by geothermal (around 15%), wind (up to 10%) and much smaller proportions of solar and biomass. However, droughts, and other environmental challenges put the country’s high reliance on hydro-electricity at risk [40].

References and additional reading

[1] CIA (2019) The World Factbook – Costa Rica, available at :

[2] CIA (2019) The World Factbook – Costa Rica, available at :

[3] Diane Toomey (2017) “How Costa Rica is Moving Toward a Green Economy”, available at:

[4] Carlos Alvarado (2019) « How Costa Rica will complete its drive to go carbon free »  – Article from the Financial Times, available at

[5] World Bank (2029) Costa Rica Profile, available at:

[6] OECD (2016) « Costa Rica Policy Brief » available at :

[7] OECD (2017) « Costa Rica has made major socio-economic progress but more efforts needed to reduce inequality and poverty » available at :

[8] OECD (2017) « Tax Policy Reviews – Costa Rica », available at :

[9] OECD (2017) « Tax Policy Reviews : Costa Rica », available at

[10] OECD (2017) « Costa Rica: Tax Reform is needed to ensure inclusive growth », available at :

[11] OECD (2018) « Costa Rica: Restore fiscal sustainability and make growth more inclusive », available at :

[12] CEPAL (2019) « Fiscal Panorama of Latin America and the Caribbean: Tax policies for resource mobilization in the framework of the 2030 Agenda for Sustainable Development »

[13] The World Bank in Costa Rica,

[14] J. M. Rodriguez Zuniga (2003) « Paying for forest environmental services : the Costa Rican experience » available at :

[15] LSE « Costa Rica’s Forest Law (Law No.7575) » available at :

[16] World Economic Forum (2019) « Costa Rica has doubled its tropical rainforests in just a few decades. Here’s how »,

[17] United Nations University (2011) « Ethics and environmentalism: Costa Rica’s lesson »,

[18] MNN (2019) « Costa Rica has doubled its forest cover in the last 30 years »,

[19] IIEED (2012) “De Rio a Rio+ Lecciones de 20 años de experiencia en servicios ambientales en Costa Rica” available at:

[20] The Guardian (2012)”Costa Rica’s Green economy shows that money can gro won tres”, available at:

[21] IEA (2018) « Costa Rica National Programme on Biofuels (Programa Nacional de Biocombustibles) 2008 » available at :,&return=PG5hdiBpZD0iYnJlYWRjcnVtYiI-PGEgaHJlZj0iLyI-SG9tZTwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy8iPlBvbGljaWVzIGFuZCBNZWFzdXJlczwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy9yZW5ld2FibGVlbmVyZ3kvIj5SZW5ld2FibGUgRW5lcmd5PC9hPjwvbmF2Pg,,

[22] IEA (2018) “Costa Rica Regulation on Biofuels 2009”, available at:,,&s=dHlwZT1yZSZzdGF0dXM9T2s,&return=PG5hdiBpZD0iYnJlYWRjcnVtYiI-PGEgaHJlZj0iLyI-SG9tZTwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy8iPlBvbGljaWVzIGFuZCBNZWFzdXJlczwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy9yZW5ld2FibGVlbmVyZ3kvIj5SZW5ld2FibGUgRW5lcmd5PC9hPjwvbmF2Pg,,&s=dHlwZT1yZSZzdGF0dXM9T2s,

[23] IEA (2018) “Costa Rica Regulation of liquid biofuels and their mixtures 2017”, available at:

[24] IEA (2018) « Energy Strategy of Costa Rica: Towards a New Energy Model (Estrategia Energetica: Hacia un nuevo modelo energetico para nuestro pais) », available at :,&return=PG5hdiBpZD0iYnJlYWRjcnVtYiI-PGEgaHJlZj0iLyI-SG9tZTwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy8iPlBvbGljaWVzIGFuZCBNZWFzdXJlczwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy9yZW5ld2FibGVlbmVyZ3kvIj5SZW5ld2FibGUgRW5lcmd5PC9hPjwvbmF2Pg,,

[25] IEA (2018) « VII National Energy Plan of Costa Rica 2015-2030 » available at :,&return=PG5hdiBpZD0iYnJlYWRjcnVtYiI-PGEgaHJlZj0iLyI-SG9tZTwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy8iPlBvbGljaWVzIGFuZCBNZWFzdXJlczwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy9yZW5ld2FibGVlbmVyZ3kvIj5SZW5ld2FibGUgRW5lcmd5PC9hPjwvbmF2Pg,,

[26] Law on Waste Management, n°8839, available at :

[27] Estado Ministerio de la Salud, Costa Rica (2018) « Costa Rica estrena moneda : los ecolones », available at :

[28] The Guardian (2019) “Costa Rica unveils plan to achieve zero emissions by 2050 in climate change fight”,

[29] Reuters (2019) « Costa Rica lanches « unprecedented » push for zero emissions by 2050 »,

[30] IEA (2018) « Regulations on the Efficient Use of Energy and tax incentives », available at :,&return=PG5hdiBpZD0iYnJlYWRjcnVtYiI-PGEgaHJlZj0iLyI-SG9tZTwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy8iPlBvbGljaWVzIGFuZCBNZWFzdXJlczwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdXJlcy9yZW5ld2FibGVlbmVyZ3kvIj5SZW5ld2FibGUgRW5lcmd5PC9hPjwvbmF2Pg,,

[31] LSE (2015) « Costa Rica – Approach to Climate change », available at :

[32] LSE (2017) « Law no 9518 on incentives and promotion of electric transportation », available at :

[33] Green Fiscal Policy Network (2018) « Used electric vehicles to be exempted from tax in Costa Rica » available at :

[34] QCosta Rica (2018) «Used Electric Vehicles To Be Exempt From Tax »,

[35] OECD Tax Policy Reviews Costa Rica 2017

[36] IMF (2019) « Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates”, available at:

[37] The Guardian (2017) « All that glitters is not green: Costa Rica’s renewables conceal dependence on oil », available at :

[38] MINAE – Ministry of Environment Costa Rica (2014), Plan Nacional de Energía 2015-2030 [National Energy Plan 2015-2030],

[39] OECD Tax Policy Reviews Costa Rica 2017

[40] OECD (2016), OECD Economic Surveys: Costa Rica 2016: Economic Assessment, OECD Publishing, Paris,