Background

Peru is one of the best performing Latin American states in economic terms. In 2013, GDP grew by 5.1%.  However, economic growth has put a strain on natural resources and deforestation is becoming a serious environmental challenge. As Peru is home to approximately 15 per cent of the world’s biodiversity and 13 per cent of the Amazon rainforest, preserving natural capital is fundamental. High dependence on natural assets – oil, gas, forests and fisheries – also puts the sustainability of this economic success into question. For example, fuel imports amounted to 4.2 billion USD in 2009. None the less, renewable energies are relatively high  in the country, accounting for 26.9% of total renewable energy supply as of 2009. The biotrade sector is quite promising in Peru: in 2010, it recorded a growth of almost 200 %  versus 2009 and total exports were over US$ 320 million.

Overall Fiscal Profile

Owing to external shocks and lower domestic confidence, growth slowed to 5 per cent in 2013, from 6 1/3 in the prior year, partially owing to a decline in exports. The country experienced an increase in headline inflation as a result of supply shocks, and exchange rate pass-through effects. The current account deficit widened recently as a result of poor performance in exports.  Fiscal policy has recently played an important role in 2013, and the surplus fell by 0.5 per cent of GDP. Fiscal policy supported primary spending to achieve social inclusion goals and increased wages, increases in capital spending and  there was also a decline in mining related revenues.

Policy and Legal Framework for Green Economy

The Peru Country Strategy (2013-2016) includes a number of objectives related to the green economy. For example, by 2021, 100% of regional governments are to implement mitigation and adaptation strategies, and 100% of public entities are to implement a National Environmental Plan. Additionally, the strategy strives to reduce GHG, generated by land use change and forestry,  by 100% by 2021, compared to 2000 levels. Within the National Biodiversity Strategy and Action Plan, Peru will strive to be the first country in the world (by 2021) to have the most benefits from conservation and sustainable use of biodiversity in order to realize the needs of present and future generations.

The 1997 National Resource Sustainable Use Act, the 2000 Solid Waste Act, the 2005 Environmental General Act (providing a regulatory structure) and the 2009 Water Act all relate to ensuring protection of environmental services and sound management of scarce resources.  The National Environmental Policy, another integral document approved in 2009, has four main priorities: conservation and sustainable use of natural resources and biodiversity, sound management of environmental quality, environmental governance and international environmental commitments and opportunities. It incorporates BioTrade as an important part of its green growth strategy.

Fiscal Measures for a Green Economy

Peru’s Fiscal Policy for 2014-16 explicitly requires that excise taxes (ISC – Impuesto Selectivo al Consumo) should be set taking into account the negative externality generated by the consumption of affected goods in terms of impact on the environment and public health. The objective of excise taxes on fuels is to discourage fuel consumption in order to foster the use of less polluting fuels and to make Peru’s energy matrix cleaner. Through the Fuel Harmfulness Index, the ISC on fuel incorporates a criterion of proportionality concerning the degree of harmfulness to health caused by contaminants contained in fuel, thus a higher tax is applied on fuels with higher contaminants. Accordingly, the ISC on diesel is now higher than the ISC on gasoline. In addition to ISC on fuels, ISCs are set in line with externalities associated with consumption of cigarettes and alcoholic beverages (Egúsquiza de la Haza, 2013).

According to the results of a modelling exercise of Peru’s biotrade sector carried out by UNEP in 2011, enhancing  Peru’s annual  biodiversity-based products to 40 per cent until 2020 would increase sales from US$110 million (2009) to US$ 2.7 billion by 2020, while contributing more than 250,000 new jobs.  Peru has adopted a number of fiscal incentives for a Green Economy. For example, the vehicle ownership tax was set at 1% on an annual basis on cars, four wheel drives and station wagons for 3 years as of 2013.

Trade liberalization and a reduction of royalty fees has promoted FDI since the 1990s, thus contributing to continued exploitation and exploration in the extractives industry. In 1991, Peru spent 6.5% of its GDP to support mining activity. An income and capital tax, royalties and concession rights on mining companies amounted to roughly $2.5 billion per year from 2006 – 2009.

In terms of renewables, an accelerated depreciation (for income tax purposes) of up to 20% of the investments in machinery, equipment and civil construction for renewable generation has been provided since 2008. Additionally, in the same year, renewable electricity producers connected to the grid were provided with a guaranteed distribution and transmission priority access; coupled with a steady price over a twenty year period. A premium will be paid by the Superior Organism of Energy and Mines Investment on a project by project basis. Finally, in 2004, a cross subsidy was introduced in rural towns for private investment in renewable energy, as part of a social inclusion initiative. The consumer only pays 20% of the actual tariff (based on the cost of generation) which is financed through a special tax on electricity bills – charged to those who consume higher than 100 kWh/ a month.

Fossil Fuel Subsidy Reform

Peru’s oil market is a duopoly controlled by two companies responsible for refining and distribution. The private Relapasa and the public PetroPeru. In the past,  the government regulated consumer prices of oil but  in 2004, it launched two kinds of reforms.  Firstly, a pricing mechanism to adjust excise taxes to smooth flows of fluctuations in international prices was introduced. Secondly, the authorities initiated a stabilization fund called “the Fondo de Estabilización de Precios de Combustibles (FEPC)” to regulate the price of gasoline and LPG. However, the fund has incurred numerous liabilities. The subsidies were untargeted, leading to  inefficiencies. Fiscal subsidies reached their highest point in 2008, amounting to a fiscal expenditure of 1.4% of GDP.

In 2010, amid the reduction in international prices, the government saw a window of opportunity to introduce reform measures. Therefore, in 2010 both regular and high octane gasoline were excluded from the Stabilization Fund, and the remaining resources were allocated exclusively to LPG. Moreover, a rule was introduced which would automatically update price boundaries every two months. Price changes would be limited to 5% with an exception for domestic consumption on LPG (with a maximum of 1.5%). The government also set aside a special sub-account in the Treasury to finance the FEPC. In 2011, high octane gasoline used in luxury cars was excluded from the fund, with international price changes being passed on to domestic prices. Shortly afterward in 2012, regular gasoline was also removed with only diesel and LPG for household consumption remaining. Peru’s reform efforts did not provoke widespread opposition but none the less, the reform has not yet targeted diesel and LPG, which account for 80% of subsidy spending, rendering the reform to only amount to a modest fiscal saving (0.1 per cent of GDP).

Related documents and sources:

Egúsquiza de la Haza J. A. (2013). Taller Regional de Intercambio y Expertos Hacia una economía verde inclusiva en América Latina y el Caribe. Grupo de trabajo II “Política Fiscal e instrumentos económicos para una economía verde inclusiva”. Dirección General de Política de Ingresos Públicos – Ministerio de Economía y Finanzas.

IMF (2013). Peru Staff Report for the 2013 Article IV Consultation. Retrieved from: http://www.imf.org/external/pubs/ft/scr/2014/cr1421.pdf

IMF (2013). Case studies on Energy Subsidy Reform: Lessons and Implications. Retrieved from: http://www.imf.org/external/np/pp/eng/2013/012813a.pdf

Ministry of Peru. National Environmental Strategy. http://theredddesk.org/sites/default/files/national_environmental_policy_peru_0.pdf

UNEP (2012). Green Economy Sectoral Study: Biotrade, A catalyst for Transitioning to a Green Economy in PeruDownload here.