Argentina – Country profile

Background

Argentina has roughly 44 million inhabitants and is the second largest economy in Latin America after Brazil and Mexico with a GDP of more than USD 600 billion. Agriculture, livestock and the mining of raw materials play a major role in the economy. In 2017, the service sector represented about 61 percent of GDP, while industry accounted for 28.2 percent and agriculture 10.9 percent of GDP respectively (CIA, 2018). After three consequent terms of left-wing presidents (Nestor Kirchner and Cristina de Fernandez Kirchner), Mauricio Macri’s victory in the 2015 presidential elections led to a significant change in Argentine economic policy including unification of the exchange rate, an agreement with international creditors, and modernization of the import regime (World Bank, 2018). In 2016, fossil fuels, accounting for 62 percent of total gross electricity production, were the most important energy source, followed by hydropower with a share of about 32 percent (Griffa, 2018). Nuclear energy (5.3 percent) and other renewable energies (2.1 percent) remained at a low level despite favourable environmental conditions. CO2 emissions per capita have more than doubled in the last 50 years reaching 4.7 tons per capita in 2014, which is still around 1 ton lower than per capita emissions in Europe (World Bank, n.d.).

Overall fiscal policies

After an economic contraction of 1.8 percent in the first half of 2016, the economy recovered and grew 2.9 percent in 2017. In addition, the primary deficit decreased from 4.3 percent of GDP in 2016 to 3.8 percent of GDP in 2017, both below official fiscal targets, and is expected to reach the target of 2.7 percent of GDP for 2018 (World Bank, 2018). Even though this recovery has continued throughout the first months of 2018, changing developments in international financial markets (i.e. higher interest rates in the US, lower dollar inflows due to a bad harvest) have brought the vulnerabilities associated with Argentina’s gradual fiscal adjustment and the reliance on external debt financing to the fore. Since May 2018, the authorities reacted by raising interest rates, strengthening the commitment to fiscal adjustment, intervening in currency markets and agreeing to an IMF loan in June 2018. As this triggered a downturn of investments, the economy is expected to contract by 2 percent in 2018 and 0.1 percent in 2019 (Focus Economics, 2018). Due to the depreciation of the peso, Argentine inflation increased drastically and is expected to be at around 45 percent at the end of the third quarter of 2018 (Trading Economics, 2018).

Policy and Legal Framework for a Green Economy

Argentina places environmental protection at the highest level, securing it explicitly within an article in its national constitution (Article 41). Each Province maintains jurisdiction over environmental issues and its natural resources, whereas the federal government is responsible for shaping the framework of environmental protection (FIEL, 2017). Therefore, some activities regulated by federal authorities (for example, energy, oil and gas) are also subject to specific regulations for the protection of the environment and natural resources. In general, provincial regulations follow the federal regime but in some cases standards of protection have been raised (Federico S Deyá, Marval, O’Farrell & Mairal, 2012). Since the change of government in 2015, Argentina has become more active in its actions against climate change. In March 2016, the National Cabinet of Climate Change (Gabinete Nacional de Cambio Climático), composed of members from twelve different ministries, was established with responsibility for assigning instruments to implement commitments undertaken. It started with revising Argentina’s Nationally Determined Contribution (NDC) to the Paris Climate Agreement and elaborated the country’s first national climate change strategy in 2016 (UNFCCC, 2016). The strategy sets an unconditional target to limit emissions to 483 MtCO2e by 2030 including land use, land-use change and forestry (LULUCF). This is equivalent to 22 percent above 2010 levels and 74 percent above 1990 levels (excluding LULUCF). The conditional target (including LULUCF), which can be achieved if Argentina receives international financial support, limits emissions to 369 MtCO2e by 2030, which is equivalent to a 7 percent reduction below 2010 levels and 22 percent above 1990 levels (excluding LULUCF). A National Adaptation Plan is under preparation and should be implemented in 2019 The country has also actively supported the development of renewable energies in the past two decades (IEA, 2018a). In 2007, it set a target of raising the share of renewable energies to 8 percent of the national electricity mix by the end of 2016, however as renewable energy sources accounted for between 1 and 2 percent of total energy production this goal was missed by a large margin (Twenergy, 2017). The Program to Promote the Use of Renewable Energy in Electricity Generation, adopted in 2015 set the following new targets: 8 percent by the end of 2018, 12 percent by 2019, 16 percent by 2021, 18 percent by 2023 and 20 percent by 2025. Moreover, with the PERMER (Proyecto de Energia Renovable en el Mercado Electrico Rural) programs, the government supports the use of renewable sources of energy generation especially for rural electrification purposes. In addition, since 2007 Argentina has a National Program for Rational and Efficient Use of Energy (Programa Nacional de Uso Racional y Efficient de la Energia) that aimed to decrease electricity consumption by 6 percent and energy savings of 1500 MW by 2016 (IEA, 2015a). It covers several policy areas (in the short-term: focusing on education and awareness of energy consumption, lamp replacement in households, increasing energy efficiency of appliances; and in the long-term: focusing on industry, commerce, buildings, co-generation, public lighting and transport) with several sub-programs developed for different sectors. In 2009, the Argentinean Energy Efficiency Fund (Fondo Argentino de Eficiencia Energetica) was developed under a World Bank Energy Efficiency Project that provides low interest loans for energy efficiency projects in small and medium enterprises (SMEs) (IEA, 2015b). While holding the G20 Presidency in 2018, Argentina’s government emphasized the importance of climate sustainability and energy transition, which are among the twelve work streams of its Presidency. In this regard, a “G20 Resource Efficiency Dialogue” was held to share knowledge and discuss options to promote a more efficient use of resources with officials from G20 members, engagement groups, international organizations and third parties (G20, 2018). Building on the legacy of past G20 Presidencies, climate change was one of the top priorities for the Argentine G20 Presidency, which sought to advance issues such as aligning international climate finance flows with implementation of the NDCs and behaviour change for energy efficiency through the work of the Climate Sustainability Working Group and the Energy Efficiency Leading Programme Task Group.

Fiscal measures for a Green Economy

Environmental permits, for instance, for the extraction of water from public sources, discharge of liquid effluents, or discharge of gaseous emissions, are a common instrument applied in Argentina. Currently, environmental regulations that contain tax elements address only a few problems and can be characterized as marginal (Almada et al, 2017). In 2014, environmentally related tax revenues accounted for 1.3 percent of GDP, compared to 2.0 percent on average among 39 OECD and partner countries (OECD, n.d.). Moreover, taxes on energy represented 79 percent of total environmentally related tax revenue in Argentina, compared to 70 percent on average among the 39 countries. Argentina uses subsidies, tax incentives and loans to support the development of renewable energy. In 1999, feed-in tariffs (FiTs) were introduced for wind energy (IEA, 2018b) and a requirement that the overall fiscal burden of renewable energy projects cannot be increased by means of augmented, modified, new or additional taxes and fees for a period of 15 years was adopted for both wind and solar energy (IEA, 2015c). A new law in 2006 extended the revised and expanded feed-in tariffs  to solar, geothermal (<30 MW), tidal, biomass, biogas, and small hydropower (<30MW) (Global Data, 2017). The tariffs were funded from a Fiduciary Fund for Renewable Energy, financed by a tax on electricity levied on large distribution and wholesale companies. In 2016, a new decree and law introduced several fiscal incentives to independent power producers, including among others import duty exemptions, accelerated fiscal depreciation allowances, and VAT refunds on applicable assets (IEA, 2018c). In addition, the renewable energy auction programme of Argentina (RenovAr), introduced in 2016, is an innovative renewable energy bidding program with fiscal incentives and financial support mechanisms, in which different companies present their investment projects and the price at which they are willing to sell their capacity. Argentina promotes biodiesel and bioethanol and has a blending mandate originally set at 5 percent, which increased to 10 percent in 2014 and finally to 12 percent in 2016 (IEA, 2015c). The country also offers fiscal incentives for the production and export of biofuels. In 2001, the Biodiesel Competitiveness Plan established an exemption for biodiesel from the Fuel Transfer Tax and capital gains tax for investments in biodiesel facilities (IEA, 2012). Local authorities were encouraged to provide additional tax exemptions on production and storage facilities. The 2006 Biofuels Law provides tax breaks for investing companies, lower export taxes for biodiesel, VAT reimbursements and accelerated depreciation of assets for income tax purposes (IEA, 2018d). In addition, biofuels are exempt from the Hydrocarbon and Diesel taxes (20 percent each). In 2017, Argentina introduced a tax on the carbon content of gasoline, gas oil, fuel oil, coal and other liquid and solid fossil fuels, which corresponds to approximately USD 10 per ton of CO2 (Jakob et al., 2018). Currently the fixed amount per liter for liquid fuels ranges from USD 4.18, for example for kerosene and diesel, to USD 6.73 for fuels with higher CO2 intensity, such as petroleum naphtha (Mexico2, 2018). The carbon tax was designed to have no immediate impact on the final prices of fuels as it partially replaced an existing tax on fuels. Fossil fuels that were previously not subject to taxes, such as natural gas, coal and liquefied petroleum gas (LPG), are exempted from the tax. The intention, however, is to start preparing the ground for future price rises that will have a real impact on final prices. Thus from 2019 the tax will be levied at the full rate for most liquid fuels, increasing annually by 10 percent until 2028. In the end, the carbon tax is estimated to cover about 20 percent of the country’s GHG emissions and is expected to raise approximately ARS11.5 billion (US$571 million) in revenue per year. The distribution and use of these revenues is explicitly established and will be allocated to different funds and programmes including on public transport compensation, water infrastructure and transport infrastructure (CPLC, 2018). Since the 1990s when Argentina began to reform public service sectors by applying concession schemes, including in the road, water and sanitation, and waste management sectors, the importance of user fees and charges for funding such investments increased. For instance, to address the major costs and financing gaps in the road sector, user fees and charges were introduced to support the reconstruction and maintenance of existing roads and reduce the public finance required by the sector. Involving the private sector was seen as a way to both shift the financial burden to users and maintaining roads more efficiently in exchange for the right to charge users tolls (Estache et al, 1999). The government under Mauricio Macri is intensifying this approach of PPP for infrastructure management and calling for tenders for the design, construction, and maintenance of the highway network. Buenos Aires is one of the only cities in Latin America that has begun to implement some form of congestion pricing. In April 2018, the Argentine capital began charging an annual fee equivalent to approximately USD 77 to every driver entering 70 blocks of the city’s downtown area between 11am and 4pm on weekdays. There are plans to expand this measure to 142 blocks and increase the time from 9am to 6pm (Echenique, 2018). With a total of USD 487 million in procurement expenditure of the central government, sustainable public procurement (SPP) wields enormous power for sustainability. Argentina has adopted several laws that have an impact on SPP such as the Buy National decree or a law for the promotion of small and medium sized companies. Most recently, a decree on the Regulation of the Procurement Regime of the National Public Administration, adopted in 2012 and amended in 2015, states that the National Procurement Office (ONC) will develop mechanisms to promote the effective implementation of environmental, ethical, social and economic criteria in public procurement (UN Environment 2017a). The ONC manages an estimated yearly procurement of approximately USD 2.5 billion has set up an e-tendering portal – Argentina Compra – which is utilised by all ministries, security forces, hospitals and other entities of the national government, as well as  by other actors like state-owned companies and private companies. In this regard, Sistema de Identificación de Bienes y Servicios (SIByS), a catalogue system for goods and services that includes information on environmental sustainability has been established. In 2015, sustainable products or services from the SIByS represented approximately 14 percent of the total procurement expenditures managed by the ONC (UN Environment 2017b).

Fossil Fuel Subsidy Reform

Argentina applies price-fixing rules to its petroleum products, residential and industrial natural gas prices are subsidized and liquid fuel prices such as gasoline were mostly managed through export taxes which were used as a policy instrument to keep domestic prices low and insulate them from international fluctuations. As the former administration had virtually frozen final tariffs, distortions of prices paid by final consumers accumulated over 12 years resulting in residential electricity users paying less than 10 percent of average generation costs in 2015 (FIEL, 2017). Hence, energy subsidies had risen from 0.1 percent of GDP in 2003 to a peak of 2.9 percent in 2014. The government also supports companies looking to invest in oil and gas through tax breaks or budgetary transfers. For instance, in 2013 laws were amended so that oil and gas companies willing to invest more than USD 1 billion in the country would be allowed to sell 20 percent of their production abroad for five years without paying export taxes or being required to repatriate profits (Pickard, 2015). In 2014, a new Hydrocarbon Law enhanced these benefits even further. In parallel, there are several other tax incentives to promote exploration. In addition, large budgetary transfers arise from the premium payments under different programmes like Petróleo Plus, Refinacion Plus and Gas Plus, which the government paid to producers of crude oil, refined oil products and natural gas, respectively. Here the domestic prices paid to fossil fuel producers are fixed with the aim of attracting investment in fossil fuel exploration, production and refining activities. With the fall in oil prices in 2014 offering an opportunity to phase-out such subsidies, Argentina undertook a drastic reform to raise gasoline, diesel and electricity prices, which eventually led to a reduction in energy subsidies. The government set an ambitious goal of tackling universal subsidies within 4 years and introduced social tariff schemes based on eligibility criteria. For example, natural gas prices in Argentina have been progressing towards market-price parity when the government introduced measures to close the gap between the cost of domestic and imported natural gas supplies and prices paid by consumers in 2016. As a result, average residential natural gas prices increased by over 700 percent between 2015 and 2017 in nominal terms and natural gas subsidies fell from USD 5.7 billion in 2015 to USD 2.2 billion in 2017 (IEA and OECD, 2018). This price convergence plan is set to be completed by 2019 for most regions except for Patagonia, which will continue to benefit from subsidized gas prices up to 2021. In parallel, the government has created a Federal Social Tariff to direct its subsidy expenditures to vulnerable consumers. As of 2017, 22.5 percent of residential consumers had access to the Federal Social Tariff. Despite these efforts by the government, a study published in mid-2018 indicates that governmental support for fossil fuels is still quite high in Argentina (FARN, 2018). In 2017, fossil fuel subsidies represented 5.6 percent of the national budget amounting to USD 9.4 billion; in 2018 this decreased to 3.1 percent of the national budget and amounted to USD 6.9 billion. The OECD Inventory of Support Measures for Fossil Fuels 2018 identified 21 new measures added in 2015 and 2016 (OECD, 2018). For instance, even though programmes like Petróleo Plus, which accounted for USD 3.3 billion of subsidies since 2008, had been cancelled in 2013, new measures such as a stimulus program to produce crude oil (Programa de Estímulo a la Producción de Petróleo Crudo) were introduced (Crespo, Zanotti, Kofman, 2016) shortly thereafter. To ensure that Argentina remains on track to phase out its inefficient fossil fuel subsidies in line with its international reform commitments and to increase its transparency and accountability in this regard, Argentina’s Energy and Mining Minister together with their respective counterpart from Canada announced in June 2018 that both countries will conduct peer reviews of inefficient fossil fuel subsidies under the G20 voluntary peer review process (Department of Finance Canada, 2018).

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