The Politics of Fuel Pricing in Latin America and Their Implications for the Environment

Abstract

Historically, fuel prices in Latin America have not been set based on conventional marginal cost or opportunity cost principles. Instead, fuel prices have been based on political considerations, income distribution goals and the promotion of industrialisation. Although this has gradually changed in most of the countries of the region in the last years, it still applies to Ecuador, Venezuela and Mexico. These countries have been characterised by high degree of government intervention, which has resulted in very low fuel prices, and along with it, very high fuel consumption. In these countries, the transport sector accounts for a considerable share of emissions such as particulate matter (PM), carbon monoxide (CO) and nitrogen oxides (NOx), which seriously affect public health. It also represents the fastest growing CO₂ emitting sector. Steadily increasing demand for fuels, accompanied by continued low fuel prices in these countries, can be expected to counteract any efforts aimed at reducing both local and global emissions. This paper presents current pricing policies in some Latin American countries and discusses their implications for the environment.¹