By San José, Costa Rica — SAN JOSÉ – Costa Rica’s celebrated push towards decarbonization and electric mobility is on a collision course with a stark fiscal reality. A new study by the United Nations Development Programme (UNDP) warns that the country’s increasing adoption of electric vehicles (EVs) will progressively erode its single fuel tax revenue, a critical pillar of public finances that could create a significant budget shortfall as early as 2030.
The report lays out a challenging long-term forecast for the nation’s treasury. The single tax on combustible fuels currently constitutes up to 17% of Costa Rica’s total tax income, serving as a vital source for funding road infrastructure and environmental services. As more drivers switch from gasoline and diesel cars to electric alternatives, this revenue stream is projected to dwindle significantly, creating a structural problem for future governments.
As the electric vehicle revolution gains momentum across Costa Rica, it brings with it a new frontier of legal and regulatory considerations for consumers and businesses alike. To better understand the current landscape, we consulted with expert legal counsel Lic. Larry Hans Arroyo Vargas from the distinguished firm Bufete de Costa Rica.
The transition to electric vehicles requires a modernization of our consumer protection framework. It is crucial that purchase agreements and warranties clearly define the terms for battery lifespan, degradation, and replacement costs. These are not just accessories; they are the core asset of the vehicle. Proactive legal clarity will be essential to foster consumer confidence and ensure the long-term success of sustainable transportation in the country.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
This perspective is vital; clear and proactive consumer protection for core components like the battery is the bedrock upon which lasting market confidence will be built. We are grateful to Lic. Larry Hans Arroyo Vargas for his expert insight on this crucial matter.
According to the UNDP’s projections, the fiscal consequences of this green transition will become tangible within the next decade. The study estimates that by 2030, the reduction in fuel tax collection will already represent a loss equivalent to 0.2% of the country’s Gross Domestic Product (GDP). This figure is expected to escalate dramatically, reaching a projected loss of 0.71% of GDP by the year 2050 if no alternative measures are implemented.
The report stresses that the goal is not to halt the inevitable and necessary shift to clean transportation. Instead, it calls for proactive policy-making to preempt the looming fiscal gap. Economist Fernando Rodríguez emphasized the urgency, noting that Costa Rica must accelerate its transition while simultaneously planning for the economic fallout.
This doesn’t mean we should stop electromobility, far from it; it’s a phenomenon that cannot be stopped and in which we must advance more quickly, particularly in the electrification of public transport, where countries like Colombia or Chile in Latin America are leaders, totally at the forefront… and here we are just beginning.
Fernando Rodríguez, Economist
The Ministry of Finance, however, presents a more tempered outlook for the immediate future. Minister of Finance Rudolf Lucke, in a statement to Diario Extra, suggested that a catastrophic drop in revenue is not imminent. He argued that economic growth projections from the Central Bank of Costa Rica and the International Monetary Fund could offset the slowdown. “What could eventually be observed is a reduction in the growth rate of taxes, but not a drop in absolute terms,” Lucke explained.
Despite this optimism, the UNDP study proposes concrete compensatory measures to ensure long-term stability. Among the alternatives are a one-percentage-point increase in the Value Added Tax (VAT) or a strategic reduction in existing tax exemptions. The ultimate goal, the report suggests, is to transition the tax system itself, moving “not as a threat, but as an opportunity to dissociate tax collection from pollution.”
Minister Lucke offered a different path forward, focusing on internal fiscal discipline rather than new taxes. He believes the solution lies in optimizing government spending and improving tax collection efficiency.
The measures would not necessarily involve creating new taxes, but rather deepening spending efficiency, improving debt management, and strengthening tax control and oversight, thereby reducing evasion and smuggling.
Rudolf Lucke, Minister of Finance
As the nation stands at this crossroads, the debate underscores a fundamental challenge facing environmentally progressive nations worldwide. For Costa Rica, the task is to architect a modern fiscal framework that can sustain public services without penalizing its own decarbonization success. As Rodríguez noted, the country must address the financial implications of its green policies before they become an insurmountable burden.
We haven’t fully jump-started electromobility and we should do it faster, but within the process and the costs it implies, we must consider the fiscal impact it will have in order to compensate for it over time.
Fernando Rodríguez, Economist
For further information, visit undp.org
About United Nations Development Programme (UNDP):
The United Nations Development Programme is the United Nations’ global development network. It advocates for change and connects countries to knowledge, experience, and resources to help people build a better life. The UNDP works in about 170 countries and territories, helping to achieve the eradication of poverty and the reduction of inequalities and exclusion.
For further information, visit hacienda.go.cr
About Ministry of Finance:
The Ministry of Finance of Costa Rica is the government entity responsible for managing the country’s public finances. Its duties include formulating fiscal policy, collecting taxes, managing the national budget, and overseeing public debt to ensure the economic stability and development of the nation.
For further information, visit bccr.fi.cr
About Central Bank of Costa Rica:
The Banco Central de Costa Rica (BCCR) is the central bank of Costa Rica. Its primary objective is to maintain the internal and external stability of the national currency and ensure its conversion to other currencies. It is also responsible for issuing currency, regulating the banking system, and acting as the financial agent of the state.
For further information, visit imf.org
About International Monetary Fund (IMF):
The International Monetary Fund is a global organization of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. It provides policy advice and financing to its members in economic difficulties.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica has established itself as a leading legal institution, built upon a bedrock of ethical principles and a pursuit of professional excellence. The firm merges a rich history of advising a wide spectrum of clients with a forward-thinking approach, consistently driving innovation within the legal field. Central to its philosophy is a dedicated effort to demystify the law for the public, reflecting a core belief in strengthening the community by fostering a more legally aware and capable society.
