By Alicia Ruiz, Climate Finance Consultant for the Decarboost Project; Adriana Bazán Fuster, Climate Finance Sr. Associate at CCAP
July 2021
Climate change is undoubtedly affecting Latin America and the Caribbean, a region of utmost importance in terms of global natural capital and ecosystem services. COVID19 has put into perspective the scale and depth of the impacts of a systemic event., This has led to an analysis of the consequences of not taking proactive measures, such as long-term planning for the transformation of our economies to a zero-carbon and climate-resilient trajectory.
The IDB estimates that Latin America and the Caribbean hard hit by COVID-19. The 7.4% drop in GDP in 2020 was the largest on record in a single year. Twenty-six million jobs were lost and poverty (extreme and moderate) is expected to increase by about 5 percentage points of the population. Growth in 2021 could be as low as 0.8% if vaccination efforts are delayed or virus mutations prove resistant to vaccines.
At the global level, the request of actors aware of the opportunity to address climate change issues in synergy with national COVID19 recovery strategies, advocate that the revival of economies that consider decarbonization and resilience to climate change will generate sustainable jobs, mobilize private investment while addressing structural weaknesses, such as infrastructure deficiencies, financial inclusion, gender equality, biodiversity loss, etc.
Investments in productive infrastructure for transportation, energy, telecommunications and sanitation are a priority., There is the possibility of incorporating carbon emission reduction and resilience measures to ensure cost-effective public spending in the long term, which requires the participation of the private sector.
The bioeconomy and Nature-Based Solutions (NBS) offer an opportunity to sustainably use natural resources while creating economic growth. In its report World futures, WWF expresses that if the world adopts a more sustainable development path and safeguards areas that are important for biodiversity and ecosystem services (including carbon storage), annual global GDP would be 0.02% higher (USD 11 billion) by 2050 than in a baseline scenario with no change in ecosystem services; generating an annual net gain of USD 490 billion per year compared to the scenario. Business as Usual (BAU).
The transformation of investment towards resilience and decarbonization must first come from government spending, both capital and recurrent spending. According to the World Bank, On average, government procurement represents between 13 and 20% of the world's GDP. According to the Inter-American Government Procurement Network (RICG), the average for Latin America and the Caribbean was between 10% and 15% of GDP in 2011 - according to the Organization for Economic Cooperation and Development (OECD). OECD, in 2017 reached about 17.4% of total government spending. Some countries are making efforts to integrate sustainability criteria into their LAC instruments and procurement priorities that can have a positive impact on small and medium-sized enterprises (SMEs).
A recent publication of the Inter-American Development Bank and the International Labor Organization reveals that decarbonization in Latin America and the Caribbean can create 15 million net jobs by 2030 in sectors such as sustainable agriculture, construction and renewable energy. It will also bring new investments, decongest traffic in cities and promote electric mobility, increase competitiveness, air quality and people's quality of life. The International Renewable Energy Agency (IRENA) estimates that labor intensity for the energy transition - renewable energy, efficiency and flexibility - will be the highest in Latin America and the Caribbean, creating up to 30 jobs for every US$1 million invested.
Forward-looking industrial policies are more important than ever to transform production structures towards green industries. As expressed in the IRENA: «especially in developing countries that lack pre-existing capabilities in these areas, where market forces can undermine optimal welfare outcomes and where broader trends in anti-poverty and recovery policies have long favored consumption jobs over production jobs".».
Latin American and Caribbean countries remain somewhat dependent on fossil fuels, with the risk of becoming stranded assets. Latin America and the Caribbean is also a region dependent on agricultural commodities that are particularly vulnerable to climatic variations.. In this sense, innovation-driven industrial policies and value chain evolution depend on public institutions, encouraging companies to undertake research and development, quality certification, standard setting, incubation, technology transfer and dissemination. IRENA also notes that Latin America and the Caribbean account for 5% of the annual investment needs for renewable energy and energy efficiency deployment.
Implementation of new guidelines - including criteria, principles and indicators - to promote green investments is also another way to encourage zero carbon and resilience investments in Latin America and the Caribbean, some of these references are those of the Green Climate Fund, European Union, International Capital Market Association, Green Investment Group, World Economic Forum, etc.
Carbon pricing has been recognized as a policy instrument that must be applied worldwide to have a significant impact on reducing greenhouse gas emissions. and, at the same time, have a positive effect on sustainable development. According to the World Bank, By 2021, there are 64 carbon pricing initiatives representing 21.7% of global greenhouse gas emissions, which increased by more than USD 53 billion. Latin American and Caribbean countries are in the process of designing and implementing mechanisms such as carbon taxes and offset/compensation programs, at the national level with cases in Mexico, Chile, Brazil, Colombia, Argentina; and at the subnational level such as Baja California, Jalisco, Tamaulipas and Zacatecas.
Governments in Latin America and the Caribbean are striving to reflect greater ambition in their nationally determined contributions. (NDCs), in formulating robust Long Term Strategies (LTS) and in updating their domestic climate policy instruments. The development plans of zero-carbon and resilient countries are already providing evidence of future economic and financial benefits. However, a major obstacle is how to translate these policy visions into investment vehicles that redirect public and private resources to projects and programs aligned with these instrumentss. According to the Climate and Development Alliance (CDKN There are many challenges in zero carbon and resilience investments, such as externalities and public goods, financial market imperfections, new and unproven technologies, information asymmetries, behavioral failures, economies of scale, policy frameworks, regulatory risk, among others. All of these unfold differently across sectors within each country context.
The recovery process is certainly driven by governments, but domestic public resources - already diminished by declining tax revenues and massive spending - will not be sufficient to meet the challenges of a green economic recovery.. Many recovery plans are demonstrating that the approach to recovery green is not yet a tangible priority, as noted by the Climate Action Tracker (CAT). Structural transformation requires changes in structural policies and in the places where investments are made. In other words, collaboration with government actors, the private sector, financial institutions and citizens is needed more than ever.
These are some of the factors that will mark the scenarios and trends of decarbonization for the region, and that will mark the possibility of promoting low-carbon investments towards zero emissions by 2050. Therefore, it is important to understand what decarbonization is, what are the benefits of creating long-term public policies aimed at achieving carbon neutrality in Latin America and the Caribbean; but above all to know how to develop, plan, communicate, and finance this new economic development scenario that undoubtedly requires the efforts of several actors, both from the public and private sectors.
