Carbon Mitigation in LAC Deck .pptx

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www.energypolicy.columbia.edu | @ColumbiaUenergy
Climate Mitigation in Latin-America and
the Caribbean:
Ambition vs. Reality
Mauricio Cardenas

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Opportunities associated with the energy transition
M O T I V A T I O N
Environmental and health
benefits. E.g. reductions
in air pollution mortality
and morbidity
Economic growth and
new jobs
Sustainable farming
could release fiscal
resources that were
used for subsidies
Less livestock
agriculture could
free up land
Some countries have
natural resources in
metals needed in low
GHG technologies
production
Countries vulnerable to
climate disasters will
experience significant
growth and fiscal
benefits overtime
But, aspirational unless some fundamental obstacles are resolved.

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SOURCES: World Bank WDI, Reuters
Covid-19 Global Tracker, Global Burden of
Disease Study 2019 in Our World in Data
L A T I N A M E R I C A N C L I M A T E M I T I G A T I O N I N T H E G L O B A L C O N T E X T
Latin America and the Caribbean in the world
LAC's share of global GHG emissions is around 7%, which is broadly consistent with the size of its
economies and population

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GHG and CO2 Emissions per Capita in LAC
Sources: World Resources Institute, CAIT Climate Data Explorer; United Nations Framework Convention on Climate Change; and IMF staff calculations.
'Net GHGs emissions include gross GHGs emissions (see footnote 2) plus LULUCF, which can be positive or negative.
2Gross GHGs emissions include CO2, CH4, N20, and F-gases, sourced from energy, industrial, agriculture, waste, and others.
LAC's share of global GHG emissions is around 7%, which is broadly consistent with the size of its
economies and population, although there are significant differences within the region

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Greenhouse Gas Emissions and Energy Matrix
Sources: IMF, Carbon Pricing
Assessment Tool; International Energy
Agency; Organization for Economic Co-
operation and Development; World
Resources Institute -CAIT Climate Data
Explorer; IMF staff calculations.
LULUCF = Land Use, Land-Use Change,
and Forestry;
LAC’s emission are driven by land-use change and agriculture rather than electricity generation

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SOURCE: Reprinted from Data & Statistics, by Irena, n.d.,
https://www.irena.org/Statistics. Copyright 2011-2020 IRENA -
International Renewable Energy Agency. All Rights Reserved.
Renewable
electricity is a
success story in
LAC
2019

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SOURCE: Estimating the Fiscal
Impact of Extreme Weather
Events by Alejos, L., 2018.
Extreme Climate-Related Weather Event Frequency in LAC
1980–2017
Although the region is not a sizeable GHG emitter, it is one of the most vulnerable to climate change

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High level of
vulnerability to
climate change
• 10 countries of the region are among
the 25 most vulnerable
(Germanwatch Index)
• Central America and the Caribbean
are the two most vulnerable
geographic areas in the world.
o Hurricanes
o Droughts
o Rising sea levels
o Crop losses
L A T I N A M E R I C A N C L I M A T E M I T I G A T I O N I N
T H E G L O B A L C O N T E X T

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In theory there is support for climate action, but in
practice…
SOURCE: IPSOS Global Advisor. 2020. How does the world view climate change and Covid-19. April 2020. Retrieved on May 23r, 2020
from: https://www.ipsos.com/sites/default/files/ct/news/documents/2020-04/earth-day-2020-ipsos.pdf

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Climate Ambition in LAC

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-34.3%
C L I M A T E G O A L S I N L A C
Second iteration of LAC’s NDCs
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Emmissions (2020e) Emissions BAU
(2030f)
NDCs (2030)
Brazil Mexico Colombia Argentina Peru Chile
The largest six economies of the region or LAC-6 updated their NDC. In these revisions, most
countries have increased their targets except Mexico and Brazil

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T R A N S I T I O N T R A J E C T O R I E S T O A L O W - C A R B O N E C O N O M Y
Scenarios of the transition to a low carbon economy
The transition to Net-Zero is front-loaded, and reaches net-negative emissions in LAC, while the
NDC trajectory is slower and concentrated towards the 2030-2050 period
-500
0
500
1000
1500
2000
2500
3000
3500
4000
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Mt
CO2/yr
Nationally Determined Contributions (NDCs) Net Zero 2050
Two scenarios:
 NDC scenario: Assumes currently
pledged NDCs are fully
implemented, and 2030 targets are
met. From 2030 onwards, the
climate policy ambition remains
comparable to the levels implied by
the NDCs.
 Net-Zero scenario: Assumes the
world reaches net-zero CO2
emissions in 2050, in an orderly
transition as a result of a global
welfare optimization.

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Transition trajectories by sector
-200
0
200
400
600
800
1000
1200
1400
1600
2020 2025 2030 2035 2040 2045 2050
Agriculture, Forestry, and Other Land Use Industrial Processes
Transportation Electricity Generation
0
200
400
600
800
1000
1200
1400
1600
1800
2020 2025 2030 2035 2040 2045 2050
Agriculture, Forestry, and Other Land Use Industrial Processes
Transportation Electricity Generation
NDC Net-Zero
The AFOLU sector will be the primary driver of LAC’s emission reduction. The Net-Zero reductions
seems unrealistic given current policies and States’ capacity

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Countries' Long-Term Strategies (LTS)
Most of the LAC-6 countries have designed
strategies to achieve NDC goals:
• The high-impact initiatives are associated primarily
with the AFOLU sector. Several countries are
committed to reforesting, restoring, and better
managing native forests and implementing
programs under the REDD+ framework
• The energy sector is another focus of LAC-6
NDCs. All countries identify the need to increase
the share of non-hydro renewable energy and
promote energy efficiency measures in
commercial and residential sectors
However, there is a general lack of specific
financial plans to support the delivery of these
strategies:
• The lack of financial plans casts doubt on the
feasibility of implementing LAC NDCs.
• Only Chile, Colombia, and Peru mention they are
working on climate change financing plans.
• Few countries have been explicit about the fiscal
impact of the energy transition, both in terms of
revenues and expenditures.
• Only Colombia mentioned using carbon taxes to
finance these policies.

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Putting a price tag to the energy
transition

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Countries' Long-Term Strategies (LTS)
I n v e s t m e n t r e q u i r e d t o a c h i e v e t h e N D C s
0
50
100
150
200
250
2020 2030 2050
Argentina
0
200
400
600
800
1000
1200
2020 2030 2050
Brazil
0
5
10
15
20
25
30
2020 2030 2050
Chile
0
20
40
60
80
100
120
140
160
2020 2030 2050
Colombia
0
100
200
300
400
500
600
2020 2030 2050
Mexico
0
20
40
60
80
100
120
140
160
2020 2030 2050
Peru
MtCO2
MtCO2
MtCO2
MtCO2
MtCO2
MtCO2
• The cost calculation starts with the
total emissions expected to be
reduced in the period 2030 to 2050
on each of the sectors in the NDC
• The trajectories show that Colombia
and Chile have the steepest
expected decline in emissions, which
is consistent with their more
ambitious pledges.
• These scenario shows that only
these two countries achieve a gross
reduction in 2030.
• Mexico has the lowest foreseeable
reduction in emissions within the
region.

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Investment required to achieve the NDCs
C L I M A T E G O A L S I N L A C
Own estimates based on the NGFS NDC 2050 scenario using REMIND-MAgPIE and McKinsey (2021)
• The emissions reductions are
multiplied by a carbon abatement
cost from McKinsey (2022). This
costs is between USD 250 -
300/tCO2e.
• Compared to US and Europe the
transition is more costly as a
percentage of the GDP.
• Three drivers of this result
- Amount of spending relative to the
size of the economy
- Higher projected rates of
economic growth
- Reallocation of spending from high
to low-emissions assets
0% 2% 4% 6% 8% 10% 12% 14%
United States
Europe
China
Colombia
Chile
Brazil
Peru
Argentina
Mexico
Cost (% 2021-2030 GDP) Cost (% 2021-2050 GDP)
The transition will require on average 8% of GDP per year for LAC-6. Colombia and Chile will face
the highest cost as a share of their GDP

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Additional obstacles: Transition
risks and fiscal challenges

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Commodity exporters: The loss of fiscal and foreign
exchange revenues
Natural Resources Rents. 2018
(Percent of GDP)
Dependence of Fossil Fuels, 2015-19
(Percent of total exports)
Agricultural Exports, 2019
(Percent of GDP and exports)
Sources: WDI. UN Comrade. Carbon Tracker. Haver Analytics. National authorities, and IMF staff calculations - Regional Economic Outlook, Western Hemisphere, IMF
T R A N S I T I O N R I S K
Fossil fuels and high-emissions products would see shrinking demand in the next two decades. If
the 1.5°C pathway is achieved, regional oil production needs to fall by 60% below 2019 levels

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T R A N S I T I O N R I S K
A taxonomy of exposures and risks

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F I S C A L C H A L L E N G E S
A new model of conversion of natural capital (N)
into physical (K) and human capital (H) is needed

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Paying for the energy transition
“Enlightened self-interest alone is unlikely to be sufficient to help achieve net zero” (McKinsey, 2022).

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From energy subsidies to carbon pricing
Carbon Tax Rate, 2021
(US dollar per ton of CO2 emissions)
Total Fossil Fuel Subsidies by Type, 2019
(Percent of GDP)
Sources: World Bank, Carbon Pricing Dashboard (June 2021); and IMF staff calculations.
Regional Economic Outlook, Western Hemisphere, IMFv
There are significative and growing fossil fuel subsidies. Only four countries have established a
carbon tax, although these are among the lowest in the world.

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Carbon taxes are needed, but are not a silver bullet...
Reduction of Gross GHG Emissions (excluding LULUCF) from Illustrative
Scenario of Subsidy Removal and Carbon Tax
(Percent of 2030 BAU emissions)
SOURCE: Sources: IMF, Carbon Pricing Assessment Tool; and IMF staff calculations.
Note: NDCs are harmonized to 2030, to exclude LULUCF, and to be unconditional, or, where available, the average of conditional and unconditional.
To achieve a neutral fiscal impact, carbon prices must be increased to levels that are not be realistic
given the economic and political context of LAC

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Use of extra revenues from green taxes is
critical:
• Earmark for new climate-related uses
• Easy to verify
• Not for fiscal deficit reduction
• Engage civil society

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A new fiscal pact: ‘green’ fiscal rules
G R E E N F I S C A L R U L E S
• Existing fiscal rules combine ER (expenditure rule),
DR (debt rule), and BBR (balanced budget rule).
• Most rules were abandoned or deactivated during
the pandemic.
• Opportunity to redesign rules:
• Use structural primary fiscal balance with faster
convergence towards target if debt is above certain
threshold.
• Include provisions to finance the energy transition.
• Reward (with extra fiscal space) countries that raise
carbon taxes and reduce energy subsidies.
• Add another dimension to fiscal sustainability:
explicitly consider a carbon budget and measure
environmental contingent liabilities.
• Create a carbon council (in addition to fiscal
council)
Existing fiscal rules in LAC by type (number of countries)

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Voluntary Carbon Markets

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Low investment in R+I
P R I V A T E S E C T O R C H A L L E N G E S
Source: McKinsey (2022)

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Markets still favor deforestation
• Preventing deforestation is cheap (less than $3 per
metric ton of CO2 in tropical areas) and avoids
emissions immediately.
• Restoration via reforestation, afforestation,
peatland restoration, and coastal restoration would
be LACs most significant contribution to
decarbonization.
• 250 million hectares could be reforested today,
especially in Brazil, Colombia, Panama, and most
of Central America.
• Negative emissions can be used to offset hard-to-
abate emissions in sectors such as cement and
steel.
• Preserving forests has many nonmarket co-
benefits: temperature regulation, rainfall regulation,
water filtration, prevention of soil erosion, and crop
pollination.
M A R K E T F A I L U R E S : D e v e l o p a d e e p m a r k e t f o r o f f s e t s

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SOURCE: Bloomberg
NEF; and IMF staff
calculations.
Global Sustainable Debt Issuance
(Billions of US dollars; as of June 30, 2021)
LAC: Sustainable Debt Issued
by Instrument Type1
(Billions of US dollars)
Measuring risk (TCFD/IFRS) and verifying compliance is a
key role for the financial sector
(cost of capital remains inconsistent with the transition)
M A R K E T F A I L U R E : M a r k e t f o r l o n g - t e r m f i n a n c e w i t h l o w e r c o s t o f c a p i t a l

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Conclusions
1. Ambition is not enough.
2. Physical risks are already evident and help mobilize public
opinion.
3. Not all mitigation efforts can be self-financed. Public
investment is required.
4. Changes in fiscal frameworks are needed (including those
used by rating agencies).
5. A large number of market failures have to be fixed.
6. Measurement and reporting of scope 1, 2 and 3 emissions
and a functional and deep market for carbon offsets is
crucial for Latin America.
7. A fast reduction in emissions from deforestation is cost-
effective and does not require technological
breakthroughs. It needs to be a well-funded global priority.

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