Climate Change in Latin America and the Caribbean: Challenges and Opportunities
IMF Blog, October 28, 2021
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Bibliographic details
- Authors: Anna Ivanova, Julie Kozack, Jorge Roldos, Sonia Munoz
- Published: October 28, 2021
Overview
- Authors: Anna Ivanova, Julie Kozack, Jorge Roldós, Sònia Muñoz
- Date: October 28, 2021
- Summary finding: Adapting to new climate conditions while intensifying mitigation efforts will require major structural transformations in the region.
- Regional context: Higher temperatures, extreme weather events, and reliance on climate-sensitive sectors such as tourism and agriculture create heterogeneous impacts across LAC; natural endowments of “green” metals (copper, nickel, cobalt and lithium) offer transition opportunities.
- Link to IMF analysis: Findings are drawn from the Regional Economic Outlook referenced in the source.
Policy options for climate mitigation
- Emissions profile:
- LAC accounts for about 8 percent of the global total of net greenhouse gas (GHG) emissions.
- Energy sector: 43 percent of LAC emissions versus 74 percent global average.
- Agriculture: 25 percent of LAC emissions versus 13 percent global average.
- Land use, land-use change, and forestry (LULUCF): 19 percent of LAC emissions versus just over 1 percent global average.
- Cost-effectiveness:
- Model simulations (Huppmann et al.) suggest it may be more cost-effective for the world to compensate LAC countries for protecting, managing and restoring ecosystems than to scale up mitigation elsewhere.
- Recommended multi-pronged mitigation approach:
- Increase energy efficiency and renewable energy use.
- Reduce emissions in transportation and agriculture.
- Restore and protect forests (natural carbon sinks).
- Policy toolkit (examples):
- Price-based measures: reduction in fossil fuel subsidies; introduction of carbon taxes; establishment of emissions trading systems; development of feebates.
- Non-price measures: public investment in low-carbon technologies and infrastructure; fiscal incentives; supportive regulations.
- Fiscal and distributional implications:
- A gradual removal of energy subsidies and introduction of universal carbon taxes of up to $75 per ton could help some LAC countries reach their 2016 Paris accord targets.
- Revenues from these policies range between ½ and 4½ percent of GDP and could be used to compensate vulnerable households.
- Analysis indicates universal cash transfers can fully offset the negative impact on the first six to seven deciles of per capita household consumption in Argentina, Brazil, Colombia, and Mexico.
Strengthening adaptation
- Economic benefits of structural resilience:
- Investing in structural resilience can boost long-run GDP by between 2 and 6 percent for Caribbean islands and between 0.2 and 1.4 percent for Central American countries.
- After resiliency is achieved, output would be around ¼ percent higher three years after a natural disaster in the Caribbean on average and around 0.1 percent higher for Central American countries.
- Public debt would be ¾ percentage point lower after three years in the Caribbean and around ¼ percentage point lower in Central America.
- Financial resilience via insurance:
- Insurance coverage of 15–30 percent of GDP for Caribbean countries and 10–20 percent of GDP for Central America, Panama, and the Dominican Republic could cover 99 percent of the fiscal costs related to natural disasters.
- Proposed insurance framework includes building a precautionary government savings fund, accessing the Caribbean Catastrophe Risk Insurance Facility and issuing state contingent bonds.
- This could cost countries between 0.5–2 percent of GDP per year.
- Financing adaptation:
- Upfront costs require innovation in funding; deeper private sector contributions can help and should be facilitated by policies to improve access to financial services and the climate risk resilience of country financial systems.
The cost
- Estimated regional cost to reach mitigation and adaptation goals: $90–110 billion per year for the entire region.
- Financing needs and composition:
- Estimates are subject to high uncertainty.
- Most countries will not be able to cover these costs domestically; external financing—from both official and private sectors—will be essential.
- Private-sector instruments: sustainability-linked debt and equity markets, state-contingent instruments such as catastrophe bonds or debt-for-nature swaps.
- Caution: Actions needed to avoid “greenwashing.”
- Bilateral and multilateral support—on concessional terms and in the form of grants for the most vulnerable countries—will be crucial.
Opportunities and trade-offs
- Transition opportunities:
- The climate transition could boost growth, generate new jobs, support pandemic recovery, and improve health outcomes.
- Natural endowments of “green” metals (copper, nickel, cobalt and lithium) can facilitate the transition in some countries.
- Policy design principle:
- The best combination of policies will depend on each country’s specific challenges and circumstances; a tailored, multi-pronged approach is emphasized.
Source: Climate Change in Latin America and the Caribbean: Challenges and Opportunities (IMF blog), October 28, 2021.