Emissions Reduction in Latin America: Between Pressure and Opportunity

Those who want to understand why the energy transition is not progressing at the pace needed to meet the Paris Agreement would do well to look at Brazil.

During COP28, Brazilian President Luis Inácio "Lula" da Silva harshly criticised developed countries for not reducing their consumption of fossil fuels. At the summit's close, his government applauded the historic commitment to accelerate the energy transition and reaffirmed the commitment to reach carbon neutrality by 2050.

However, on the same day, 14 December 2023, Brazil tendered 602 oil and gas exploration blocks. Of these, 21 are in the Amazon basin, where at least 15 protected areas and two dozen indigenous communities would be affected.

Brazil's decision is not an isolated act of hypocrisy; it highlights the challenging dilemma many emerging economies face. Balancing emission reduction with economic growth and income generation is particularly challenging for Latin American countries, given their high poverty levels and carbon-intensive economies.

Although there are signs of a mild decoupling in the last decade, there is an almost perfect correlation between economic growth and carbon emissions in Latin America an the Caribbean (known as the LAC6) from 1990 to 2022, as this graph shows.

Latin American countries have one of the cleanest energy matrices in the world due to the abundance of hydroelectric and solar resources (IEA, 2023). Instead, the primary challenge for countries like Brazil is committing to carbon neutrality without exploiting their rich oil and natural resources. Hence, more than an energy transition, Latin American countries faced the demand for a structural transformation of their economic systems.

Such change faces resistance from industrial interests, local actors and communities to maintain the status quo, whether due to political interests, power struggles or the lack of resources to adapt to a new growth model. Furthermore, local and central governments in poverty-stricken and unequal societies face immense pressure to create jobs and generate tax revenue, often at the expense of escalating emissions.

Political dynamics tend to favour short-term gains over long-term climate commitments. Faced with the immediate necessity to alleviate poverty and stimulate economic growth, Latin American governments often prioritise investment and job creation, even in contradiction with their climate pledges.

Take Mexico as a case in point. The Mexican General Law on Climate Change mandates that 35 per cent of energy should be derived from clean sources by 2024. However, as of 2021, only 9.24 per cent of Mexico's total energy supply came from renewable sources, and a mere 1.6% from nuclear energy, as per IEA's 2022 report.

Contrarily, under the leftist President Andres Manuel Lopez Obrador, the Mexican government has favoured thermopower and bolstered oil production. Obrador's rationale hinges on achieving energy independence by utilising Mexico's hydrocarbon reserves to drive economic growth while arguing that oil exports "remain a lucrative business" for the country.

Then there is Chile. During its presidency of the COP25, Chile became the first Latin American country to commit to carbon neutrality by 2050. Although emissions reductions and environment protection were key to the electoral program of the progressive president Gabriel Boric, its government increased fuel subsidies in 2022 and 2023 in response to higher international prices while the economy went through a steep economic slowdown.

The decision of Boric's government was equivalent to a subsidy of USD 108 per tonne of CO2, mainly consumed by the transport sector, the second source of emissions in Chile.

Opportunities ahead

In facing the choice between immediate economic growth and reducing emissions, leaders of emerging countries, such as Mexico's President López Obrador, have called for financial compensation from wealthier nations in return for ceasing fossil fuel exploitation and preserving natural reserves.

Securing these payments from developed countries has been challenging. However, there is an increasing interest from private investors in funding the transformation of emerging economies. This interest is driven by political pressure for sustainable investments and the potential for profitable returns.

The International Renewable Energy Agency (IRENA) estimates that reaching the 1.5°C target set by the Paris Agreement will require cumulative investments of approximately $4.1 trillion in Latin America. This figure breaks down to an annual investment of about $136.3 billion from 2021 to 2050. For the LAC6 countries, this investment represents 2.36% of their annual GDP.

More recently, researchers for the UNDP suggest that the required investment from public and private sources may vary from 7 to 11 per cent of the annual GDP from 2021 to 2050. For instance, this amount far exceeds most of these countries' current fiscal spending on social assistance (between 1.5 and 3.5 per cent of GDP).

To reach carbon neutrality, Latin American countries will need more clean energy sources for their industries and transform whole economic sectors such as Agriculture, Transport, Construction and Waste Management, adopting new technologies and better practices.

Considering that the whole of Latin America is responsible for 9 per cent of global GHG emissions (including land-use), which is significantly lower than the USA's 11 per cent or Asia's 22 per cent - more than a task to achieve - countries in the region should see carbon neutrality as an opportunity to attract investments and modernise their economies, boosting economic growth, improving productivity and creating better jobs.