Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
We have seen growing discomfort with the climate agenda in developed countries. Frustrations have varied motivations, but it is worth highlighting those related to the perceived increase in the cost of living, the perceived burden of financing the transition to renewable energy sources, carbon and emissions taxes, taxes to finance public spending, and the perception that the environment issue compresses rates of return on investments.
This frustration is concerning, as it compromises what might be the most urgent challenge we face. For the climate agenda to withstand criticism and broaden its support base, it must prioritize people. To do this, it will be necessary to find means that provide the world with green, safe, affordable, and efficient solutions. Consider the magnitude of the challenge in Europe, which has committed to reducing emissions by no less than 55% by 2030.
Recently, the European Commission announced a proposal for a 90% target by 2040. Due to the high costs of decarbonization options, it won't be easy for developed regions to achieve ambitious emission reduction targets within relatively short timeframes without hindering economic growth.
the region already has the greenest power grids, can increase the supply of renewable energy at decreasing marginal costs, and the cost of renewable energy can be very competitive by international standards. Countries with these attributes are well-positioned to participate in the corporate strategy of powershoring and welcome energy-intensive plants that need to decarbonize and reduce costs at an accelerated pace.
Manufacturing under powershoring conditions can be crucial for safeguarding corporate interests, as well as those of the people. Indeed, powershoring can contribute to reducing energy costs, eliminating emission rights costs, accelerating the placement of green products in the market, reducing environmental compliance expenses, and lowering taxes. With this, it is possible to provide the international market more quickly with green inputs and consumer goods at more affordable prices.
High-emission sectors, such as steel, iron, aluminum, ceramics, glass, fertilizers, cement, hydrogen, and chemicals, are particularly exposed to environmental regulations that impact costs and final prices. Consider the case of steel, which accounts for between 7% and 9% of all greenhouse gas emissions on the planet, and whose conversion cost for mature plants can be prohibitive. In the European Union, steel alone is responsible for 22% of all industrial emissions.
Low-emission steel produced in powershoring zones could have wide repercussions downstream in production processes that use the metal, helping to cheapen and green cars, construction and other goods of popular interest - for reference, steel and aluminum can represent 70% of the weight of a medium-sized car. The powershoring strategy can also support the achievement of NDCs in countries that import and substitute steel and other green inputs, as well as reducing the cost of the energy transition in these countries. By easing the burden of taxation and inflation on people's shoulders, powershoring presents itself as an ally of decarbonization and could help garner the necessary sympathy for the climate agenda.
But, for Latin America and the Caribbean (LAC) to contribute, trade must be a piece of the decarbonization puzzle. However, what we see is an increasing politicization and commodification of the green agenda in developed countries, with rising tariff and non-tariff protectionism, increasing discrimination against imported green products, unprecedented subsidies for local production of green goods, even if they are not competitive, and a blockade on new trade agreements. All this disrupts markets, interferes with resource allocation, fosters inefficiencies, and raises prices and public debt.
Beyond frustrating their own citizens, the current policy of developed countries can also cause frustration among citizens of developing countries. After all, those market interventions reduce the attractiveness of green investments in southern countries, promote investment diversions, and increase the cost of capital in those countries. All this neutralizes comparative advantages and opportunities to monetize green businesses that could be crucial for financing adaptation and mitigation.
But countries in LAC also have high potential and competitiveness for the production of biofuels and green hydrogen, possess many of the largest reserves of strategic minerals, the richest biodiversity, and a huge carbon market and bioeconomy potential. And the region also has a lot of fresh water and enormous capacity to increase agricultural production to support the global fight against food insecurity. However, just as with the trade blockade, we also observe manifestations that neutralize the potential in these other areas. Think about the resistances to nature-based solutions and the charging for environmental services.
LAC is considered the region whose politicians and population are most sympathetic to the climate agenda. However, this outlook could change due to a lack of means and resources to combat the effects of climate change. The fragmentation of international markets and short-term vision could be particularly damaging for developing countries with small internal markets and facing even more restrictions and challenges.
To move forward, it will be necessary to encourage the trade of low-carbon products with preferential trade mechanisms, traceability, and proof of origin. The G20 and COP30 in Brazil are valuable opportunities to address these issues and their relationship with decarbonization in developed countries, economic and social development, and the financing of the climate agenda in developing countries.
