The Inter-American Development Bank (IDB) is recommending that finance and planning ministries in Latin American and the Caribbean (LAC) consider fiscal policies to accelerate the transition to green economies and pave the way for the region to meet decarbonisation goals.
The IDB in a new study titled “Fiscal Policy and Change Climate: Recent Experiences of Ministries of Finance in Latin America and the Caribbean,” is also suggesting that policies focused on green growth have the potential to increase resilience to climate change and create new economic opportunities that generate more and better jobs.
The publication also highlights the importance of reducing economic dependence on fossil fuels by reducing subsidies to maintain economic competitiveness and ensure fiscal sustainability.
The decarbonisation of the region’s economies can create 15 million net new jobs by 2030 and every dollar invested in making infrastructure and economies more resilient can generate up to four dollars in economic benefits.
According to the study, the region’s economies will have to create new patterns of production and consumption of goods and services to achieve net-zero emissions by 2050.
It said to meet this objective, finance ministries will have to consider implementing fiscal policies that promote these changes while mitigating the possible risks in public finances generated by extreme climatic events and the upcoming structural and technological changes.
“The clock is ticking. The unprecedented level of transformations that must occur in all economic sectors demands a much deeper level of involvement by finance ministries with policies to combat the effects of climate change,” says Benigno López, IDB Vice President for Sectors and Knowledge.
“These ministries play a central role as they need to implement adequate fiscal management to mitigate risks and use public investment and their spending and taxation policies to leverage the opportunities of the green economy and promote a just transition for citizens affected by these changes.”
The average annual frequency of extreme climatic events per country in the region increased by more than 50 per cent in recent decades, going from 0.2 per cent annually during 1980-2000 to 0.3 per cent per year between 2001 and 2019.
It is estimated that the impact of these extreme events was between 0.2 per cent and 0.3 per cent of GDP per year for the region between 2001-2019.
The study also estimates that Latin American oil production may be reduced to less than four million barrels per day by 2035 according to scenarios consistent with the Paris Agreement goal of preventing global warming from exceeding 1.5 ° C.
That would represent a 60 per cent reduction in oil production relative to its pre-pandemic levels, which, in turn, will impact tax and non-tax revenues associated with oil. Likewise, revenue in the region could increase by up to US$224 billion per year if energy subsidies are eliminated and a tax is levied on local externalities and carbon emissions.
The study discusses how the functions of finance ministries related to public expenditure management and evaluation, budgeting, fiscal policy, and mobilisation of private and international finance can help advance public policies against climate change.
It also analyses their capacity to strengthen inter-institutional coordination mechanisms to align government operations with the objectives of sustainable growth.
The publication identifies three key areas of intervention for the region’s finance and planning ministries.
Under the management of economic and fiscal risks related to extreme weather events and the transition to net-zero emissions, the study notes that public finances would benefit from having mechanisms in place to diversify risks and to build financial buffers, as well as to establish broader governance and risk management mechanisms within finance ministries’ mandates.
As part of these efforts, it is necessary to strengthen investment systems by incorporating resilience and risk management elements into projects and programmes.
The IDB is also recommending promoting a just and green transition, indicating that finance ministries must design policies towards a green transition that consider and address the distributional impacts on the affected economic sectors and workers through proper fiscal, tax, public investment, and spending management.
“This means not only the application of compensatory policies, but also the promotion of new sources of employment and economic growth that result from the adoption and development of new technologies and investments,” the IDB said.
It said also access to financing would allow for the resources needed to finance the transition far exceed the financial capacity of governments.
Finance ministries play a catalytic role in attracting private investment by establishing incentive frameworks, proposing public investments, and implementing regulatory reforms to help reduce barriers to private investment.
“Moreover, they can contribute to the development of new markets (such as green bonds) by taking advantage of the growing interest of capital markets in placing resources in sustainable projects, thereby accessing a new investor base,” the IDB added.
This article was originally shared by the Jamaica Observer.
