Beyond the health emergency, the pandemic has dealt a severe blow to the economies of Latin America and the Caribbean. According to the World Economic Outlook report, it is estimated that our region will contract by 9.4% in 2020, which will constitute the worst recession in a long time, even deeper than that caused by the global financial crisis of 2008-09 and the debt crisis of the 1980s. For 2021, a slight recovery in growth is expected.
Our governments will have to adopt important fiscal measures to reactivate public investment and return to the path of sustainable growth. Given that most of the countries in the region will have little fiscal space to increase their investments, governments need to improve the quality of their projects, prioritizing those that create employment; and reduce inequality, support the transition towards decarbonization of economies, and increase their adaptive capacity to climate change.
In this sense, we identify nine promising areas for public investment in the post COVID-19 era that meet these objectives:
- Renewable energy. According to the International Labor Organization, investing in renewable energy, along with smart energy grids designed to meet large-scale demand, supports decarbonization, reduces air pollution, and creates employment because they are more labor-intensive than fossil fuel-based activities. In fact, investment in renewable energy can create five more jobs for every million dollars invested than investment in fossil fuels (McKinsey, 2020). Additionally, according to the International Renewable Energy Agency (IRENA, 2020), renewable energy sources are becoming cheaper, as shown by the recent experiences of Chile, Mexico and Peru, where distribution companies purchase solar energy for up to 3 US cents per kilowatt-hour, a lower amount than other type of energy sources.
- Transportation. Transportation in Latin America and the Caribbean (LAC) is one of the four main sectors that generate greenhouse gas emissions given its high dependence on the use of fossil fuels. Fortunately, the price of renewable energy is increasingly competitive, with the cost of electric vehicles estimated to be similar to those of internal combustion by 2025, according to Bloomberg’s Electric Vehicle Outlook 2020. Therefore, in a context of recovery measures, it is essential to include investments aimed at favoring the electrification of transportation, the expansion and efficient use of public transportation, and the construction of bicycle lanes and mass transport lanes. This type of investment generates important economic benefits due to improvements in health, productivity, and avoided accidents, as shown by the Decarbonization Plan of Costa Rica. This Plan considers ambitious goals for the transportation sector, including the electrification of 85% of the public fleet and 95% of the private fleet by 2050. It also projects net benefits for the country of about US$20 billion generated by improvements in health, productivity, and accidents avoided for a total of US$17.9 billion; and lower financial costs of US$3.1 billion.
- Digital Infrastructure. The accelerated deployment of high-speed digital infrastructure generates multiple economic and social benefits, particularly in peri-urban, rural, and disadvantaged regions. It also supports broader decarbonization goals, for example by reducing the demand for travel or displacement of the population. Given that working from home and video conferencing will remain at high levels after the pandemic, it is estimated that this type of investment will rapidly accelerate, generating significant economic benefits. In the case of government services, digital procedures are faster, and reduce costs for the government and citizens, reducing the time and number of trips to government offices. Digital procedures costs between 1.5% and 5% of what face-to-face procedures cost and are 74% faster than face-to-face procedures (Roseth et al 2018).
- Land use planning. Investments in urban infrastructure should be prioritized using land management plans that optimize the benefits of higher economic density and productivity such as concentration of companies, densification of the labor market and trade chains; and minimize externalities such as congestion, carbon emissions and exposure to the effects of climate change. The spatial organization of cities influences energy consumption and carbon emissions in the transportation and construction sectors. For example, Japan has urban areas five times denser with 40% lower per capita energy consumption than Canada (OECD, 2020). In other words, land use planning contributes, among others, to: (i) optimize investments in mass and non-motorized transportation infrastructure; (ii) improve the location of housing, infrastructure, and services; and (iii) facilitate conservation and better risk management in the face of natural disasters.
- Energy and water efficiency of buildings and homes. Investments to improve the efficiency in the use of energy and water of buildings and homes generate multiple benefits because they are labor intensive, reduce energy costs, and reduce emissions. This type of investment is important for the government sector, which could certify its buildings under energy and water efficiency standards, thus reducing its operation and maintenance costs. It is also important to invest in the reconversion and reconditioning of buildings – retrofit – to improve their functionality and achieve a more efficient use of resources. The building and construction sector was responsible for 22% of LAC’s total energy consumption in 2018, and for 52% of electrical energy consumption. In Brazil, where this consumption has grown by 1.6% per year between 2000 and 2016, the adoption of energy efficiency measures would reduce consumption growth by 30% by 2050 (González-Mahecha et al 2019).
- Solid waste. Comprehensive solid waste management strategies can also help save resources, create jobs, and help drive the circular economy. Many cities in the region have demonstrated the multiple benefits of solid waste reuse and recycling. Debris clean-up programs, including decontamination of soil, waterways, and oceans, also offer opportunities for job creation and improved quality of life.
- Natural infrastructure. Deforestation and land degradation, as well as of carbon emissions and loss of biodiversity, are among the main causes of food insecurity and poverty. Investments in natural infrastructure — such as reforestation, recovery of watersheds and coastal ecosystems, and the creation of ecological corridors — promote water supplies and reserves, control floods and landslides, conserve biodiversity and retain carbon. They are investments of rapid execution, low cost, high capacity to generate jobs, appropriate to a context of urban expansion, environmental degradation, and the growing demand for water. It is also important to make investments in drainage and sewerage systems that are resilient to changes in rainfall patterns.
- Food safety. The pandemic should result in increased food insecurity in the region, due to factors such as loss of income, increased price volatility, and disruptions in food production and supply chain. Actions that contribute to reducing the impact of the pandemic on the most vulnerable population, while generating employment are investments in programs to ensure production on a sustainable basis, improvements in logistics chains and food availability.
- Infrastructure to face natural disasters. LAC is particularly vulnerable to the impacts of an unpredictable and changing climate, with significant economic damage and human losses. However, there is evidence that resilient investments not only prevent or minimize future damage, but also generate benefits that far exceed their costs: in a ratio that could be greater than 10:1. Likewise, investments against disaster risks present returns that exceed four dollars in losses avoided for each dollar invested (Global Commission on Adaptation, 2019).
Financing strategies for public decarbonization investment
Public investment decisions must be complemented by a national financing strategy. These strategies make it possible to identify and promote access to resource flows that support the country’s transition to a low-emission, climate-resilient economy. This implies having financing requirements programs that are compatible with medium-term fiscal frameworks and that include the multi-year demand for resources and the supply of public/private financing from national and/or international financial entities.
Additionally, financing mechanisms and instruments should be identified to mobilize resources, in a sustainable and scalable way, so as to achieve the objectives of the national climate change policy and comply with international commitments. To accomplish this, it is necessary to manage and/or develop financial instruments, to obtain access to sources of financing, and to structure attractive investment opportunities for the private sector in issues related to sustainable recovery as well as to promote mechanisms for the transfer of risks and insurance. The following are examples of some financing instruments that could be used in the recovery and transition to decarbonized economies.
a. Climate/Green Bonds. The green bond market has grown steadily, demonstrating the importance that the international market has achieved in a relatively short time. In the region, Chile has demonstrated its commitment to combat climate change and its leadership in green financing, by becoming the first issuer of green bonds in the region and the first non-European issuer of a sovereign green bond in Europe. With this innovative transaction, Chile achieved several milestones, including a lower rate obtained in both currencies, low spreads, record demand, and an expansion of its investor base incorporating those with “green” mandates. Increased issuance of these types of bonds, especially by developing countries, will help unlock cross-border financing of climate action.
b. Debt swaps for climate. This consists of the sale of a foreign currency debt to an investor or the forgiveness of the debt by the creditor, in exchange for the debt relief having to be invested in activities related to climate change. By adjusting their approach, debt swaps could provide financing for climate action including mitigation and adaptation measures.
A “debt-for-climate” swap would not necessarily put more resources at the disposal of a government (especially for highly indebted countries), but a properly designed swap can create a fiscal space that allows more domestic savings to be mobilized for investments related to climate action. Costa Rica has been carrying out several debt-for-nature swap operations that will allow it to finance conservation projects, especially those that include direct actions to mitigate the impacts of COVID-19 on biodiversity and the livelihoods of communities.
c. Insurance and Guarantees. Insurance is a risk transfer mechanism that provides resources for weather-related disasters and transfers loss responsibilities to capital market investors. Insurance products play a critical role in risk management. Their use could be promoted in green assets, reinsurance for high-risk assets, or the existence of sovereign catastrophic risk plans. Likewise, it is possible to use guarantees in its two forms: guarantees as a promise to pay the debt related to a climate change activity, or as an instrument to improve the credit profile in the financial structuring of sustainable infrastructure projects.
Shared risk funds are another mechanism that allow for the offer of insurance policies for tropical cyclones, earthquakes, excess rain, and the fishing sector, among others. For example, the Caribbean Catastrophe Risk Insurance Fund (CCRIF) allows countries to purchase coverage, similar to business interruption insurance, that provides them with immediate liquidity in the event of a natural occurrence. The financial structure of the insurance instrument allows CCRIF to provide countries with coverage tailored to their needs at a significantly lower cost than that of the financial markets.
Multilateral development banks, such as the IDB, play a very important role in financing climate action and public investment, either through contributions to the implementation of financial instruments and mechanisms to attract more capital and providing direct, contingent financing, and/or through guarantees to both the public and private sectors. In 2018, climate finance from multilateral banks reached a record US$43.1 billion.
These institutions are in a privileged position to channel resources and provide technical assistance to countries as they establish financing strategies for their recovery and transition policies towards decarbonized economies. Finally, multilateral institutions maintain links with all relevant players in the public and private sectors, civil society, and social organizations, which facilitate the construction of the necessary consensus for the establishment of financing strategies for climate change.