Which green and just transition?

September 13, 2023

The green and just transition advised by the UN focuses on issues that combine environmental sustainability with social justice and strives for the "leaving no one behind" principle. This notion recognizes that both issues are interconnected and must be considered in any effort to build a more sustainable future for everyone. Mitigation and adaptation are strategies of a comprehensive agenda to address the challenges of climate change. While critical, they do not always properly address the needs of vulnerable groups and can even exacerbate existing inequalities.

Many developing countries face the three-fold challenge of delays in attaining sustainable development goals, recovering from the effects of COVID-19, and climate change. Estimates suggest financing needs between USD 4 and 6 trillion every year until 2050 to address these challenges, which seems virtually impossible. Developed countries pladged yearly contributions of USD 100 billion until 2025 to underpin the climate change agenda of developing countries. Not only has that commitment not been honored, but the funds would have still been a negligible contribution towards meeting the needs.

Tackling the task of a green and just transition will require seeking alternative financing, adjusting the approach to the realities of each country and exploring new avenues. Besides mitigation and adaptation, an avenue to be explored further and deeper is a type of productive transformation that capitalizes on the new business opportunities associated with climate change and leverages the strengths of each country in order to make the strategy self-sustainable. It is about seeing the glass half full.

Productive transformation can be crucial in protecting the poorest, e.g. by creating green jobs, diversifying sources of income, promoting economic activities with less exposure to climate change, fostering new business opportunities for small and medium-sized enterprises, providing access to new technologies and management practices, and reducing the volatility of growth, which hits the poorest particularly hard. This productive transformation needs to incorporate climate resilience and sustainability in an effort to significantly build the coping capacity of the poorest to withstand the impacts of climate changes.

And what would productive transformation look like in Latin America and the Caribbean, and where should the region focus its efforts? Ideally, on activities that will play a key role in the global demand structure, on activities whose relative prices will inevitably rise in the coming decades, and on activities where the region already has comparative and competitive advantages.

This category would include everything that requires—directly or indirectly—plenty of water, renewable energies and critical minerals for transition, which are abundant in many of the countries of the region. This would also include food-related activities, as the region is one of the largest agricultural producers and has unmatched conditions for sustainable agriculture; activities related to the world's largest rainforest and many of the major biomes; activities related to the vast biodiversity and bioeconomy potential; and the major role in biofuels and new technologies and solutions for the climate transition.

But the region's greatest opportunity to advance a green and just transition can be summarized in powershoring, a strategy to attract investments in energy-intensive industrial plants in need of decarbonization, cost reduction and energy security. This is true for industries such as steel, cement, metallurgy, chemicals, glass, ceramics, pulp and paper, fertilizers and many others that can set up business clusters with a broad impact on jobs, income and small and medium-sized enterprises in the region. In fact, the region provides unique conditions to host powershoring investments that boost competitiveness of industrial plants and protect the interests of investors' countries. After all, powershoring slashes timelines and costs of energy transition in countries with gray energy matrices.

The greatest contribution of powershoring to green and just transition is based on its social impacts in urban areas, where most of the region's people reside and which concentrate the most serious problems of poverty, hunger, inequality, violence, informality, and low productivity.

The potential of powershoring is immense and could be transformative. Consider the case of Brazil. Based on our estimates, powershoring could add green manufacturing exports of up to USD 395 billion in the 2024–2032 period, while direct and indirect investments could total USD 351 billion over the same period. These are important figures, but even more important are their potential economic impact on national and regional value chains and on the type and nature of the region's integration into the global economy.

Despite the vast competitiveness potential that powershoring represents, the region faces major challenges, e.g. unprecedented interventions by developed countries in the markets and pricing systems for renewable energy, green energy equipment and green manufactured products by imposing protectionist and discriminatory standards and massive subsidies, which jeopardize the operation of markets and the green and just transition in developing countries.

The unique conditions of LAC boost the confidence and space needed to adopt a more assertive and ambitious stance, influence discussions, play a prominent role in the global economy, and present itself to the world as a source of solutions for decarbonization and poverty reduction.

Jorge Arbache
Jorge Arbache

Vice-Presidente do Setor Privado, CAF –banco de desenvolvimento da América Latina-