What green and fair transition?

September 13, 2023

The green and fair transition advocated by the UN combines environmental sustainability with social justice, adhering to the principle of leaving no one behind. The concept acknowledges that both components are interconnected and must be addressed to craft a more sustainable future for all. While mitigation and adaptation are essential strategies against climate change challenges, they don't always cater adequately to the needs of vulnerable groups and can even exacerbate existing inequalities.

Many developing countries grapple with the triple challenge of lagging behind in SDG targets, recovering from the effects of Covid-19, and addressing climate change. Estimates suggest a financing need between $4 trillion and $6 trillion annually until 2050 to confront these challenges, a seemingly insurmountable task. Developed countries pledged yearly contributions of $100 billion until 2025 to support the climate change agenda of developing nations, but not only was this commitment not met, but the funds would also have been a drop in the ocean compared to actual needs.

Addressing the green and fair transition requires exploring financing alternatives, tailoring the approach to each country's reality, and seeking innovative pathways. Beyond mitigation and adaptation, a more thorough exploration is needed into productive transformation, capitalizing on new business opportunities associated with climate change, leveraging each country's unique advantages so that the strategy becomes self-sustaining. It's about seeing the glass as half full.

Productive transformation can be vital for protecting the impoverished, encompassing the creation of green jobs, diversifying income sources, fostering less climate-vulnerable economic activities, promoting new opportunities for SMEs, granting access to new technologies and managerial practices, and reducing growth volatility—which harms the poorest the most. A productive transformation infused with climate resilience and sustainability can markedly enhance the poor's ability to withstand climate change impacts.

So, what does productive transformation look like in Latin America and the Caribbean (ALC)? Ideally, it lies in activities that will command a prominent position in the global demand structure, where relative prices will inevitably rise over the coming decades, and where the region already possesses comparative and competitive advantages.

This category would encompass sectors needing, directly or indirectly, large amounts of water, renewable energy, and critical minerals for the transition—which are abundant elements in many countries of the region. This includes sectors related to food, as the region is already a major agricultural producer with unparalleled sustainable farming conditions; sectors connected to the largest tropical forest and several vital biomes; those tied to vast biodiversity and bioeconomy potential; and sectors leading in biofuels and novel climate transition technologies and solutions.

The region's most significant opportunity might lie in powershoring, a strategy to attract investments in energy-intensive industrial plants looking to decarbonize, reduce costs, and achieve energy security. This pertains to sectors like steel, cement, mechanics, chemicals, glass, ceramics, paper, fertilizers, and more, forming business clusters with vast implications for regional employment, income, and SMEs. Given its advantages, the ALC is exceptionally suited for investments under the powershoring banner, reducing transition timeframes and costs for countries with non-green energy matrices.

Powershoring's most substantial contribution to the green and fair transition relates to its social impacts in urban areas, home to the majority of the region's population and the hotbed for severe issues like poverty, hunger, inequality, violence, informality, and low productivity.

Powershoring's potential is vast and transformative. Consider Brazil: estimates indicate that powershoring could augment green manufacturing exports by up to $395 billion between 2024-2032, with corresponding direct and indirect investments potentially reaching $351 billion during the same period. While these figures are significant, their potential impacts on domestic and regional value chains and the type and nature of the region's integration into the global economy are even more consequential.

Despite its competitive edge in powershoring, the ALC faces challenges, chiefly unprecedented interventions by developed countries in renewable energy markets, green energy equipment, and green manufactured products. Imposing protectionist standards, discriminatory practices, and massive subsidies jeopardizes market functionality and the green and fair transition in developing nations.

The unique conditions in ALC instill confidence and provide room for a bolder, more ambitious stance, allowing the region to influence discussions, engage in the global economy on its terms, and present itself 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-