The triple challenge of the energy transition

The global transition to cleaner energy sources has become a priority for the entire planet, urged to contain exacerbated global warming and its catastrophic consequences.

The use of fossil fuels - or non-renewable energy sources - is the biggest generator of greenhouse gases (GHG), the main cause of ozone depletion in the atmosphere. By swallowing ozone, GHGs leave huge holes in the atmosphere through which ultraviolet radiation enters freely to alter the climate and the normal dynamics of natural resources, winds, seas, rivers and soils, whose transformations in many cases are cumulative and irreversible.

The alarming situation mobilized countries to meet, put the issue on the table and discuss which path to take. Thus, under the umbrella of the United Nations (UN), the Paris Agreement emerged, signed in 2015 by 196 countries, including the 33 countries of Latin America and the Caribbean (LAC).

Thanks to this agreement, the commitment to reduce GHG emissions was made official and goals were established by region for 2030 (see table of commitments), the year in which the achievements made by each member of the consensus will be reviewed. It was also agreed to redouble efforts not to exceed a global temperature rise of 1.5 degrees Celsius by the end of the 21st century and to achieve climate neutrality by 2050.

The developed world has historically had a greater share of responsibility for emissions. Its contribution represents 45% of the total. In contrast, LAC has contributed only 11% of that pie, according to the Economy and Development Report (RED) of CAF -development bank of Latin America and the Caribbean- dedicated to the energy transition and presented at the Conference of the Parties on Biodiversity (COP16) in Cali (Colombia) last October.

It can be assumed, therefore, that it is the developed countries that are called upon to take the lead in complying with the 2015 pact. The global consensus recognizes the urgency of reducing carbon emissions. However, there are no solutions that are applied in the same way in all latitudes.

The region, for its part, has committed to reducing its emissions by 10.8% by 2030 compared to 2020. This reduction is higher than that assumed at the global level (less than 1%), but lower than that of North America or the European Union (37% and 29%, respectively).

Region with structural problems

However, reaching these goals is a real challenge for LAC, especially because of the structural socioeconomic problems that the region has yet to resolve, compared to the achievements of the most advanced developing continents.

CAF's RED highlights that when evaluating population density and per capita energy consumption, especially from fossil fuels and coal, the region outperforms the rest of the continents in the aforementioned indexes. In terms of demand, the latest report from the International Energy Agency indicates that 75% of GHG emissions currently come from countries with medium or low per capita income.

During the last decades, the region's GDP per capita has remained 30% below that of the United States. This condition is associated with low productivity, which, in turn, is linked to an excess of small, informal enterprises with low physical, human and organizational capital.

LAC countries not only have relatively low per capita income, but also a highly inequitable income distribution. On average, 1 out of every 3 people in Latin America is poor and 12 out of every 100 live in extreme poverty, according to figures from the Economic Commission for Latin America and the Caribbean (ECLAC) in 2022.

Likewise, in its 2024 report, the organization warns that the economies of the 33 countries in the region grew at a slow pace last year, achieving an expansion of only 2.2%, and that by 2025 it will remain in a growth range of no more than 2.4%.

Long-standing challenges

CAF's RED 2024 on the subject states that the region must achieve economic growth higher than that of developed countries to close the inequality and poverty gap, while at the same time redoubling efforts to mitigate GHG emissions in order to meet the target.

In short, LAC is facing the triple challenge of making the transition to clean energy without detriment to its economies and biodiversity and with the premise of closing the poverty gap.

To achieve this, it will have to face long-standing challenges that have yet to be overcome and that are largely responsible for the slow pace of its socioeconomic development.

In the first place, there are still problems of access to quality energy sources, despite the great progress that has been made. CAF's RED reveals that at least 40% of the rural population in Colombia, Honduras, Mexico, Nicaragua, Paraguay and Peru still cooks and heats their homes with firewood.

Second, there are challenges in terms of energy supply efficiency. Data from the World Bank's Enterprise Survey indicate that nearly 60% of manufacturing companies report having had two power outages per month, for an average of three hours. Because of this situation, one out of every three companies in the region considers electricity supply problems a major obstacle to their productivity. That figure is 40% higher than in Europe and Central Asia combined.

In addition, the levels of poverty and vulnerability of a large part of the population, as already mentioned, demand protection against the strong distributive changes that the energy transition may generate and impose restrictions on households to adopt clean or energy-efficient technologies.

Another characteristic of the region's energy markets that is worth highlighting is the presence of energy subsidies. Although several countries in the continent, including Argentina, Chile, Colombia and Mexico, have been gradually dismantling fossil fuel subsidies, these, to date, are equivalent to 4.7% of regional GDP, concentrated mainly in Venezuela. The existence of these subsidies may promote a high demand for non-renewable energies, with a consequent impact on emissions.

The region's energy transition, as CAF emphasizes in its RED, cannot take place with its back turned to these realities. Its sustainable development certainly implies reducing GHG emissions from energy sources in order to have a more sustainable planet and, at the same time, closing existing per capita income gaps and reducing social and energy inequalities.

More than obstacles, opportunities

The recent history of developed countries suggests that it is feasible to achieve per capita product growth and reduce emissions, a concept known as decoupling.

CAF's analysis, in its most recent RED, shows that the region could, for example, become the center of the green industry for vehicles and technological devices that demand minerals that are produced in abundance in extensive territories of the continent, such as nickel, lithium, copper and cobalt (see box).

In one of its most recent reports, the World Economic Forum states that the world needs 2 billion electric vehicles, whose essential mineral for their batteries is lithium. Argentina, Chile and Bolivia make up the so-called "Lithium Triangle": these countries concentrate 68% of the mineral's reservoirs, mainly in the form of brines, which are easier and cheaper to process than hydrocarbons. This would place us at the core of green industrialization, consolidate the new era of migration towards renewable energy sources and allow us to be on a par in terms of development with the most advanced countries in this field.

Here, it is worth highlighting the slogan on energy issues with which CAF arrived at COP16 and which it will reinforce this year at the COP30 on climate change in Belém (Brazil): regional solutions with a global vision. In other words, LAC has the means to champion the implementation of regional policies and initiatives that will have a positive and sustainable impact at the global level.

But, hand in hand with this, a great revolution must take place in the field of science, innovation, technology and education, in order to properly enter the era of efficient and clean energy consumption; This profound transformation in mentality and access presupposes, above all, that the region learns how to make efficient consumption of green energies part of its daily life, and that it has democratic and quality access to these sources, which would imply, among other things, effective options for responding to demand through the creation of new types of clean and environmentally friendly fuels.

In the last decade, Latin American and Caribbean countries have significantly increased their efforts to reduce GHG emissions. Between 2015 and 2022, the region increased its renewable capacity by 51% and, by the end of 2024, this rate rose to 64% of generation from renewable sources, says the RED report. This figure is expected to reach 70% of renewable energy supply by 2030.

In the particular case of Colombia, the Renewable Energy Association (SER Colombia) has indicated in its recent report that in the last decade the consumption of this type of energy has increased from 2% to 10%. Some of the countries leading the energy transition in the region are Brazil and Chile. Costa Rica and Paraguay are also among those with the best results in the global index.

On the other hand, the region is rich in water resources, minerals that are indispensable for the production of means of transportation - an area that, together with industrial production, is the largest consumer of non-renewable energy - and of the technology necessary for the resilient transition, as indicated above.

One of the most evident needs in the global analysis of the migration to clean energy in the region is the fact that the small-scale consumer should become a productive actor in the value chain of the new structuring of massive systems for the provision of clean energy. This, in simple terms, means that an average family can generate its own energy - by installing photovoltaic panels, for example - but also provide surplus green watts to be included and marketed in the transnational grid, thus going from being a mere consumer to a "prosumer".

As CAF's RED indicates, the path to this massification is based on the construction of well-targeted and effective subsidies that promote accessibility and affordability to the equipment and technology necessary for this purpose.

This would mean a great leap forward for the region in reducing GHG emissions, making enormous progress in climate neutralization and significantly narrowing the poverty gap.

It has been demonstrated that wind and solar energy have reached ideal levels of competitiveness compared to non-renewable energy, and that they are even cheaper. It is necessary then, as CAF's RED and SER Colombia's spokesperson emphasize, to put the foot on the accelerator and promote the ideal scenarios for the expansion of green energy supply systems.