Finance and planning ministries play a central role in promoting fiscal policies that generate more and better jobs with the transition to green economies
Adequate fiscal planning would help the decarbonization of the region's economies create 15 million net new jobs by 2030
A new Inter-American Development Bank (IDB) study, "Fiscal Policy and Climate Change: Recent Experiences of Finance Ministries in Latin America and the Caribbean", recommends that Latin American and Caribbean finance and planning ministries consider fiscal policies to accelerate the transition to green economies and pave the way for the region to meet decarbonization goals.
This recommendation suggests 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 decarbonization 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. 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.”
Impacts of climate change on public finances
The average annual frequency of extreme climatic events per country in the region increased by more than 50% in recent decades, going from 0.2 per year during 1980-2000 to 0.3 per year between 2001 and 2019. It is estimated that the impact of these extreme events was between 0.2% and 0.3% 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 4 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% 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 $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 mobilization of private and international finance can help advance public policies against climate change. It also analyzes 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:
- Management of economic and fiscal risks related to extreme weather events and the transition to net-zero emissions
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 programs.
- Promoting a just and green transition
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.
- Access to financing
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 and climate change
Climate change is one of the priority areas detailed in the Vision 2025 strategy and is part of the IDB Group's response to support the recovery of Latin America and the Caribbean in the post-pandemic era. In May 2021, and responding to a mandate from its Governors, the IDB presented a conceptual framework to illustrate the need to mainstream climate change into its operations and different sectors to generate true sustainable development in the region.
About the IDB
The Inter-American Development Bank is one of the main sources of long-term financing for economic, social, and institutional projects in Latin America and the Caribbean. In addition to loans, grants, and credit guarantees, the IDB conducts cutting-edge research projects to provide innovative and sustainable solutions to the most pressing problems in our region. Created in 1959 to help accelerate progress in its developing member countries, the IDB works every day to improve lives.