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IDB study shows key role of finance and planning in climate change

A whole-of-government approach beyond environmental ministries would boost a more sustainable recovery from the pandemic in the region, new report shows

Report launch: May, 11th, 4-5:30 pm EDT. Register here. 

Countries in Latin America and the Caribbean must include finance and planning perspectives to their climate policies and commitments in their Nationally Determined Contributions (NDCs) if they expect to deliver on their Paris Agreement objectives and promote a sustainable recovery, according to a new publication from the Inter-American Development Bank (IDB) with the results of a joint study between Columbia University’s Center on Global Energy Policy and the IDB’s  Sustainable Energy and Climate Change Initiative.  

The climate crisis can result in a potential poverty trap for countries in Latin America that do not step-up their investments in both gradual adaptation measures as well as adaptive capacity. The impacts of the pandemic make this scenario more dramatic. This is, in part, the result of an increase in the frequency of extreme weather events and losses associated with climate change. 

Achieving sustainable development in the region, according to Climate Policies in Latin American and the Caribbean: Success Stories and Challenges in the Fight Against Climate Change, requires a combination of environmental and economic policies, to deliver a comprehensive and mainstreamed climate policy solution. The study identifies and argues in favor of multiple climate policies actions which can promote growth in the short term, while also strengthening resiliency and social development.  

“Achieving a comprehensive coordination is only possible if finance and planning ministries assume a leadership role by ensuring that tax policy and resource allocation prioritizes this intersectoral approach”, said the former Minister of Finance of Colombia and co-author of the study, Mauricio Cárdenas. 

However, only four countries in the region surveyed in 2020 have reported the inclusion of a financial strategy document in their NDC strategies. And even within this limited group, the understanding of what a financial strategy should include varies greatly. 

“The good news is that, in practice, some countries in the region have been implementing successful climate policies coordinated with different actors through their governments,” said Juan Pablo Bonilla, Manager of the IDB’s Climate Change and Sustainable Development Sector and co-author of the study. “This gives consistency to their sustainable development agendas and promotes growth. From the IDB we want to help share these experiences, so they are included in their NDCs as well. This study is part of this effort and there’s more to come.”  

The study provides examples of integrated sustainable agendas in Barbados and Colombia, and how more ambitious second rounds of NDCs are being developed by Chile, Costa Rica, Argentina, and Uruguay, amongst others. At their core is the decision to align environmental policy while addressing social and economic growth through the planning and public finance prism. 

In terms of decarbonization strategies, the study evaluates the three sectors that together represent 87.2% of all greenhouse gas (GHG) emissions in the region: energy, cattle and agriculture, and land-use change, and forestry. It addresses the pros and cons of fiscal instruments for decarbonization, including multiple variations of carbon pricing instruments. The research points out that decarbonizing has the potential to add more jobs than it destroys, when properly designed, to include and implement compensatory mechanisms. In this sense, creating capacities in ministries of finance and central banks to understand these issues is as critical as the development of capacities in public debt offices to access novel financial instruments such as green or sustainable development bonds. 

The publication also details a wide range of trends and opportunities that governments in the region would be benefited in expanding clean energy mechanisms, boosting electric public transportation, and strengthening green financial markets.  

Some examples include adopting reverse energy auctions that have become a market instrument aimed at reducing renewable prices and mobilizing investments to increase installed capacity; overcome financing challenges to implement electric public transportation and Bus-Rapid Transit (BRTs) systems, including electrifying BRTs; and addressing fiscal restrictions through pushing sustainable development and green financial products both for governments and the private sector.  

Ultimately, the authors highlight the need for planning and finance ministries to identify and share a vast array of existing and potential regional solutions which are tailored to the specific institutional and economic challenges of Latin America and the Caribbean. Only then can the two dimensions of climate ambition be fully addressed: stronger targets, and effective implementation mechanisms. 

The IDB is committed to providing a tool aimed at promoting a multisectoral approach on sustainable development agenda in the region. Over the next few months, a series of interviews will be held with ministries of finance and planning aiming to match the already existing regional know-how, as well as to identify existing gaps through a new dedicated platform for dialogue, where Latin American and Caribbean countries will be able to share and learn from each other’s experiences. 

 

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About the IDB

The Inter-American Development Bank is a leading source of long-term financing for economic, social and institutional projects in Latin America and the Caribbean. Besides loans, grants and guarantees, the IDB conducts cutting-edge research to offer innovative and sustainable solutions to our region’s most pressing challenges. Founded in 1959 to help accelerate progress in its developing member countries, the IDB continues to work every day to improve lives.