Nationally Determined Contributions Across the Americas

INSTITUTE OF THE AMERICAS | NDCs in the Americas: A Comparative Hemispheric Analysis

Figure 8: Top 6 LAC Countries by Percentage of Carbon-Intensive Income

recent findings, a 1.5 degree-emissions pathway is not compatible with new fossil fuel projects beyond 2021. xxix Although economic development in the region has been largely fueled on hydrocarbons in the past decades, today renewables are, or are in the process of becoming, more competitive in many of these countries, following a global trend that will force LAC countries to eventually adjust. However, the longer they take to act, the larger the impact will be on their public finances. On the one hand, countries that are betting their economic recoveries on extractive industries, particularly on oil and gas, will increasingly struggle to finance these projects, as investors and MDBs are becoming more hesitant to fund fossil fuel generation given increasing scrutiny regarding Environmental, Social and Governance (ESG) standards both from regulators and stakeholders, and because of possible impacts on their sovereign ratings. On the other hand, these fossil fuel dependent countries will face increasing fiscal pressures as the sector enters its declining stages, since their incomes rely heavily on extractive rents. For example, according to the Grupo de Financiamiento Climático de América Latina y el Caribe (GFLAC) 2019 Climate Finance Index , xxx 28.5% of Ecuador’s income is carbon-intensive, 17 the equivalent figure for Mexico is 23.5%, and for Trinidad and Tobago, 19.25% (see Figure 8 ). If these countries fail to diversify their incomes as the world moves away from hydrocarbons, their public finances will face an inevitable crisis in the future. An IDB paper shows that scenarios consistent with the 1.5-degree goal mean that 66% to 81% of proven, probable, and possible oil reserves in Latin America should be left untouched before 2035. In such an event, regional oil exporters could lose up to USD 3 trillion in royalties. xxxi

Data Source: GFLAC’s 2019 Climate Finance Index In addition to a fiscal crisis should countries fail to transition steadily out of extractive industries, national oil companies (NOCs) run the risk of becoming obsolete and of being left with massive stranded assets. The countries’ economic competitiveness as well as that of their overall labor force will be severely compromised. These factors can be dampened by: i) providing political certainty, and appropriate incentives for the private sector to invest in the technologies of the future and assist countries in their transition; ii) through leveraging the existing infrastructure and NOCs skills to make sure the industry does not lag behind and instead becomes an engine of innovation and economic growth in line with global tendencies; and iii) in the near- term, producing and exporting nations should make sure to leverage upward natural

17 Carbon ‐ intensive labelled budget, per GFLAC’s analysis, is that which is mainly associated with revenues from tax and non ‐ tax revenues from hydrocarbon exploration and extraction.

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