Just Climate Transition and Fiscal Risks in Latin America: An Uncomfortable Relationship

Solutions emerging as key strategy in addressing climate change. 

Climate change is an obstacle to development due to its far-reaching impacts on economic activities, social welfare, the environment, and the magnitude of resources required for adaptation and mitigation processes. To avoid the worst climate scenarios, the Paris Climate Change Agreement targets a temperature rise between 1.5o C and 2o C for this century. Achieving these temperature targets requires building a global net-zero carbon economy between 2050 and 2070 (United Nations, 2015). 
Therefore, climate change involves both physical and climate transition risks that pose significant challenges for a Just Climate Transition. 
Physical risks are represented, for example, in terms of welfare, health, Gross Domestic Product (GDP) losses, or reduced possibilities for economic growth on a global scale. These impacts reduce fiscal revenue and generate additional pressures for public emergency expenditures. Climate transition risks are related to policy, technological, market, and reputation risks that correspond to changes in production and consumption patterns and public policies. Climate transition leads to an accelerated depreciation or loss of assets in carbon-intensive activities (stranded assets), which has economic and social consequences on all economic structure. For example, climate transition risks result in the closure of certain activities, such as the fossil fuel sector (oil and gas). The closure of these intensive carbon activities will have major repercussions for the financial sector and public finances due to a significant reduction in fiscal revenues from taxes and royalties from these activities. 
Additionally, the climate transition requires increasing public investment in infrastructure which leads to more fiscal pressures. 
In this sense, fiscal policy is subject to significant potential physical and climate transition risks. It is, therefore, impossible to achieve a Just Climate Transition without a proper fiscal risk administration. 
This policy brief analyzes the main physical and climate transition risks for the fiscal policy for Latin American countries. This analysis contributes to developing a proper and efficient risk administration.

About the previous project which generated evidence to support managing the growing debt crisis 

Author: Luis Miguel Galindo, UNAM, México