The vulnerability of fossil fuel-producing countries in Latin America has been exacerbated by Covid-19. The social and economic crises resulting from the pandemic, and the intense price volatility for oil, coal and gas experienced in 2020 and 2021, have only aggravated pre-existing social inequalities in the region. In parallel, the region faces significant exposure and vulnerability to climate, with its impacts already evident. In this context, Covid-19 recovery efforts represent an opportunity to build back in a more sustainable, resilient and prosperous way, with the potential to create more jobs than business as usual, bring environmental benefits from reduced emissions and advance the social equity agenda. Instead, Argentina, Brazil, Colombia and Mexico – the four largest economies and the biggest fossil fuel producers in Latin America – keep betting on fossil fuel extraction, explicitly placing the extractive sector at the heart of their economic recovery.
The brief highlights a contradiction in the four countries, between public narratives of energy transition and an emphasis on fossil fuels in recovery-related and other support policies. It points to a common promotion of gas as a “transition fuel”, promotion of coal to meet domestic demand and expansion of the extractive frontier for critical minerals. This analysis highlights risks of locking in carbon-intensive pathways that can inhibit renewable energy futures. However, post-Covid-19 recovery efforts provide an opportunity to invest in a low-carbon, equitable and sustainable future. The brief identifies key trends in the four countries outlined below.
Narratives around energy sovereignty tend to take precedence over the climate emergency to justify an expansion in the production and use of fossil fuels. In the case of Argentina, this is materialized through support for offshore activities, promotion of investment in hydrocarbons through law, and supporting activities in the Vaca Muerta natural gas reservoir. In Mexico, it is evidenced through concrete support for the national oil and gas company, PEMEX, as well as new refineries and thermal power plants. Brazil has committed to building new thermal plants and providing incentives for investment in hydrocarbon and coal-related activities. In the case of Colombia, support for fossil fuels includes the promotion of blue hydrogen (produced using fossil fuels with carbon capture and storage) despite its potentially negative contribution to climate change, as well as new regasification infrastructure, new thermal plants, investments to enhance refining capacity and pilot fracking projects.
State-owned enterprises (SOEs) have been tasked with a key role in the economic reactivation of their respective countries as the focus of support and protections through government recovery measures. This has promoted the continuity and increase of fossil fuel production, as in the case of Argentina’s YPF receiving a share of the one-off “solidarity” tax on private wealth allocated for exploring and producing natural gas. Similarly, the Mexican government provided PEMEX with tax reductions. In Colombia, Ecopetrol’s recent purchase of shares in ISA, a Colombian electricity company, should be seen as part of a diversification strategy of the state oil company, although it is still early to determine if this is also part of a decarbonization strategy.
Many countries’ fiscal dependence on fossil fuel revenues at both national and subnational levels has been used to justify the continued investment in and support for fossil fuel production despite the medium- and long-term prospects of becoming stranded assets. For example, in Argentina, subsidies for fossil fuel supply represent 1% of the government budget. Indeed, more public resources during the pandemic have been directed to fossil fuels than to clean energy, as documented by the Energy Policy Tracker. The orientation of such public resources slows the regional transition to clean energy because new energy projects in Latin America are usually heavily determined by public finance.
The four countries propose expanding the production and use of natural gas. They mainly use two narratives to justify this: labelling natural gas as a “bridge” fuel for the energy transition and concerns regarding the lack of reliability of non-conventional renewable energy sources and hydroelectric plants in years of drought. The reliability narrative underpins investments in new gas power plants and even coal power, as in the cases of Brazil and Colombia.
In the context of the pandemic, these issues combine into a public agenda to improve the competitiveness of the extractive sector. Such pressures can push to weaken environmental and social protections – the so-called “race to the bottom“. The reaction to this is consistent with pre-pandemic trends of social resistance to fossil fuel exploration and production projects, as well as critical minerals projects and renewable energy megaprojects, particularly affecting Indigenous communities (including those in Vaca Muerta and the Wayúu in Colombia). The resistance of territories affected by fossil extraction could present an opportunity to begin necessarily inclusive transition processes considering Indigenous communities as fundamental voices in the movement. Unfortunately, just transition plans are largely absent from political action despite being part of the political discourse.
Key recommendations in the brief:
- Increase the transparency of plans for new fossil infrastructures, especially gas, including in terms of their economic, social and environmental costs.
- Promote the diversification and decarbonization of SOEs’ portfolios and investments, taking advantage of their prominent role in the region’s energy sector.
- Consider the Escazú Agreement (ratified by Argentina and Mexico, pending ratification by Brazil and Colombia) as an opportunity to monitor reactivation policies. The agreement aims to guarantee the effective implementation of the rights of public participation, access to information and justice in environmental matters.
- Redirect fossil subsidies to low-carbon solutions and social policies that allow a sustainable and fair recovery from the effects of the pandemic while aligning with the climate emergency.
- Establish a just and inclusive transition route for affected workers, communities and regions, including economic diversification strategies to progressively decrease dependence on fossil fuels.
- Establish long-term decarbonization strategies that explicitly list their economic, environmental and social benefits compared to the high cost of following current carbon-intensive paths.
As the human contribution to global warming is undisputed, with carbon dioxide emissions as the main driver, it is essential that Latin American countries revisit their national fossil fuel production plans and climate ambition. It is imperative to rethink the course of extractive energy developments in the region, not only to help reduce global emissions but to address the region’s vulnerabilities as international energy markets transform. The economic recovery from Covid-19 is a key opportunity to set the path toward sustainability, resilience and prosperity in line with the climate emergency.