How will we finance climate action in Latin America and the Caribbean

Ministries of finance are among the most influential decision-makers for climate action. What is their role? Latin America and the Caribbean need between 470 billion and 1.3 trillion dollars annually to address climate change by 2030. So, how are countries in the region going to finance climate action? How will we secure the necessary funding?

Delivering the finance calls for a coordinated public-private response. Ministries of Finance play a crucial role in determining the allocation of resources and shaping public spending, including for climate. In order to strengthen their role, over the past two years, we have supported the Regional Climate Change Platform of Economy and Finance Ministries which aims at mainstreaming climate action within the core functions of economic strategy, fiscal and public financial policy.

Ministries of Finance: why should they act, how can they act, and what can they do?

Why Ministries of Finance?

The region needs to plan and deliver change urgently. Our region-and the world-face game-changing economic transformations. If we do not act now - the present and future costs will continue to grow.

We already know climate-related disasters can affect GDP by up to 19% within the next 26 years. We also know that developing countries will suffer the most losses, and that they need more preparation and resources to adapt to climate events.

Countries in the region that are fossil fuel export-dependent face potentially more significant economic impacts. Up to US$2.6 trillion in oil royalties and more than US$200 billion in natural gas royalties are at risk of disappearing in the region by 2035. Finance ministries will need to address these changes to protect public finances and fiscal sustainability while enabling a just transformation to a net-zero and climate-resilient economy, ensuring no one is left behind.

How are we going to finance climate action? How will we secure funding?

We know that the lion's share of resources for climate action will come from the private sector, nonetheless, government participation in the economy of developing countries is around 20%, and thus, public finances have a relevant role to play, and we can expect that certain types of investments, for example, paying for the costs of natural disasters will rest mainly with the public sector.

Investments in decarbonization - such as renewables or electromobility - are likely to come from the private sector, particularly as these areas of investment become increasingly profitable. We estimate that decarbonizing the economies of the region could bring an additional 2.7 trillion dollars by 2050. These investments in new technologies with lower costs for travel and energy production will also be the base of future competitiveness. 30% of the region's energy already comes from renewable sources, double the world average. We are home to two-thirds of the world's lithium and 38% of its copper, crucial to the green transition. Also, of the 12 million tons of green hydrogen that Europe will need annually by 2030, our region could export at least a third, generating $9.1 billion in revenue annually.

What can ministries do, and what are they doing?

• Public revenue spending: Ministries are paying special attention to public revenue and spending for net zero and resilience. Taxes and subsidies policies need to be revised. Finance ministers can transform $60 billion in direct fossil fuel subsidies into investments for sustainable growth by gradually reallocating funds to renewable energy and enhancing social safety nets. Countries like Ecuador have started to phase out fossil fuel subsidies and others like Colombia and México are implementing a carbon tax on fossil fuels. Public purchasing and spending can also shift to greater sustainability. Using functional classification of public budgets or budget tagging systems can help track and report positive and harmful climate expenditures. Paraguay, Argentina, Costa Rica, and the Dominican Republic are working on identifying their climate expenditure through their public budget functional classification using the best available practices as the Conceptual Framework for the Classification of Public Spending on Climate Change has shared light.
• Private financial flows: Instruments such as green finance taxonomies can help guide private investment. Mexico and Colombia have already presented their taxonomies, and others like Chile, Costa Rica, Brazil, the Dominican Republic, and Paraguay are developing theirs. Sustainability-linked bonds, green bonds, carbon markets, debt conversions as in Barbados and Ecuador, and our new initiative ECOINVEST are reducing the costs of capital for private investments that enable economic transformations.
• Government coordination: Ministries of Finance are one of the most significant policy decision-makers and can work hand by hand with Ministries of Environment, line ministries, and the financial sector. MOFs are key to identifying climate-related fiscal risks and coordinating sectoral responses to mitigate them. They play an increasingly important role in coordination and strategy over the long-term.

Our region is moving forward, and Latin America and the Caribbean Finance Ministries are making progress working on budgeting systems, sustainable taxonomies, climate finance strategies, thematic issuances, more resilient public investment management, and accountability mechanisms to measure policy implementation impacts.

In August 2024, the Regional Climate Change Platform of Economy and Finance Ministries is holding its third high-level dialogue in Belize, to map out its strategic course, aiming to amplify outcomes. Member countries will adopt a shared vision of sustainable finance, ensuring that resource mobilization contributes to a low-carbon, nature-positive, climate-resilient future and, above all, enhances the quality of life and well-being of our citizens.

Don't miss the online transmission of the opening session, keynote and panel, and closing session of the third high-level dialogue

• Opening Ceremony
  August 30 at 11:00 a.m. ET | Watch here (Livestreaming)
  
• Keynote & High-Level Panel + Closing Ceremony
  September 4 at 9:00 a.m. ET | Watch here (Replay)

Read more about green fiscal policy and finance ministries advances on climate action here:

1. Expectations of Economy and Finance Ministries on Carbon Pricing and Evidence of their Effectiveness.
2. Climate financial strategies: analysis of international experiences.
3. Integrating climate action into public investment management: lessons from Argentina, Costa Rica and Colombia.
4. Guía práctica de instrumentos financieros sostenibles para oficinas de crédito público y tesorería
5. Integrating Climate Action into Public Financial Management: Lessons from Paraguay and Costa Rica
6. Fiscal Policy for Resilience and Decarbonization: Contributions to the Policy Dialogue

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