In addition to helping mitigate the climate crisis, addressing climate change in a comprehensive manner has the potential to generate enormous economic and social benefits. In the case of Colombia, progress has already been made in key areas. For example, in 2022, jobs associated with environmental activities related to air and climate protection, wastewater management, as well as waste, among others, amounted to 258,257 full-time equivalent jobs, which represented a growth of 26.5% over 2021.
However, in order to move forward more forcefully with the climate agenda and the fulfillment of international goals, such as those contemplated in the Paris Agreement or the Kunning-Montreal Global Biodiversity Framework, it is essential that the country mobilizes more resources and invests strategically, considering climate objectives in both the public and private sectors.
In this blog we tell you how Colombia continues to advance its green fiscal agenda, while supporting sectoral decarbonization and development efforts.
The case of Colombia: Incorporating climate change into fiscal policy and financial regulation
Following Colombia’s accession to the Paris Agreement, fiscal policy approaches and tools for climate change management have been explored. Two key factors have driven this progress:
- First, the growing evidence of the physical and transitional risks facing Colombia, a country highly vulnerable to climate change, which also have implications for fiscal policy. It is estimated that 47% of Colombia’s territory faces “high” or “very high” climate risks, and 84% of the population and 86% of its assets are exposed to two or more types of natural disasters. Climate and disaster risks represent Colombia’s largest contingent liability, and could affect economic activity by 4.4% of GDP. In addition, transition risks could affect the stability of the financial system and inflation levels, due to the effects on energy prices.
- Second, there is growing interest in exploring fiscal tools, such as taxation and borrowing mechanisms, to support compliance with the nationally determined contributions (NDCs) on mitigation and adaptation under the Paris Agreement. Although Colombia has already mobilized COP$24.3 billion in public, private and international sources between 2011 and 2021 (42% earmarked for adaptation issues, 25% for mitigation and 32% for joint actions), much remains to be done. To achieve the NDC mitigation targets alone, the country would need to invest between US$8.76 and $14.19 billion annually, which would represent an investment of between 0.7% and 1.2% of annual GDP.
Therefore, financial flows need to be more consistent with the country’s climate objectives and investments (infrastructure and others) need to consider future climate change scenarios. Also, it is key that investments or subsidies that perpetuate a carbon-intensive economy or that do not assess for climate risks are discouraged.
Colombia pioneers fiscal instruments for climate action
Colombia has been a pioneer in the region in the implementation of instruments for climate action. Some examples are carbon taxes and taxes on the use of plastic bags, a measure that has been implemented since 2017 to discourage the use of fossil fuels and single-use plastics. Also, it was the first country in the region to develop a green taxonomy for economic activities and assets with environmental impact, using the agriculture, forestry and other land use (AFOLU) sector as a differential focus. It is worth mentioning that this is currently being expanded. In addition, the country issued green bonds in local currency in 2022 under the German twin bond scheme, and was recognized in the “sovereign” category with the “Green Bond of the Year 2022” award for its financial innovation, liquidity and development of green markets in Colombia.
Green finance strategy for the country’s sustainable development
In April of this year, the Ministry of Finance and Public Credit (MHCP) presented the “Green Finance for the Sustainable Development of the Country” strategy, which establishes a comprehensive roadmap for the country to mobilize the necessary resources to advance the climate agenda, while maintaining a sustainable fiscal position. The strategy seeks to establish the conditions that encourage the design of economic and financial instruments for mitigation and adaptation to the effects of climate change and the protection of biodiversity. This strategy corresponds to the “Comprehensive Climate Change Management Plan for the Finance and Biodiversity Sector”, in line with Colombia’s 2018 Climate Change Law, and aims to identify, evaluate, guide and incorporate climate change measures for said sector. In addition, this plan expands its scope to biodiversity issues, due to the recognition of the relationship between climate change, conservation and sustainable use of biodiversity with the transversality of fiscal and financial policy.
The plan is organized under five strategic lines and two action approaches. On the one hand, the strategic lines focus on the international community, the national government, subnational governments, the productive sector, as well as the citizenry and civil society. The first focus of action of the strategy corresponds to the competencies of the MHCP, covering aspects such as fiscal efficiency, sovereign financing instruments, fiscal and financial risk management, as well as institutionality. The second approach refers to the sector’s strategic lines of action that support and contribute to climate finance and compliance with the NDC. This approach includes instruments such as green taxonomy, the greening of the financial sector, sustainable infrastructure financing, the transition of state-owned enterprises to zero net emissions, carbon market regulation, resources for non-municipalized regions and public-popular partnerships.
From words to action
The Minister of Finance is a key actor in the fight against climate change in Colombia, and this green finance plan represents the roadmap for defining the actions to be taken by the sector. Its objective is to ensure that resources cover the mitigation and adaptation strategies needed to meet NDC commitments, either through the creation of economic and financial instruments or through intersectoral coordination to mobilize resources. It is very positive that the plan involves the entire finance sector and includes biodiversity as a central theme, just at a time when this agenda is becoming more relevant. Furthermore, the plan’s actions, timelines and responsible parties were the result of inter-institutional work, which allowed each entity or agency in this sector to recognize the importance of climate change in their functions. The adoption of this comprehensive plan is a significant step towards harmonizing sectoral policies with fiscal policies, achieving a greater impact on climate action and the preservation of biodiversity.
Thus, Colombia sets an important precedent for other ministries in Latin America and the Caribbean to carry out similar exercises. To this end, the joint work under the Regional Climate Change Platform of Ministries of Finance, Economy and Finance, supported by the IDB, which as of August 2024 is chaired by Colombia, will continue to be fundamental.
Finally, it should be noted that the great challenge for Colombia and the Ministry of Finance will be the implementation and follow-up of this strategy. To support this process, the IDB, together with the government of Germany through the International Climate Initiative (IKI), is mobilizing technical assistance to support the execution of several of the activities proposed in this action plan.
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