LONDON, August 3, 2023 — WTW (NASDAQ: WLTW), a leading global advisory, broking and solutions company, has today published its report on the impact of a low carbon transition in Colombia, setting out in-depth analysis of the country’s transition risks and opportunities.
Colombia aims to reach net zero by 2050, however its current economic model is highly dependent on rents from extracting coal, oil and gas. Substantially reducing economic reliance on these sectors, which contributed 55% of exports in 2020, would be no small feat. However, if the country hopes to minimise the volatility and costs associated with a long-run decline of the global fossil fuel trade, it will need to start developing and implementing contingency plans in the current decade.
The two-year research project, funded by WTW long-term partner Agence Française de Développement (AFD), reveals that if Colombian policymakers do not respond proactively to these risks, the country could face lost economic output of more than $88 billion (or 27% of 2019 GDP) between now and 2050 in a world that decarbonises in line with the Paris Agreement.
The study provides a series of recommendations for how Colombian policymakers, central bankers, financial institutions and corporates can more effectively incorporate transition risks and opportunities into their planning processes.
Matt Huxham, Director, Sovereign Transition Risk, Climate and Resilience Hub, WTW, said: “A business-as-usual approach could prove destabilising for the Colombian economy, with potential impacts including declining corporate profits, a weakening trade balance, falling tax revenues and rising public debt. This could put pressure on Colombia’s sovereign credit rating. These effects would increase the cost of Colombia’s climate mitigation and adaptation investments and cost many thousands of jobs.”
According to the WTW analysis, an accelerated transition of Colombia’s economic structure (including growth sectors with export potential, such as copper) to a low carbon base could create economic benefits that offset some of the projected decline. The economic benefits, however, may not accrue over the same timeframes, in the same locations and to the same economic groups as the downsides.
In cases where the costs of global and Colombian low carbon transitions could fall on places and economic groups with limited economic resilience (such as mining workers and local governments), the report recommends that Colombia’s government proactively provides economic and other support to ease the burden. This support could be funded by a combination of new domestic and international transition-related funding sources, such as “Just Energy Transition Partnerships”.
“A transition to a low-carbon economy that replaces lost tax revenues and jobs is not only a big task for Colombia, but for all emerging economies in Latin America and worldwide,”
Matt Huxham | Director, Sovereign Transition Risk, Climate and Resilience Hub, WTW
Huxham said: “A transition to a low-carbon economy that replaces lost tax revenues and jobs is not only a big task for Colombia, but for all emerging economies in Latin America and worldwide that historically have funded development spending from the proceeds of coal, oil and gas extraction.
“If the world limits global warming in line with the goal of the Paris Agreement, demand for these commodities on international markets will be substantially lower than producing countries expect. These external risks that countries have limited control over are too often forgotten as countries build transition plans. Greater international collaboration will be essential to ensure the benefits of a low-carbon transition are shared while supporting those set to lose out.”
Recommendations include:
The analysis was built from microeconomic modelling of value chains and financial modelling of firms in thermal coal, metallurgical coal and coke, oil and gas, power, transport, steel, cement and other industrial sectors and the mapping of the allocation of climate transition risk in the Colombian economic system, via transmission channels, such as ownership, financing structures, royalties, taxes and wages. WTW considered a range of options for mitigating the potentially destabilising risks highlighted in the paper, including the benefits of potential growth industries and the potential benefits of accelerated decarbonisation in transport and industrial sectors.
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