Combating Climate Change with Extractives Revenues

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Colombia and Peru Case Studies and Implications for Latin America

As economies seek to rebuild in the aftermath of the Covid-19 crisis, there is an opportunity to accelerate climate change mitigation and adaptation and shape more sustainable economic models. Revenues from the extractive industries can provide crucial resources in this effort, according to a new report by the Inter-American Dialogue.

Latin America is one of the world’s richest regions in natural resources, and the oil and mining sectors contribute a significant share of fiscal revenues in many of the region’s economies. But these industries are confronting major longer-term shifts in their operations and will likely face declining demand for their emissions-generating products as a result of efforts to combat climate change. The production of fossil fuels, minerals, and metals also directly generates significant emissions. Leveraging oil and mining funds in the fight against climate change could offset the negative environmental impacts of these industries in the short term and support countries’ efforts to diversify away from fossil fuels for energy consumption in the longer term.

This report examines the cases of Colombia and Peru, two resource-rich nations that distribute revenues from extractive industries to subnational governments, and the broader implications for Latin America.

Key findings:

• The authors’ analysis of spending of mining and hydrocarbon revenues shows that only a small share of extractives revenues in these countries is being spent on climate-related projects like clean energy infrastructure, reforestation, and disaster resilience. Instead, the largest share of revenue is spent on transport infrastructure.
• The report finds that countries could more effectively use extractive revenues for climate-related projects if central governments provided more clear and specific guidance to subnational governments on climate priorities and offered technical assistance to subnational governments for climate-related projects.
• For their part, subnational governments could educate local communities on the benefits of climate change mitigation and adaptation, which are less immediately tangible than large infrastructure projects, and build stakeholder buy-in for using funds to these ends.
• The report also concludes that ultimately governments may need to dedicate funds directly for sustainable development while ensuring earmarked funds are spent effectively.
• Finally, the economic recovery from Covid-19 presents an opportunity to reform systems for spending extractive industry revenues and reorient them towards a more resilient and sustainable development model rooted in climate change mitigation and adaptation.

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