Latin America’s Climate Transition
Latin America's position in the climate transition
As I write about the climate transition opportunity in Latin America, fires are burning vast amounts of forest, grasslands, and wetlands in the Amazon rainforest and the Pantana in Brazil. These areas have been increasingly affected by fires.
Natural Resources
Latin America has natural resources vital for the green transition.
Although it has some of the largest reserves of green hydrogen, lithium, copper, and silver, there is a large gap between its reserves and production capacity. As well as lacking in policy and infrastructure, mineral rents, which are the difference between the production value for minerals at global prices and the production cost for minerals, are lower in Latin America.
Policies that could help close this gap include streamlining the permitting process of exploration, extraction, and production. Stable and transparent taxes for these resources could increase long-term investments. Public-private partnerships could help scale production capacity and decrease risk.
Infrastructure that could help close this gap includes scaling renewable energy and energy transmission networks to ensure a low-cost, reliable energy supply. Also, building out transportation and export infrastructure is key for keeping up with global demand. Automating parts of the production capacity, investing in R&D, and incentivizing domestic production through subsidies could also increase production capacity.
Carbon sinks
Latin America has some of the most valuable carbon stock in the world. Carbon stock is the carbon stored in the biomass in ecosystems, including in forests, peatlands, and soil, which sequesters carbon dioxide from the atmosphere. Latin America’s total carbon stock is over 3,900 Gt of CO2. Based on the Paris Agreement 40$/tCO2e, it is worth $14.5T. The value of Brazil’s carbon stock would be worth ten times its GDP, Bolivia’s two times its GDP, and Colombia’s 80% its GDP.
Carbon sinks are areas that store more CO2 than they release. The Amazon forest stretches across eight countries and is the largest carbon sink on land (the ocean is the largest carbon sink), sequestering around 1.2 Gt of CO2 every year. This provides an opportunity for Latin America to provide voluntary carbon credits to the global market.
Green hydrogen
With 25% of green hydrogen projects, Latin America can leverage its abundant renewable energy resources to power electrolyzers and become a leader in low-cost green hydrogen production.
Lithium
Latin America has around 60% of global lithium. The reserves are most concentrated in Argentina, Bolivia, and Chile.
Lithium demand is projected to increase forty times by 2040 because it is used in lithium-ion batteries for renewable energy storage and electric vehicles (EVs). The EV market continues to grow and is projected to represent 62%-86% of global vehicle sales by 2030.
Copper
Latin America produces 40% of global copper. It is used for electrical wiring, wind turbines, 5G networks, IoT devices, charging infrastructure, solar panels, and EVs, which contain 3-4x the copper than in a fuel-based vehicle.
Silver
Latin America produces over half of global silver. Solar panels require silver for efficiency, and they are projected to use 20% of silver supply by 2030.
Green, Sustainability, Sustainability-Linked, and Social Bonds (GSSSBs)
GSSSBs in Latin America, most concentrated in Brazil, Chile, and Mexico, are projected to reach $45-$55B in 2024. In 2023, 28% of total bond issuance in Latin America were GSSSBs. To promote sustainability, Chile and Uruguay have issued bonds with a reduced interest rate if they meet sustainability goals since 2022.
Still, only 2% of global green bonds are from Latin America (40% from Europe). To establish more credibility and transparency, national governments, the UNFCCC, and independent organizations could create better certification standards for the GSSSBs. Also, a regional exchange platform could make the Latin American GSSSBs more efficient.
Foreign Investment
United States
The Inflation Reduction Act (IRA) requires 80% of critical minerals in EV batteries to be extracted and processed in the US or the countries with which the US is in a free-trade agreement, including Chile, Peru, and Mexico. The US’s weakening relationship with China and the proximity of these countries also strengthens the opportunity for these partnerships.
China
Recognizing the opportunity for a green transition in Latin America, China invested over $5B in EVs, lithium-ion batteries, and solar panels in Latin America in 2021. China made practically all the solar panels imported by Latin America, as well as 70% of the EVs and 90% of the lithium-ion batteries. State-owned Chinese companies control many of the electricity distributors in Latin America. This poses a risk as China can easily disrupt the electricity distribution, especially without a robust method for assessing security in foreign investments in Latin America.
Europe
The European Investment Bank invested $730M in green transition in Latin America in 2023, and the EU pledged $50B by 2027 in various projects, including in the green transition.
Opportunity Sectors
Electricity
In Latin America, 60% of electricity generation is renewable, 45% is from hydropower and the rest is from wind and solar. Companies working on technologies like green hydrogen and direct air capture will move to be in places with cheap clean electricity, like Latin America.
The investment in renewable energy infrastructure, especially solar and wind, in Latin America is projected to reach $555B by 2030, bringing 320 GW online. The infrastructure to transmit this energy is also expanding.
Transportation
Transportation accounts for 39% of GHG emissions in Latin America, making it the highest emitting sector. Initiatives to electrify transportation are increasing, for example with Chile and Colombia’s fleets of electric buses and vehicles.
Manufacturing
In addition to extracting the natural resources listed above, Latin America is focused on manufacturing these resources. For example, Argentina built its first lithium-battery plant in 2022 and Chile is incentivizing domestic lithium production by offering a 25% discount on lithium to local battery manufacturers.
Agriculture
Basic agricultural product exports from Latin America grew at around 4.5% every year for the last ten years, while biofuels, bioplastics, and biofertilizers exports grew at around 25%, 20%, and 14%, respectively, every year for the past five years. Due to the rising demand, farmers may replace basic agriculture products with bio-based products.
Latin America is the largest net food exporter, producing 60% of soybeans and over 30% of maize, beef, poultry, and sugar. However, climate change’s negative impact on agriculture disrupts the global food supply and exacerbates rural poverty. Farmers need to invest in sustainable agriculture to maintain their market share, improving crop yield, traceability, and livestock farming by using big data, precision agriculture, management software, and marketplace platforms.
Key Challenges
The main challenges in Latin America’s green transition are in education and R&D, mining, and financial management.
Education and R&D
Latin America invests an average of only 0.62% of its GDP in R&D (compared to 2.27% in Europe and 3.40% in the US) and has a limited number of engineers.
Mining
Resource Access
Copper ores in Chile are now low-grade, so miners have to dig deeper to extract copper.
Floods have forced copper mines in Chile and Peru to close.
Regulation and Activism
Mining can damage water sources and glaciers. Activism and regulation due to the environmental risk often disrupt mining operations. For example, the operations of Las Bambas, a copper mine in Peru responsible for 2% of global copper supply, were paused due to protests in 2022.
Chile more than doubled the length of its approval process for new copper mines and increased the top tax rate on copper miners. Chile’s government also wants majority state-control of mining.
Mexico’s lithium deposits were nationalized in 2022.
Investment Uncertainty
Since returns on investment for mining can take years, investors need legal certainty, which is unlikely with changing regulation.
Financial Management
Large investments are required for sustainable natural resources extraction and production in Latin America to meet global demand, for lithium, $40B by 2030, and for copper, $575B by 2040.
Volatile costs of materials and electricity increase risks for industry. For example, due to this, Brazil’s largest copper processor filed for bankruptcy protection in 2022.
The economic states of some Latin American countries are weak. For example, the debts of Argentina, Belize and Jamaica have surpassed their GDPs, and the high interest rates of Brazil are making borrowing more expensive for the government.
With the green transition boom, Latin American currencies could appreciate, increasing non-commodity exports prices and driving activity towards the volatile natural resources extraction industry. To control this risk, central banks can stabilize currencies and exporters can hedge against price volatility and save when prices are high. However, often, Latin American governments take short-term advantage of booms without long-term risk considerations.
What’s next?
Latin America’s resources and carbon sinks are vital for global sustainability sectors, including the electricity, transportation, manufacturing, and agriculture sectors, and for a green bonds market. Through education, R&D investment, resource management, regulation, sustainable investment, and financial management, Latin America can play a key role in the climate transition.