Inter-American Development Bank – Just Transition Initiative

Summary

This report takes a detailed look at decarbonization pathways in the Latin America and the Caribbean region and highlights the potential to create 15 million net jobs in sectors, such as sustainable agriculture, forestry, solar and wind power, manufacturing, and construction during such a transition. The report suggests that, with adequately-designed measures to ensure that these jobs are decent and that those who lose out in the transition are protected and supported, recovery plans can create climate benefits, while also boosting growth, tackling inequality, and making progress towards the Sustainable Development Goals.

This report is based on an input-output analysis using a Global Trade Analysis Project Power database, a commonly employed tool for assessing the direct and indirect environmental and socioeconomic impacts of decarbonization efforts. The study finds that only three sectors would shrink in the transition to a decarbonized economy: 1) fossil-fuel based electricity, with about 80,000 jobs lost, or more than half of the current number; 2) fossil-fuel extraction, with almost a third of the current number, or 280,000 jobs eliminated; and 3) animal-based food production systems, with five percent of current jobs lost, representing half a million jobs.

The report provides a sectoral overview of the region and highlights how it is still struggling with gender and ethnic inequalities, skills gaps, insufficient social protection, and a large informal sector, despite more than a decade of steady progress. Prevailing decent work deficits, inequalities, and dependence on fossil fuel exports are expected to make Latin America and the Caribbean particularly susceptible to the social and economic impacts of climate change. The report also identifies the critical need for fairness in this transition and devotes a chapter to identifying the sector-wise equity and justice considerations needed to allow a successful transition in sectors that include energy, agriculture, forestry, waste management, tourism, transport, and construction.

Summary

The report identifies the impact of energy subsidies on public finance in Ecuador and looks at the distributional impacts of subsidies. To inform policy design, the authors use the household survey data from Ecuador, in combination with augmented input-output data, to assess the distributional impacts of energy subsidy reform. Energy subsidies account for about seven percent of Ecuador’s yearly public spending or two-thirds of the fiscal deficit. The study finds that it costs USD20 to transfer USD1 to the bottom income quintile through gasoline subsidies; USD10 through electricity; USD9 through diesel subsidies; and USD5 through liquefied petroleum gas (LPG) subsidies. Relative to household income, subsidy removal without compensation would be regressive for diesel and LPG, progressive for gasoline, and approximately neutral for electricity.

While removing these subsidies would yield clear economic and climate benefits, the expected adverse effects on vulnerable households are likely to make such reforms politically difficult. The authors analyze how a fraction of financial resources, freed up by the subsidy reform, could be used to mitigate the income losses of poor households by means of in-kind and in-cash revenue recycling schemes. The results indicate that removing all energy subsidies and increasing the existing social protection program, Bono de Desarrollo Humano, by nearly USD50 per month would confer net benefits of almost 10 percent of their current income to the poorest quintile and also free up significant amounts in the public budget.

The authors also conduct expert interviews to evaluate the political and institutional challenges related to the energy subsidy reform. They identify two combinations of reform options and recycling schemes that would benefit the poorest 40 percent of households, namely eliminating subsidies on gasoline, while increasing the amount transferred to vulnerable households through Bono de Desarrollo Humano; and replacing the universal LPG subsidies with targeted LPG vouchers. The authors suggest that countries in Latin America may benefit from increasing energy prices to fund development programs, reduce public deficits, and incentivize a transition to a low-carbon economy. The cash transfer programs of the region could be an instrument to reduce the impact of energy price hikes on poor consumers, thereby making price reforms more palatable.