The arrival of Gustavo Petro and Francia Márquez to the government in Colombia came as a shock to many, not only in Colombia, but also in the rest of the region, including governments where, from leftist positions, development is thought through extractivism.
And that is how, in order to end the current dependence on oil to move towards a new development model, Petro has proposed banning new exploration projects, as well as the exploration of unconventional deposits, stopping fractioning pilot projects and the development of offshore deposits. This will imply an enormous challenge, both economic and institutional, for the new government.
Banning new oil exploration projects is nothing new, nor is it irrational from an economic point of view. At the very least, the activity should be banned where it affects biodiversity, as the government of Belize did when it decided to protect the barrier reef from offshore exploration. Costa Rica has directly banned all oil activity on its territory, consolidating its goal of zero emissions by the year 2050.
Furthermore, similar measures can be seen in Denmark, Spain, Portugal, France and Ireland, in a Europe where the energy transition is a strategic issue. In addition to the exceptional measures announced to limit short-term shortages, the invasion of Ukraine confirms the irremediability of change.
Prohibitions also arise on the other side of the Atlantic. The Governor of the State of California decided not to grant new fracking licenses and to stop all oil activity until the year 2045. In Canada, the province of Quebec not only went ahead with the ban on all exploration activity in its territory, but also decided to that public banks do not continue to finance the industry.
These examples show a new kind of transitional policy, what economists call supply, which are often complemented by policies that act on technology. This is because all investment in fossil fuels should be avoided to prevent technological lock-in. Development cannot be based on investments in past processes and products.
From a macroeconomic perspective, leaving “the oil underground” is the most rational approach. However, these types of proposals are categorized as childish or directly dangerous, not only by many financial analysts, but also by sectors of the Latin American left that militate in favor of neo-development and neo-extractivism. For both sides, Latin America has no choice but to continue with the current model.
Clean energies are competitive and offer a clean service while allowing universal access. The advantages it offers are beneficial for the majority and harmful for the oil companies. As the Secretary General of the United Nations, Antonio Guterres, stated in a present marked by war, the only plan capable of guaranteeing peace and prosperity is to stop financing the oil industry.
Considering the activity in exploration, the main central banks began to implement a series of measures that tend to increase the cost of financing. This type of measure implies imposing greater capital requirements on those that contaminate.
The oil industry is also penalized in open market operations, which puts an end to the idea of prevailing market neutrality. These monetary policies aim to prevent financial markets from ending up facing abrupt changes in the assets they manage and to prevent investors from seeing the value of their assets being liquidated abruptly.
Although these are important measures, they are not relevant for the region, given the underdevelopment of its financial market. This forces us to think about alternatives.
It would be more convincing to impose some kind of control over capital flows, establishing a differential reserve requirement on funds, as implemented by Chile in the 1990s. Such a reserve requirement would imply a levy on funds coming in to finance the oil industry, redirecting the tax towards financing clean energy.
Obviously, any attempt to introduce a reserve tax or prevent funding could end up generating a legal argument before ad-hoc arbitral tribunals, as provided for by the foreign investment protection scheme introduced in the 1990s.
Despite the commitment on climate matters and the growing risk of climate disasters, the sovereign is unable to act. Even when the scientific community has demonstrated the need to keep most of the reserves underground, polluting companies continue to block the transaction with lawsuits.
This type of attitude was evident in the Netherlands, when the government proposed to proceed with the closure of coal-fired power stations. But this case is not exceptional. Recently, a group of ten European countries decided to modify the Energy Chapter Treaty (ECT), while Spain became the first member of the European Union to propose the need to abandon the treaty for threatening the transition.
Faced with the climate crisis, whose severity impacts an increasing number of those affected, as shown by the disasters produced by floods or displaced by droughts, “the industry that generates it continues to be protected”. This was declared by a group of young people in their presentation before the European Court of Human Rights, in order to eliminate the Energy Treaty.
The problems generated by extractivism in vast sectors of the Latin American population are evident, and activism bears witness to this. In addition to the deaths associated with natural disasters, the region has a record number of murders of socio-environmental leaders. The gravity of the climate crisis forces us to act, but also to look at conflicts from a different perspective. For this reason, initiating institutional change is a first step.
What happens in Europe should be closely followed by Latin American governments, which should initiate consultation processes to begin reformulating the legal framework signed in the 1990s. All this should alert the region’s leaders to the need to avoid the predominance of leaving the energy transition to the market.
If Boric in Chile and Petro in Colombia can carry out their campaign goals, fossil progressivism will be a thing of the past.
*Translation from Spanish by Giulia Gaspar
