After the last meeting of the United Nations Climate Change Conference that took place in Glasgow, Scotland, at the end of October last year, one of the points that most generated hope among developing countries was the commitment to comply with the 2015 Paris Agreement. : provide subsidies for climate change. External financing is a key aspect to ensure the energy transition in developing countries. So the leaders of the developed world pledged in Glasgow to unlock the funds once promised.
But the enthusiasm didn’t stop there, it spread to the private sector, where the biggest contributions to the transition are expected to come from. Mark Carney, a pioneer in acknowledging the climate problem by presiding over the Bank of England; co-founder, with Michael Bloomberg, of the Task Force on Climate-related Financial Disclosures (TCFD), and who currently leads a consortium of 450 financial companies (Glasgow Financial Alliance for Net Zero), highlighted the alignment of the financial sector to comply with the climate goals. But, above all, with regard to the pursuit of the goal of net zero emissions by 2050.
In short, both promised long-term funding of funds to achieve the common good. However, the financial markets’ gamble on climate change could last less than expected. Recently, Larry Fink, CEO of BlackRock and one of the most powerful men in the financial world, declared that the war in Ukraine would be marking the end of globalization. The outbreak of the Covid-19 pandemic sparked the debate about reshoring, the tendency to relocate global value chains, something that has already spurred China’s growing technological power.
The invasion of Ukraine caused disturbances among Western leaders, and at a stroke, the candid view that many had about the regime of Vladimir Putin disappeared. Faced with the unpredictable military response, many decided to impose economic sanctions on Russia. In addition to the effects on the future of the conflict, the measures adopted could mark the end of financial and commercial globalization.
However, the financial consequences can be greater, and no doubt will be. Paradoxically, the US Treasury Department could be badly affected if China decides not to continue mass buying Federal Reserve bonds. Beijing may also consider accelerating the process of internationalization of the yuan, forcing its partners to abandon the dollar in their transactions, as Russia now requires sanctioned to its buyers of hydrocarbons.
The Russian invasion forced the European Union to rethink its energy strategy, unequivocally marking an acceleration in the green transition. To cover these costs, immense sources of new funding are needed, but this brings different initiatives in this field as far as our region is concerned. For most Latin American countries, the end of the current structure of financial and commercial globalization (as we know it until now) will end up delaying the transition process. In addition, rising international inflation increases the cost of financing and will discourage long-term financing.
The war may not only imply a reversal of current financial and trade globalization, but it will also affect the multilateral structures that have distributed power since the end of the Cold War. Less access to external financing will affect the energy transition, while rising prices provide greater incentives for oil exploration.
However, this not only implies a lower availability of funds for the transition, but it will also highlight a re-routing to funds seeking short-term profitability. Rather than moving forward with the transition, a barrel above $100 will push for new rounds of oil bidding. On the other hand, the increase in energy consumption bills by households will force countries in the region to increase energy subsidies, but reacting with higher levels of public debt and weakening the already deteriorated public finances after the pandemic.
Like other developing regions, Latin America’s “green hope” was associated with inflows of capital, and several leaders returned from Glasgow convinced of the power of the market to accelerate the transition. However, this optimism has been diluted in the face of new global restrictions that predict a slower world economy and greater costs for governments. There will therefore be less surplus to invest in this inevitable energy transition.
