One region, all voices




Read in

Let’s leave oil in the ground, let’s transform institutions instead

The arrival of Gustavo Petro and Francia Márquez to the government in Colombia has been a shock for many not only in Colombia, but also in the rest of the region, including the governments, especially those from the left, where development is based on extractivism. In order to end the current dependence on oil and move towards a new development model, Petro proposed to prohibit new exploration projects, the exploitation of unconventional deposits, and to stop fracking pilot projects and the development of offshore fields. This will prove to be a huge economic and institutional challenge for the new government.

Banning new oil exploration projects is not a new idea, nor is it irrational one from an economic perspective. At the very least, the activity should be prohibited when it affects biodiversity, as the Government of Belize did when it decided to protect the barrier reef from offshore exploration. Costa Rica directly banned all oil activity within its borders  in order to strengthen its ability to reach its goal of zero emissions by 2050.

Similar measures can be seen in Denmark, Spain, Portugal, France, Ireland, and more broadly in a Europe where the energy transition is a strategic issue. Beyond the exceptional measures announced to limit shortfalls in the short term, the invasion of Ukraine has confirmed the irremediability of the change.

Bans are also emerging on the other side of the Atlantic. The governor of the state of California decided not to grant new fracking permits and to discontinue all oil activity by 2045. In Canada, the province of Quebec not only moved forward with a ban on all exploration activity in its territory, but also decided that public banks would no longer be able to finance the industry.

These examples show a new type of transition policy, what economists call “supply-side” policies, which are often complemented by policies that act on technology. This is because any investment in fossil fuels should be avoided to prevent technological lock-in. Development cannot be based on investing in processes and products of the past.

From a macroeconomic perspective, leaving “oil in the ground” is the most rational approach. However, this type of proposal is labeled as “childish” or more directly as “dangerous,” not only by many financial analysts, but also by sectors of the Latin American left that militate for neo-development and neo-extractivism. For both sides, Latin America has no other option but to continue with the current model.

However, clean energy is competitive and provides a clean service, while allowing universal access. The advantages it offers are beneficial to the majority of the world’s population, and pernicious for the oil companies. As stated by the Secretary General of the United Nations, Antonio Guterres, “in a present marked by war, the only plan capable of guaranteeing peace and prosperity depends on ceasing to finance the oil industry.

The main Central Banks have begun to implement a series of measures that tend to make the cost of financing more expensive. Such measures involve imposing higher capital requirements on polluters. The oil industry is also penalized in open market operations, which puts an end to the idea of market neutrality. These monetary policies are intended to prevent financial markets from having to face abrupt variations in the assets they manage and to prevent investors from seeing the value of their assets suddenly liquefy.

Although these are important measures, they are not relevant to the region, given the underdevelopment of its financial market. This forces us to think of alternatives. For example, it would be more convincing to impose some kind of control over capital flows by setting a differential reserve requirement on funds, such as the one implemented by Chile in the 1990s. Such a tax would imply a tax on funds coming in to finance the oil industry and redirect the money made from the taxes to finance clean energy.

Obviously, any attempt to introduce a reserve tax or prevent financing could end up generating a legal claim before ad hoc arbitration tribunals, as foreseen in the foreign investment protection scheme established in the 1990s.

Despite the climate commitments and the growing risk of climate disasters, the sovereign is unable to decisively act. Even though the scientific community has demonstrated the need to keep most of the reserves underground, polluting companies continue to block the transition with lawsuits and other legal obstacles.

This kind of attitude was clearly on display in the Netherlands, when the government proposed to move forward with the closure of coal-fired power plants. But this case is not exceptional. Recently, a group of ten European countries decided to pursue amendments to the Energy Charter Treaty (ECT), which is a legal framework meant to integrate the energy industries of the world but is often criticized a significant obstacle to enacting policies to combat climate change. Similarly, Spain recently became the first member of the European Union to propose the need to completely abandon the ECT because it threatens the transition.

In the face of the climate crisis, the seriousness of which impacts an increasing number of people and is shown by the severity of the disasters caused by floods and droughts, “the industry that generates it continues to be protected.” This was stated by a collective of young people in their presentation to the European Court of Human Rights in an effort to eliminate the Energy Treaty.

The problems generated by extractivism in vast sectors of the Latin American population are evident and activism is a clear sign of this. Beyond the deaths caused by natural catastrophes, the region has a record number of assassinations of socio-environmental leaders. The seriousness of the climate crisis forces us to act, but also compels us 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. They should initiate consultation processes to begin to reformulate the legal framework signed in the 1990s. All of the above should alert the region’s leaders to seek to avoid the predominance of the approach of leaving the clean energy transition to the wills of the market.

If Gabriel Boric in Chile, and Gustavo Petro, in Colombia, succeed in carrying out their campaign goals, fossil fuel progressivism will be a thing of the past.

Translated from Spanish by Alek Langford


Otros artículos del autor

Investigador Asociado del Centro de Estudios de Estado y Sociedad - CEDES (Buenos Aires). Autor de “Latin America Global Insertion, Energy Transition, and Sustainable Development", Cambridge University Press, 2020.


Related Posts

Do you want to collaborate with L21?

We believe in the free flow of information

Republish our articles freely, in print or digitally, under the Creative Commons license.

Tagged in:


More related articles