By Mauricio Tolmasquim and Ariel Yepez
Covid-19 has hit the Caribbean hard but there is a silver lining. With the right policy mix of investments and carbon taxation, the region will not only recover but grow faster and better than before.
The economic slowdown caused by the pandemic has cut energy-related greenhouse gas emissions. However, without decisive government intervention to consolidate transition to a clean, sustainable energy future, emissions risk rebounding once the pandemic is over. For reference, carbon dioxide (CO2) emissions fell 400 million tons following the financial crisis of 2009, only to soar to 1.7 billion tons in 2010, the most significant increase ever recorded, according to the International Energy Agency.
A strong emission rebound is not inevitable if some policies are implemented to promote new technologies. Renewable wind and solar options, and some disruptive energy storage solutions like lithium-ion batteries and green hydrogen produced by water electrolysis, are cheaper than ever and ready to be implemented on a larger scale.
The major constraint for non-conventional renewable sources’ growth is no longer price since they are competitive compared to fossil fuels, but their intermittency. The existing reservoirs of hydroelectric dams are a great asset to integrate non-conventional renewable energy. Energy storage with other technologies will also be economically feasible in regions where the hydro potential is limited, such as in Caribbean islands.
According to the IDB, if the Caribbean Community (CARICOM) countries invest optimally in renewable electricity generation, they could save US$5.7 billion in generation costs from 2020 to 2040. As a result, the share of renewable generation will increase by a factor of almost four, while reducing electricity costs, oil imports, and CO2 emissions. These options could be feasible with storage options different to hydroelectric dams. In effect, energy storage is forecast to grow briskly, reaching 53 gigawatts deployment annually by 2030.
The good news is some countries are moving in the right direction. Leaders have ambitious renewable energy targets. For example, Dominica and Barbados have pledged 100% renewable energy target by 2030, and Guyana by 2040.
In Guyana, the government has made significant investments in solar PV mini grids with battery storage in nine isolated hinterland communities. In Suriname, the electricity company has launched a tender to install 10 mini solar networks to electrify homes, schools, medical centres, water pumping stations and other facilities.
Similarly, Barbados, with IDB support, is deploying renewables to promote greater energy efficiency in public buildings, retrofitting public lighting across the country, and promoting the switch to EV in the public fleet.
These investments will have an even more significant impact if coupled with reforms that remove subsidies for fossil fuels, and, at the same time, taxes to carbon emissions, a fee that a government imposes on any company that burns fossil fuels. The International Monetary Fund (IMF) estimates that Latin America and the Caribbean earmarked around US$ 213 billion in fossil fuel subsidies in 2017. Low oil prices offer a unique opportunity to correct this.
In addition to providing a price signal in favour of clean energy, a carbon tax would generate resources to finance recovery packages and compensate the most impoverished populations for the increase in the price of fossil fuel-dependent activities. Part of the income collected from carbon prices could return as compensation for vulnerable people. A remuneration would provide lower-income households with a more significant profit than the loss of income caused by the carbon tax. This rate would be fairer and would make fuel increases more acceptable.
A policy of subsidies distorts prices and is regressive. Alternatively, a social policy aimed at granting equivalent transfers directly to a target population has important implications for consumers and taxpayers. Well-designed transfer mechanisms meet two objectives: reducing economic distortions and effectively supporting the portion of the population at which the support is aimed.
The depth of the current crisis and the breadth of recovery packages mean that the measures taken now are likely to have lasting effects on the global economy and shape societies in the coming decades, affecting the planet’s emissions and climate. The Caribbean is well placed to actively participate in the much-needed energy transition.
Mauricio T. Tolmasquim is Full Professor at the Federal University of Rio de Janeiro
Ariel Yépez is the Energy Division Chief at the Inter-American Development Bank.