Petro’s best bid to decarbonize is to keep current renewables’ laws

Colombia’s first left-wing President Gustavo Petro promised during his campaign to suspend new hydrocarbon projects and support renewables, but has yet to present a clear roadmap for decarbonization and flip-flopped on policy, spooking the markets and hurting the Peso. Southern Pulse South America Consultant Marco Bastos investigates whether his green agenda is over, or just getting started.

In the nearly four months since Gustavo Petro was sworn in as Colombia’s president, senior officials in his government have issued contradicting statements about whether he will follow through with his campaign pledge to end new fossil fuel exploration and double down on renewables.?

On 13 October, Petro’s Minister of Mining Irene Velez said there would be no new exploration contracts, but on 20 October, Petro said on Twitter that oil and gas production would continue normally. Later that same month, Petro’s Minister of Finance Jose Antonio Ocampo said the government was still studying the matter, suggesting some new projects may be allowed to continue.?

Despite the mixed messaging, the government does appear to be looking for ways to support a green transition. One of the first bills Petro and Ocampo proposed was a tax reform – about to be approved by Congress – that establishes new taxes for coal, gas, and oil when international prices rise above certain levels.?

While the tax reform represented a step forward in Petro’s plan, it has also prompted warnings that it will disincentivize investment in the oil and coal sectors. These concerns, combined with ongoing uncertainty over new hydrocarbon projects, were not well received by the markets. The Colombian Peso has depreciated sharply against the US Dollar and Morgan Stanley dropped Colombian state-run energy company Ecopetrol from its investment index. Other emerging market currencies have also fallen against the US Dollar as the US Federal Reserve increases interest rates, but Colombia’s depreciation was among the four most dramatic in a basket of 30 emerging market currencies tracked by financial data provider Refinitiv.?

One of the reasons why markets are worried is that it’s unclear how Petro might fund his green agenda (and other expensive welfare proposals). His campaign pledge to keep fossil fuels in the ground was dramatic because oil derivatives represent approximately 30% of Colombia’s exports and a similar proportion of the revenues in the national government budget. This means other sectors need to grow if increased government spending, including a green transition, is to be sustained.

Petro has argued that tourism can help fill the revenue gap caused by fewer new oil sites. Elsewhere in South America, Chile has shown that it is possible to boost the tourism sector through a concerted effort maintained across several different administrations. However, this effort would also need more funding. In Colombia’s 2018-2022 National Development Plan, tourism was granted a mere 0.0002% of public spending.?

Charting a way forward

Whether it’s tourism, new hydrocarbon projects or some other revenue stream, the absence of a clear plan to support decarbonization risks serious harm to Colombia’s finances when combined with a muddled approach to fossil fuels. Energy policy expert Alvaro Llano Uloa told Southern Pulse that uncertainty over the fiscal sustainability of Petro’s green agenda is its main weakness. Moreover, if investors perceive the tax reform as a way to punish the sector, private investment could decrease and government revenues from hydrocarbons would drop.

To curb today’s level of anxiety in the economy, the government must provide a clear plan and take concrete actions to support it. The Minister of Mining said that the government will present its decarbonization plan in early 2023 – this cannot come soon enough.

In the meantime, there are other ways Petro can calm the markets. Key posts in several regulatory agencies still remain unfilled. These include the National Agency of Hydrocarbons and the Superintendence of Industry and Commerce. Who gets appointed will be watched closely by the markets. If Petro appoints more left-leaning allies (as happened in the state-run pension fund Colpensiones) that would add to business uncertainty. However, investors would likely be calmer if technocrats get these positions.?

Petro has already indicated a willingness to work with politicians from the other side of the aisle. Due to the small number of politicians from his own party in Congress, he was forced to successfully court conservative groups to pass his tax reform. Petro would be wise to continue down this path of compromise if he wants a warmer reaction from the markets and get the bulk of his energy transition passed.

However, perhaps the biggest error Petro could make would be to tear up the renewables legislation passed by the previous administration. The temptation for his government to present itself as a break with the past in Colombia must be moderated. Colombia currently offers tax-breaks to green energy producers and friendly legislation for solar and wind auctions. These policies contributed to Bloomberg ranking it the fourth most attractive destination for renewable energy investment this year out of 107 emerging market economies.?

Ultimately, Petro has a strong hand to play with. The renewables market in Colombia is already worth roughly USD1 billion. It has the potential for big expansion over the next decade due to Colombia’s endowment of natural resources. If Petro keeps existing legislation, slows the phase out of fossil fuels and presents a clear plan to the markets, there’s every reason to believe his promise to decarbonize the country can be achieved.?

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