Colombia: a Key Tool for the Energy Transition

“GEMMES Colombia has enhanced the national policy dialogue on the energy transition by providing a robust scientific framework, and making it easier to understand and manage the fiscal and financial risks resulting from the energy transition,” said Gustavo Hernandez, who works at the Economic Studies Department of the National Planning Department (DNP), during the launch of the book Modelling Low-carbon Transitions in Colombia: Macrofinancial Opportunities and Risks. This collective work summarizes the results of six years of cooperation between the Colombian authorities and AFD, in the context of the GEMMES Colombia project. The challenge behind this project was to reconcile energy transition and macroeconomic stability.

Because the country has strong climate ambitions: reduce its greenhouse gas emissions by 51% by 2030 and reach a capacity of 19 GW of non-conventional renewable energies by 2050. In 2023, the Government also pledged to stop granting new oil and gas exploration licenses. The transition is especially urgent because oil reserves are estimated at 7.1 years of production, and gas reserves at 6.5 years.

Further reading: “Atlas” of Latin America and the Caribbean: 17 Sustainable Development Initiatives

Financing the energy transition, a complex matter

But the Colombian Government has very little leeway. It needs to come up with resources to finance the transition (for example, new infrastructure), at a time when the international environment is not conducive for attracting foreign capital. In addition, the budgetary framework is constrained: “Colombia’s fiscal accounts are under strong pressure. With a strict fiscal balance requirement and a limit of 55% for the government debt-to-GDP ratio, financing the energy transition poses a major challenge,” says Antoine Godin, Head of the GEMMES Macroeconomic Unit at AFD. Not to mention the fact that fossil resources are a major source of revenue for the State, with the oil industry accounting for 8% of total tax revenues. Their reduction places a further constraint on the economy.

Further reading: Diego Guevara: “We Cannot Develop Sustainably if We Lack the Resources”

A model to test transition scenarios

In this context, the Colombian authorities, in particular the Ministries of Finance, Planning and Energy, have joined forces with AFD’s modelers to develop the GEMMES Colombia model. By simulating various scenarios to test policies for the low-carbon transition, this tool helps identify the potential macroeconomic vulnerabilities and opportunities of these environmental transitions. It thus provides strategic support for a more effective management of the challenges ahead. “GEMMES helps provide an understanding of the macroeconomic imbalances, such as debt development, and choose the best financing options, whether public or private, with or without green bonds. It’s a key tool for supporting the country’s climate targets, without jeopardizing its economic stability,” says Frédéric Doré, Ambassador of France to Colombia from 2021 to July 2024.

Diversification to ensure an effective transition

One of the results of the GEMMES model shows that it would be possible to mitigate the macroeconomic effects of the transition through policies focused on re-industrialization, the diversification of exports, and integration into global value chains. By coordinating industrial, monetary and fiscal policies, it could be possible to overcome the challenges of this diversification, while providing greater fiscal space for investment in green projects.

The transition can also create opportunities for Colombia: diversification of its productive structure, phased integration of new green industries, strengthening of its public infrastructure, creation of quality jobs, and reduction of its dependence on natural resource-based industries. This process could thereby accelerate the socio-economic development of the country, while mitigating certain negative effects.

On the heels of the GEMMES Colombia project, AFD is now supporting the PowerShift strategy game project. This tool helps reveal “mindsets” that influence the decisions and strategies of stakeholders in the transition, while giving them a greater understanding of the macroeconomic issues. At a time when the energy future of Colombia is unfolding, it could well become instrumental in strengthening cooperation between the various agents of change.

Watch the video (in Spanish): Presentación del libro - GEMMES Colombia