Climate action in Latin America

• Climate action in seven Latin American countries – Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, and Peru (LA7)-  relies primarily on non-market-based instruments (nMBIs). In 2023, nMBIs accounted for 43% of total LA7 climate action, one of the highest shares observed across regions.
• Climate action in LA7 countries increased considerably between 2010-2023, but has slowed down from 2020, mostly due to increased fossil fuel subsidies as part of countries’ COVID-19 measures.
• LA7 countries have multiple policy options to further reduce emissions. Policy instruments such as carbon taxes, emissions trading schemes or renewable portfolio standards are rarely, if used at all.
• The transport sector offers the most significant leeway for emission reductions. Despite having the highest emissions share (excluding agriculture and land use, land-use change and forestry [LULUCF]) [1], it recorded the lowest level of climate action in the region in 2022.

Climate action significantly increased between 2010 and 2023 in LA7 countries (Figure 1), in line with the trend observed in other countries. While the climate action trajectory of LA7 countries grew stronger than that of OECD partner countries [2], the gap between LA7 and OECD countries has widened. The literature often emphasises two key challenges for climate change mitigation in LA7: 1) the relatively high costs of emission reduction compared to national income, and 2) the significant risks associated with a low-carbon transition, particularly the potential fiscal and export revenue losses linked to fossil fuels (UNDP, 2021).

Since the COVID-19 pandemic, climate action has stagnated in the region. Figure 2 highlights that this trend is evident both in policy adoption and policy stringency. While the number of policies implemented in LA7 countries grew at an average annual rate of approximately 9.5% between 2010 and 2020, it has increased by only about 1.2% per year since 2020. Similarly, the share of high-stringency policies increased by more than 10 percentage points between 2010 and 2020, but this progress stalled after the pandemic. In fact, the share of high-stringency policies has even decreased slightly since then. 

Stagnation in climate action after the pandemic is also apparent at the sectoral level (Figure 3). Between 2015 and 2020, climate action consistently increased across all sectors, with strong progress in the industry sector due to the establishment of energy efficiency mandates and financing mechanisms for energy efficiency. However, since 2020, climate action has declined in the industry and transport sectors and has stagnated in the buildings sector. The observed slowdown in climate action in the industry and transport sectors are primarily driven by increasing fossil fuel subsidies which many countries expanded as part of their post-pandemic recovery measures (SEI, 2021).

Climate action expanded at varying speeds across all policy types between 2010 and 2023 (Figure 4). The implementation of nMBIs experienced the most significant growth in absolute terms. Climate action associated with targets, governance and climate data increased substantially, both in absolute and relative terms, particularly after the adoption of the Paris Agreement. In contrast, market-based instruments (MBIs) have shown the least progress over time, even declining in both absolute and relative terms since 2020. This regional trend is in line with a broad overall trend for all countries covered by the CAPMF (OECD, 2024). The decline in MBIs is of concern since carbon pricing is widely viewed as the most cost-effective way of reducing greenhouse gas (GHG) emissions (OECD, 2024). 

Growth in climate action also differs significantly across policy instrument types (Figure 5). Since the adoption of the Paris Agreement, LA7 countries have made significant progress in the areas of targets and international co-operation, surpassing the OECD average. LA7 countries have all ratified the most relevant climate treaties, participating in major international climate initiatives, and have committed to comparatively stringent net-zero targets. Likewise, LA7 countries rank above the OECD average in the implementation of a variety of nMBIs such as speed limits, planning for the expansion of renewable energy sources, as well as policies reducing fugitive methane emissions. In contrast, carbon pricing trading systems, subsidies, and taxes and fees have witnessed the least progress over time, highlighting the limited scope of MBIs in the region. Additionally, LA7 countries made little progress in the provision of climate data, an indicator of effective implementation, particularly in areas such as the submission of biannual evaluation reports and GHG emissions accounting, where gaps in reporting and transparency persist.

A distinct feature of the region’s current policy mix is its limited reliance on MBIs (Figure 6). In 2023, LA7 countries recorded the second-lowest global share of MBIs, at just 31%. Conversely, they demonstrated the second-highest share of nMBIs and the highest share of targets, governance and climate data as a proportion of overall climate action in regional comparison. Although MBIs are generally considered to be the most cost-effective way to reduce emissions, nMBIs have some advantages. NMBIs provide regulatory certainty since measures such as bans, mandates and standards deliver clear and predictable outcomes. By contrast, MBIs, such as carbon pricing, are heavily influenced by fluctuating market conditions, which can create uncertainty. Similarly, unlike MBIs, nMBIs do not impose a visible financial burden on consumers, which can result in a higher public acceptance compared to MBIs.

The policy approach in LA7 countries generally shows a uniform pattern. Using the CAPMF data, D’Arcangelo et al. (2023) conducted a data-driven analysis to identify various climate mitigation strategies across countries. Their findings reveal that LA7 countries have similar characteristics marked by the adoption of the same policy instruments with relatively similar stringency levels, hence all LA7 countries are grouped under Cluster 1 (Figure 7 and Table 1). 

LA7 countries could intensify climate action in the transport sector (Figure 8). There is notable variation in the level of climate action across sectors. Generally, climate action is most stringent in the buildings sector, while industry, electricity and especially transport, display the lowest levels of climate action. Most importantly, climate action in the transport sector seems to be misaligned with countries’ emissions profile. Although the transport sector accounts for the largest share of emissions, it exhibits the lowest degree of climate action in the region [3]. Conversely, the buildings sector, with the lowest emissions share, presents the highest level of climate action [4].

The misalignment between sectoral climate action and emissions is particularly pronounced in Colombia, Chile, and Mexico, where the transport sector displays the lowest level of climate action, despite its high contribution to emissions (Figure 9). Emission reduction in the transport sector often presents greater challenges and higher costs, as it typically requires the widespread adoption of zero-emission vehicles, development of supporting infrastructure, and shifts in consumer behaviour to achieve a substantial impact. Progress in zero- and low-emission technologies has been slow. For instance, in 2022 only 40 000 zero- and low-emission light vehicles were registered across the region, compared to over 3 million in the United States and Europe and more than 5 million in China (IADB, 2024). In contrast, the buildings sector is the sector with the highest level of climate action within countries in six of the seven analysed countries. 

Despite the region’s predominant reliance on nMBIs, there is some evidence that MBIs are more effective in achieving significant emissions reductions. Using the CAPMF, Stechemesser et al. (2024) assessed which climate mitigation policies contributed to reducing GHG emissions. The authors conducted a systematic ex-post evaluation of all the policies covered by the CAPMF, causally linking policy interventions to major emissions breaks. The effective policy measures identified by the authors are detailed in Table 2. Their analysis revealed that 8 of the 11 identified emissions breaks among LA7 countries (73%) were associated with the adoption of MBIs. These successful policy interventions spanned a wide range of countries and sectors, highlighting the critical role of MBIs in driving emissions reductions across the region. The findings suggest a need for more widespread adoption of such instruments to achieve countries’ overarching climate goals [5].

Overall, LA7 countries have implemented a diverse policy mix, as reflected in the CAPMF (Figure 10). By 2023, net-zero targets and nMBIs, such as minimum energy performance standards and labelling in appliances, have been implemented across all LA7 countries. However, policies such as carbon taxes, ETS or participation in CORSIA are not yet widely adopted. No LA7 country has yet pledged to phase out passenger cars with internal combustion engines.

IMPORTANT NOTES

[1] Note that the AFOLU sector, the highest-emitting sector in LA7 countries, is not covered in the current edition of the CAPMF.

[2] OECD partner countries include Argentina, Brazil, Bulgaria, China (People's Republic of), Croatia, India, Indonesia, Malta, Peru, Romania, Saudi Arabia and South Africa.

[3] The AFOLU sector, the highest-emitting sector in LA7 countries, is not covered in the current edition of the CAPMF.

[4] Note that this insight is only based on descriptive analysis and is intended to provide policymakers with some general guidance on which sector could be prioritised.

[5] Note that Stechemesser et al. (2024) focussed exclusively on large emission reductions, rather than all instances of emission declines. As such, their findings should not be interpreted as evidence that policies not listed in Table 2 were ineffective. Instead, the policies highlighted in Table 2 represent successful case studies from which policymakers can draw valuable lessons.