Paula Garda
OECD
Michael Koelle
OECD
OECD Economic Surveys: Colombia 2024
OECD Economic Surveys: Colombia
Abstract
Climate change poses significant risks to Colombia due to the country’s high exposure to climate-related extreme events, including floods, wildfires, landslides, and extreme heat days. Additionally, as a major exporter of oil and coal, Colombia faces substantial economic challenges as demand for fossil fuels will decline amid the global energy transition. Colombia has ambitious greenhouse gas emission reduction targets supported by a robust energy transition strategy that also aims at gradually phasing out the extraction of fossil fuels and is working to diversify exports and fiscal revenues. Achieving emission reduction targets requires swift action but also offers opportunities to leverage the global green energy transition, given Colombia’s rich biodiversity, abundant renewable energy potential and minerals. Strengthening climate adaptation policies, reining in deforestation, and boosting measures to effectively decarbonise the economy, including stepping up renewables by developing green financial instruments, a stable regulatory framework and more ambitious price signals for abatement are required.
As Colombia charts its path towards a more prosperous and equitable future, it faces three pivotal climate transitions. Firstly, it must shift from a climate-vulnerable to a resilient economy, implementing robust climate adaptation measures. Secondly, guided by its ambitious climate mitigation goals, it needs to transit towards net-zero greenhouse gas emissions by 2050. Lastly, with declining global demand for oil and coal, Colombia must undergo a transformative economic shift.
Colombia is highly vulnerable to climate change (Figure 5.1) and faces increasing frequency and intensity of climate-related extreme events such as floods, wildfires, landslides, and extreme heat days. The incidence of slow-onset climate hazards such as drought and sea-level rise is increasing. These events often have devastating impacts, including damage to infrastructure and other assets, disruptions in electricity generation and supply, human capital losses, negative health impacts, agricultural losses, and financial risks. A significant majority (94%) of Colombians acknowledge the impacts of climate change on their daily lives (EIB, 2023[1]). Adaptation to climate change is crucial to managing these challenges and limiting economic and fiscal costs. Without investments in adaptation, climate change could reduce Colombia’s GDP by 1.5% to 2.5% by 2050, disproportionately affecting the poorest and most vulnerable populations (World Bank, 2023[2]).
Note: Data in Panels A and B are averages from 2010 to 2022. LAC is a simple average of ARG, BRA, CHL, CRI, MEX, and PER.
Source: OECD Environmental Risks and Health.
Despite accounting for only 0.6% of global CO2 emissions, Colombia has ambitious greenhouse gas emission reduction targets, including updated targets in its Nationally Determined Contribution (NDC), which targets a 51% reduction in emissions by 2030, and a commitment to achieving carbon neutrality by 2050. Colombia has also announced a plan to ban new hydrocarbon exploration permits, while continuing with current oil and gas exploratory contracts. Proven oil reserves decreased by 2.6% during 2023, while proven gas reserves decreased by 15.7%. However, current measures fail to align with the 1.5°C temperature increase limit established in the Paris Agreement (Climate Action Tracker, 2022[3]). Since the 2000s, Colombia’s greenhouse emissions have not decreased and have grown in absolute terms (Figure 5.2, Panel A). The primary sources of emissions are the land use sector, including land-use change and forestry, accounting for 35% of the country’s greenhouse gas emissions in 2018, and the energy sector which account for 33%, particularly from transport and energy industries (Figure 5.2, panel B). During the pandemic, total greenhouse gas emissions declined in Colombia as in many other countries, but they started rising again in 2021 (DANE, 2023[4]). However, greenhouse gas emissions have continuously decoupled from GDP growth since the 1990s (Figure 5.2, Panel C).
Note: Data are available until 2018. Panel A, BAU refers to the ‘Business-as-usual’ scenario, and NDC refers to ‘National Determined Contributions’. Panel C, emissions intensity is measured as the kilograms (in thousands) of GHG emissions including LULUCF per 1 000 USD.
Source: OECD Greenhouse Gas Emissions.
Colombia faces significant economic challenges amid the global green transition and declining global demand for fossil fuels. With oil constituting 32% of total exports and coal 18% in 2023, Colombia could potentially lose up to 10% of its export revenues, 6% of government revenues, and 8% of its GDP by 2050 due to global decarbonisation efforts (World Bank, 2023[2]). Oil accounts for a fifth of foreign direct investment. These changes could lead to labour reallocation and job dismissals in fossil fuel-dependent sectors, impacting mostly the vulnerable.
Although navigating these transitions will be challenging, it presents an opportunity for Colombia to diversify its productive and export structures. By leveraging its renewable energy potential, mineral resources, protecting its biodiversity, and ecotourism potential, Colombia can foster long-term growth, create formal employment opportunities, and alleviate poverty. By protecting the rich biodiversity and ecosystems, Colombia can not only combat climate change but also support sustainable development and community well-being.
This chapter discusses priority measures for Colombia's three climate transitions. These include climate adaptation policies, achieving climate neutrality by 2050 by addressing deforestation, accelerating the clean energy transition, reducing greenhouse gas emissions from transport, and strategies to turn the global green transition into opportunities.
Colombia has a comprehensive and proactive approach to climate adaptation. It has a multi-sector governance framework, a disaster risk management system and has prioritised integrating climate adaptation measures into its national development plans. The country has implemented various climate adaptation initiatives, such as a comprehensive management plan to help agricultural producers address the impacts of climate change, guidelines for sustainable cattle farming, and a roadmap for the agricultural sector to reduce environmental impact and implement climate-smart practices. Additionally, both Colombia's National Adaptation Plan and the 2050 resilient net zero pathway strategy commit to reduce vulnerability and enhance the adaptability of critical sectors such as transport, energy, and construction, while emphasizing landscape conservation. The National Development Plan also focuses on water management, which is beneficial for climate change adaptation and deforestation prevention. Nature-based solutions also play a crucial role in the national strategy for climate adaptation.
Significant challenges persist, however, particularly at the subnational level, where obstacles hinder effective implementation of climate adaptation measures. Subnational governments are responsible for the bulk of public investments in adaptation, but they encounter difficulties in project design and execution, and municipalities face financial constraints to allocate resources to disaster risk management (World Bank, 2023[2]). Furthermore, territorial plans do not always follow the legal requirements of incorporating climate adaptation actions and because of that infrastructure projects often overlook climate adaptation and resilience measures. Addressing these challenges necessitates coordinated efforts between the central government and subnational entities, focusing on enhancing local capacities and providing support for effective local adaptation planning and implementation. There is also a need to ensure climate adaptation measures integrate traditional knowledge and ancestral practices of ethnic communities, with policies to enhance their participation and create intercultural dialogue spaces. Climate adaptation investments can have high returns, with cost-benefit ratios ranging from 2:1 to 10:1 (Global Commission on Adaptation, 2019[5]). Investments in adaptation not only reduce the risks and impacts posed by climate change but also enhance productivity and foster innovation (Cárdenas, Bonilla and Brusa, 2021[6]). Colombia has significant financing needs for climate change adaptation, and green and sustainable bonds can help address these needs by providing capital for environmental projects. These bonds are increasingly used in Colombia to support sustainability initiatives, including climate change adaptation.
Efforts to expand and enhance nationwide early warning systems must persist to improve disaster preparedness and response capabilities (OECD, 2019[7]). Warning systems exist for certain hazards and in specific areas, but there is a need to achieve a comprehensive coverage of hazards and to upgrade existing systems to make them real-time. This can be done building on good practices that exist at the local level, such as the integrated Landslide Early Warning System in place to protect Medellín’s informal settlements (Gamperl et al., 2023[8]). There is a need to develop training and awareness programmes on the use of early warning systems in ethnic communities, using their languages and traditional communication methods. Ensuring the interoperability between the social registry (Sisbén) and the Disaster Risk Management registry would help identify and alert vulnerable populations promptly, as well as help to implement targeted interventions depending on specific risk factors and needs.
Colombia, a biodiversity hotspot, faces significant challenges from climate change and habitat loss. Nature-based solutions could contribute up to 30% of the reduction in climate change vulnerability by 2050 globally, supporting the Paris Agreement's goal of limiting global warming (IUCN, 2022[9]). Nature-based solutions are crucial for managing water resources, preserving biodiversity, and preventing deforestation in Colombia. These approaches include reforestation, afforestation, and sustainable land management activities, which help offset greenhouse gas emissions and enhance the resilience of local ecosystems. Colombia’s participation in COP28 highlights its commitment to addressing biodiversity loss through initiatives like the forest protection fund and emphasizing the importance of integrating nature-based solutions.
The insurance sector can critically provide insurance mechanisms to manage climate-related risks. To date, insurance schemes against climate risks have limited penetration and geographical coverage in Colombia (UNDP, 2023[10]). A pilot scheme that could be scaled up is the InsuResilience initiative in place in Medellín, a public-private partnership to build urban resilience against climate risks. The project uses predetermined triggers, such as specified rainfall levels, which immediately activate financial assistance without the necessity for extensive damage assessments. The National Development Plan includes regulatory adjustments to stimulate the parametric insurance market. Expanding access to insurance schemes would be particularly important for the agricultural sector, especially among small-scale farmers. The take up of agricultural insurance is low, even if the government subsidises up to 80% of the cost of insurance premiums. To increase insurance uptake, the government can raise awareness among small farmers. It can also learn from the successful experiences of other countries, including Guatemala, which fully covers insurance premiums and pays out based on predefined triggering events, such as satellite-measured rainfall levels or natural disaster events, rather than indemnifying actual losses (World Bank, 2024[11]). Insurance based on weather-based indices bundled with improved targeted farming practices can boost farmers' adoption of technologies that strengthen their resilience to climate change, as seen in Malawi where it raised incomes by combining insurance with crop-specific loans (Le and Panella, n.d.[12]).
Colombia needs to significantly reduce deforestation to meet its greenhouse gas emission reduction targets, as deforestation is the primary contributor to carbon emissions (OECD, 2022[13]) (Figure 5.2, panel A). Furthermore, reducing deforestation would help to preserve Colombia's biodiversity, safeguarding water resources, protecting the rights of indigenous and local communities, and promoting sustainable development. Between 2001 and 2022, Colombia lost 3.3 million hectares of forest, with a notable acceleration following the signing of the Peace Agreement in 2016 (Figure 5.3). The main causes of deforestation include extensive cattle farming, the expansion of agriculture, illicit drug cultivation, illegal mining, illegal logging, and road construction (Fedesarrollo, 2022[14]).
Colombia has a strong commitment and sound framework to combat deforestation (OECD, 2022[13]), and is targeting to more than halve deforestation to 50 thousand hectares per year by 2030. The National Development Plan 2022-2026 contains several measures to curb deforestation, focusing on the main deforestation hotspots in the Amazon. It also aims at creating forest development and bioeconomy hubs in some municipalities targeted for territorial development in the peace agreement. The current government aims to combat deforestation by fostering dialogue and agreements with poor farming communities. These efforts aim to preserve forests, deter illegal gold mining and coca cultivation and enhance access to state services in remote rural regions. Deforestation efforts in 2022 were effective, achieving the 2026 reduction target in the National Development Plan ahead of schedule. The National Development Plan 2022-2026 focuses on territorial planning around water, incorporating sustainable water management into policies, regulations, and legislation. This approach enhances resilience to climate impacts like droughts and floods, helps protect ecosystems, and reduces deforestation by maintaining biodiversity. Additionally, water-focused planning ensures communities are better prepared for climate change.
Note: 2025 and 2030 targets are from the NDC. The target for 2026 is from the 2022–2026 National Development Plan.
Source: OECD calculations based on Institute of Hydrology, Meteorology, and Environmental Studies (IDEAM).
While an effective control of deforestation is key, in Colombia efforts are hampered by its decentralised environmental management system and the disconnection between central government policy and on-the-ground deforestation control. The new national council for the fight against deforestation can help better coordinate efforts, if it has sufficient resources and is able to streamline the institutional setup (World Bank, 2023[2]). Additional resources for effective law enforcement should be deployed permanently to accelerate the fight against deforestation, particularly to combat illegal mining, as recommended in past Surveys (Table 5.1, (OECD, 2022[13]). Enhancing criminal intelligence capabilities to identify and target illegal mining operations properly would be essential, requiring increasing state presence and control of the Amazon. Additionally, strengthening cooperation with neighbouring countries like Brazil is crucial to address transnational illegal mining networks operating in border regions. Furthermore, enhancing legal frameworks and regulations to impose stricter penalties for illegal mining activities, deter perpetrators, and provide clearer guidelines for law enforcement actions would help. Furthermore, uncertainties regarding land ownership due to incomplete land registries in remote areas must be addressed to prevent opportunistic deforestation, particularly around natural parks.
Accelerating and expanding the payment of environmental services as outlined in the national development plan 2022-2026 is warranted. Costa Rica’s success in reversing deforestation shows that paying for environmental services is an important ingredient of a successful multipronged strategy (Box 5.1), but should also include strong institutions, fiscal incentives for reforestation, or effective land title enforcement, as relying only on payments for environmental services is expensive and may not prove sustainable. Colombia is actively working on completing and updating land registries and resolving land-use conflicts (see Chapter 3). They should continue these efforts to prevent opportunistic deforestation and encourage farmers to invest in sustainable agriculture, as recommended in the 2022 Economic Survey (Table 5.1). To be successful, payment for environmental services programmes need to be accessible and beneficial to ethnic communities, and designed with their direct participation, promoting co-creation and valuing their traditional environmental management practices.
Better control of deforestation and productive sustainable agriculture can help curb deforestation (World Bank, 2023[2]). Redirecting extensive cattle breeding, an important source of greenhouse gas emissions and a key driver of deforestation, towards modern production techniques could also help, as discussed in the 2022 Economic Survey. Sustainable agricultural practices provide alternative livelihoods, reducing the need of clearing forests for farming. Fostering the adoption of climate-smart agriculture practices, such as cultivating-climate resilient crop varieties or efficient use of nitrogen fertilizers, could help boost productivity and resilience, as only 15% of agricultural units in Colombia used these technologies in 2020 (Gaviria González, 2022[15]). To further expand the use of these practices, facilitating sharing of best practices and capacity-building initiatives through famers associations and local institutions would help to scale up practices that are already implemented in some sectors (coffee), to other crops and farmers (Argote, 2014[16]). Assistance from public institutions to access financial services and fostering the development of agriculture insurance could also help overcome adoption barriers.
Costa Rica managed to significantly reverse deforestation since the 1980s, raising its forests from 30% to 60% currently due to reforestation efforts. The main pillars of this strategy were as follows:
The country established a national “Reducing Emissions from Deforestation and Forest Degradation” strategy in 2008, including reference emission levels from forests, and monitoring systems. The strategy involved broad public consultation to understand deforestation drivers.
Success factors of the deforestation strategy included: strong institutions, fiscal incentives for reforestation, payment for environmental services, elimination of cattle ranch subsidies, and effective land title enforcement.
Payment for environmental services played a crucial role, investing approximately USD 200 million from 1997 to 2004, protecting over 460,000 hectares of forests and providing additional income for over 8,000 forest owners.
Moreover, the development of ecotourism contributed to revenue generation and conservation incentives.
Colombia’s energy transition policy is a priority, shifting away from an extractive industry model heavily dependent on oil and coal exports towards a more diversified clean energy economy based on investments in renewable energy sources, critical minerals and hydrogen. Energy related greenhouse emissions, mostly from transport, energy production and manufacturing, account for 33% of the country’s total greenhouse emissions (Figure 5.2, panel A and B). To accelerate the energy transition and transform the energy mix, the government is prioritizing non-conventional renewable energy sources, such as wind, solar, biomass and geothermal. Authorities have announced it will not grant new licenses for hydrocarbon exploration. The government’s reindustrialisation policy agenda (see Chapter 3) is the primary mechanism to drive the energy transition while facilitating a shift away from oil and carbon dependency and fostering diversification of exports and fiscal revenues.
In 2023, Colombia announced a robust roadmap for a just energy transition that requires a six-fold increase in wind and solar capacity, from below 0.4% of total energy generation today, halving oil demand in refineries by 2050, complete reliance on imported gas by 2027 and no thermal coal production by 2040 respectively. Additionally, it calls for a 75% reduction in fossil fuel consumption in transportation, a modal shift to public and non-motorised transport (such as buses, trains, bikes or walking), higher emphasis in multimodal cargo transportation, adoption of green hydrogen and green technologies, and improved energy efficiency in industry, households, and services. Another piece of Colombia’s renewable transition strategy are the so-called energy communities, to promote renewable energy use, enabling self-generation for unserved users and reducing costs by avoiding extra charges from distribution or transmission assets. This roadmap is welcome and if implemented will help to curb greenhouse gas emissions significantly (Figure 5.4), however it will not be enough to meet Colombia’s commitment to carbon neutrality by 2050. To achieve carbon neutrality by 2050, greater emphasis is needed to accelerate the deployment of renewable energy and the reduction in transport emissions (Gonzalez, forthcoming[17]).
Note: *2021 is simulated, as the latest available emissions inventory for Colombia is for 2018. The ‘Trend’ scenario maintains current trends in energy production and consumption, the ‘Announced Policies’ scenario reflects announced policies to 2022, the ‘Just Energy Transition’ scenario reflects the government roadmap for a just transition, and the ‘COP26’ scenario is consistent with Colombia’s commitments under the Paris Agreement.
Source: (Gonzalez, forthcoming[17]) and Energy Ministry (2023), National scenarios, Just energy transition.
5.4.1. Accelerating the adoption of renewable energies
Colombia’s energy generation from renewable sources, at 29% of total primary energy supply, is relatively high compared to the OECD average of 12%. In the case of electricity, generation from renewable resources is higher than regional peers and the OECD average (Figure 5.5, Panel A), accounting for 83% of total energy generation, largely hydropower (Figure 5.5, Panel B), but there is scope to further develop solar, wind, geothermal and bioenergy. Colombia has significant potential for renewable energies (Figure 5.5, Panels C and D). Regions like La Guajira in the Caribbean have significant potential for wind and solar power generation, with wind speeds three times higher than the global average and solar irradiation levels 60% higher than the global average. Bioenergy opportunities remain largely untapped (OECD, 2022[18]). Enhancing the renewable energy mix would also help diversify energy resources and ensure a more reliable energy supply, as frequent weather events such as El Niño can create power supply restrictions.
Note: LAC is a simple average of ARG, BRA, CHL, CRI, MEX, and PER. PV = photovoltaic. Solar * potential includes specific estimates for rooftop PV installations in large cities (solid), while other solar (dotted) potential is purely illustrative, given average solar radiation in Colombia in comparison with Germany. Bioenergy** only includes estimates for electricity generation capacity from agricultural residues.
Source: OECD Green growth Indicators ; OLADE; OECD (2022), Enabling Conditions for Bioenergy Finance and Investment in Colombia, Green Finance and Investment; DANE; and Ministry of Mines and Energy.
To capitalise on this potential and achieve decarbonisation by 2050, Colombia must implement regulations that foster private sector investment in renewable projects and ensure regulatory and policy certainty. Recently, there have been significant delays in the completion of renewable energy projects and transmission lines due to regulatory bottlenecks and delays and low support for projects among local communities. Addressing these challenges, requires improved environmental licensing processes to reduce bureaucratic hurdles (OECD, 2023[19]), early engagement and informed consultations with communities and effectively integrating their concerns into project planning and execution to avoid negatively impacting their territories and ways of life. To alleviate adverse effects of renewable projects, it is essential to evaluate and mitigate the negative consequences of renewable energy sources on ecosystems, the quality of life and employment opportunities of communities most directly impacted.
Significant additional investment is needed for the energy transition, with the private sector being a critical source of funding and innovation to drive the necessary advancements. Colombia needs to at least triple its annual investment, that is three times more than it currently invests in the petroleum sector (BloomberNEF, n.d.[20]). Foreign direct investment (FDI) can play an important role to reduce greenhouse gas emissions in key sectors. Foreign firms in the mining and quarrying industry are on average 16% less carbon intensive than domestic competitors in Colombia. Nevertheless, Colombia is one of the countries that attracts the smallest share of FDI for renewable energy production in the region (OECD, 2022[21]).
Stepping up investment will surely require a mix of public funding, private investment, and innovative financing mechanisms. Given limited fiscal space, attracting private investment and developing innovative financing mechanisms become crucial for stepping up investment. One challenge is that there is no clear government policy to secure the required funding for the energy transition nor a government assessment of how much it will cost. Green bonds and public-private partnerships have proven successful in Colombia, showcasing positive experiences in sustainable investment. Colombia has made strides in green finance, including the 2021 emission of a green bond in the local market, the first such issuance in Latin America, and the adoption of a national green taxonomy in 2022 that has spurred growth in the green finance market. This growth is evidenced by increased green credits and offerings, such as green mortgages and financing for sustainable construction, provided by commercial banks. However, these initiatives are still in their early stages and remain relatively small in scale. The number of private sustainable and green bond issuances has remained modest (5 sustainability bonds and 10 green bonds) and green credits at 5% of the total in 2023 (World Bank, 2023[2]). Further efforts to strengthen regulation to accelerate climate‑focused PPPs, deepen and diversify green financing instruments, particularly from local banks will also be needed. Further expanding the role of public development banks in green financing is also needed. The underdevelopment of green capital market instruments is partly due to a shortage of investment-ready projects (World Bank, 2023[2]). Sector platforms integrating the real, finance, and public sectors can address this, while project preparation facilities can cultivate a pipeline of viable projects.
Additional robust policy signals are needed to further promote renewable energy. Colombia lacks targets for renewable energy sources, which reduces investment predictability. Establishing mid-term targets based on cost-benefit analysis of renewable installations, together with a defined schedule of auctions for long-term power purchase agreements would encourage private investment. Strengthening international cooperation to access funds and benefit from technology transfer in renewables generation is also essential (IEA, 2023[22]). Finally, tapping the potential of bioenergy, requires robust policy signals like deployment targets and fiscal incentives to stimulate early market uptake (OECD, 2022[18]).
Enhancing carbon pricing is a crucial element of a stronger decarbonisation strategy. Tax revenues from energy use, discounting subsidies, are only 0.4% of GDP, the lowest among OECD countries (Figure 5.6), primarily from levies on fuels, carbon, electricity, and emissions trading. The explicit carbon tax covers various fuels, including gasoline, diesel, kerosene, fuel oil, and liquefied petroleum gas. The 2022 tax reform expended it to include coal, but other fuels such as natural gas remain uncovered. Furthermore, it remains very low at around EUR 6 (or COP 25799 in 2024) per tonne of emissions (IEA, 2023[22]) well below estimated climate-related costs and other similar-income countries’ rates (Federsarrollo, 2021[23]).
Note: Year 2021. Net energy tax revenues represent the estimated net revenues derived from taxes and subsidies applied to fuels, carbon taxes, emissions trading systems (ETS), and electricity. LAC is a simple average of Argentina, Brazil, Chile, Costa Rica, Mexico, and Peru.
Source: OECD Tax and Climate.
In a commendable decision, in 2023, authorities eliminated petrol subsidies and announced a plan to gradually reduce subsidies for diesel during 2024 and 2025, although the political economy is proving to be more complex. This initiative led to a significant increase in petrol prices, more than doubling them, amidst a backdrop of elevated inflation and economic deceleration. Eliminating all fossil fuel subsidies and increasing gradually the carbon tax to align it with decarbonisation goals, as discussed in Chapter 2 and recommended in the 2022 Economic Survey, can incentivize the substitution of fossil fuels and accelerate the transition to cleaner energy sources by removing artificial price advantages that fossil fuels enjoy due to subsidies. Raising the carbon tax gradually creates a clear economic signal for businesses and consumers to reduce their carbon footprint, thereby stimulating the adoption of energy-efficient practices and the development of sustainable alternatives. Additionally, aligning the carbon tax with decarbonisation goals and broadening the tax base helps internalise the true cost of carbon emissions, reflecting their environmental and societal impacts, while also generating additional revenue to support investment in clean energy and mitigate the effects on the most vulnerable.
Under the current carbon tax design, emissions could decrease by 2.6% from the Nationally Determined Contributions baseline scenario by 2030. However, with a carbon tax reaching USD 67/tCO2e by 2030, emissions could potentially drop by up to 40%, which would be consistent with a slow decarbonisation scenario targeting net zero by 2060 (OECD, 2021[24]). Revenues, under this scenario, could temporarily increase by up to 0.7% of GDP annually by 2030 (OECD, 2021[24]). Phasing the increase in a gradual manner and using the additional revenues to support vulnerable households with targeted and temporary transfers while investing in projects for clean energy technology development, such as energy efficiency initiatives, could enhance acceptance and support.
The establishment of emissions trading system could provide an additional mechanism for incentivizing emissions reductions and fostering investment in carbon-reducing projects. By creating a market-based system where companies can buy and sell tradeable permits, Colombia can further drive innovation, attract international investment, and achieve its decarbonisation objectives in a cost-effective manner. While Colombia has a legal framework for a regulated carbon market, is not fully operational. The introduction of a pilot of Emissions Trading System has been planned for 2024 but has not yet started (CPC, 2023[25]). Transparent and effective carbon markets are needed to attract international emitters for mitigation efforts.
A well-planned strategy to communicate how revenues from higher carbon taxes will be spent could help garner political support. Carbon tax revenues can provide fiscal space for the green transition and for offering support to vulnerable households and businesses, mitigating short-term adverse economic and distributional effects of higher carbon prices and the phasing out of fossil fuel subsidies. These revenues can fund targeted social assistance, energy efficiency tax incentives, job retraining programmes or productive investments. For instance, British Columbia’s carbon tax, introduced in 2008, increased from approximately USD 7.5 per tonne of CO2 equivalent to around USD 60 per tonne in 2024. It is designed to be revenue-neutral, reallocating tax revenues through tax credits for low and middle-income families. Similarly, South Africa launched a carbon tax in June 2019, targeting about 90% of its emissions. It has plans for gradual future increases to advance its decarbonisation goals, despite current low effective rates due to transitional measures aimed at preserving competitiveness and protecting low-income households until 2025.
5.4.2. Enhancing energy security
Ensuring a secure energy supply must be a government priority (IEA, 2023[22]). It is crucial to maintain resilience in electricity and natural gas and oil provision, especially during drought periods and in remote regions. Addressing energy gaps requires providing electricity to 820,000 homes and transitioning 1.7 million households from firewood to efficient cooking fuels.
Diversifying the energy mix is key to enhance energy security, especially given Colombia's heavy reliance on hydropower for energy production (Figure 5.4, panel B), which makes it vulnerable to fluctuations in rainfall and climate change impacts, as seen during events like El Niño. Colombia could use natural gas as a transition energy to sustain energy security until renewables gradually play a larger role. Such approach would help curb greenhouse gas emissions, as natural gas emits 40% less CO2 than coal and up to 20% less than oil, while complementing renewable energy sources. However, a current concern is a growing reliance on natural gas imports, which poses risks to energy security. Estimates indicate Colombia may lose natural gas self-sufficiency by 2026. By 2034, demand for natural gas is projected to outstrip supply, even with planned import facilities in place (Fedesarrollo, 2022[14]; Gonzalez, forthcoming[17]). This will require a plan and financing to enhance gas supply and demand flexibility, maximizing production from current fields, investing in gas storage facilities, reducing harmful emissions caused by certain gas extraction practices, and expanding the country's gas supply alternatives through the development of additional LNG terminals (IEA, 2023[22]).
5.4.3. Reducing greenhouse gas emissions from the transport sector
Decarbonising the transport sector, a major contributor to the country’s greenhouse gas emissions, will be critical towards achieving its net zero target. To achieve it, the transport sector needs a large transformation. The transport sector is primarily dominated by road transport, which serves as the main mode of transportation for both passengers and freight due to the country's mountainous terrain and dispersed population. More than 80% of transport emissions are generated by road transport, from which 65% comes from freight, reflecting the freight sector’s dependence on road transport, use of diesel, and the poor state of vehicles.
The decarbonisation of freight transport requires increasing substantially the participation of rail in freight operations. Government efforts for the next decade prioritise fluvial and rail modes in the new 5G, public‑private partnership pipeline programmes, as highlighted in Chapter 3, but it not expected to reduce emissions by mid-2030s. The road freight sector underperforms regional peers in terms of emission standards, fleet modernisation, fuel technologies, intermodality, and advanced logistics management (World Bank, 2023[2]). Implementing the scrappage schemes to all the heavy-duty transport fleet and expending it to all older polluting vehicles should be implemented as a priority (IEA, 2023[22]). The adoption of strict emission standards for new trucks entering the market would ensure that vehicle replacement leads to the introduction of cleaner, more efficient alternatives, while incentives for fleet modernisation would also help. Accelerating innovation and adoption of alternative sustainable fuel technologies is also key.
The national development plan 2022-2026 (IEA, 2023[22]) aims at improving transportation and the National Electric Mobility Strategy and tax incentives have shown progress, but further mitigation actions are needed. These include further electrification of the private and public vehicle fleet and developing a robust network of charging stations. Expanding public transport infrastructure, promoting alternative modes like walking and cycling, would also help reduce pollutant emissions and improve air quality. Colombia stands out as a global frontrunner in bus-based public transportation, boasting mass urban transport systems in seven cities, including bus rapid transit, cable cars, and a metro system in Medellín, collectively serving 17 percent of the population. By 2025, Bogotá's deployment of electric buses is expected to create the largest electric bus fleet in the region (World Bank, 2023[2]). There are also plans for intermediate cities to incorporate passenger electric buses into their fleet. Prioritizing further electrification of buses is paramount, given its financial feasibility and significant contributions to enhanced air quality and public health.
Colombia has significant spending needs for adaptation and mitigation, and green medium-term fiscal frameworks could be instrumental in creating the needed fiscal space and helping to prioritise spending. Strengthening the medium-term fiscal framework to systematically include climate change considerations would help mitigate the significant economic risks and fiscal costs (OECD, EU Comission & IMF, 2022[26]), following the example of some OECD countries (Box 5.2). Colombia’s medium-term fiscal framework provides transparent planning over several years (MinHacienda, 2024[27]), but could be strengthened by integrating fiscal risks associated with climate change in fiscal strategies, medium-term budget frameworks, and long-term fiscal sustainability analyses to create sufficient fiscal space to absorb losses.
Since 2021, Colombia national budget law includes green budgeting requirements to assess the environmental impact of budgetary and fiscal policies (OECD, EU Comission & IMF, 2022[26]). Yet, Colombia has only started to do ex-post environmental impact assessment of some measures. Moving forward, Colombia could prioritise incorporating climate-related expenditures and revenue measures into the budget and medium-term fiscal framework to align fiscal policies with climate objectives. One approach is to include green forecasts, such as emissions, alongside projections related to renewable energy deployment, energy efficiency improvements, biodiversity conservation efforts, and sustainable land use practices, like some OECD countries (Box 2.3). These climate impact assessments can inform the evaluation and selection process of public investment projects, enhancing alignment with climate goals.
Denmark adopted macro-fiscal forecasting and modelling tools that incorporate climate and environmental impacts to inform the preparation of the country’s fiscal strategy and budget. Moreover, its GreenREFORM macroeconomic model makes projections extending to 2100, facilitating medium-to-long-term analysis, ensuring alignment with climate targets and enhancing Denmark’s fiscal framework with a central focus on environmental policy. The model accounts for factors like energy usage, pollutant emissions, and the effects of environmental taxes and subsidies.
New Zealand incorporates climate change considerations into its long-term fiscal reports, such as the Long-term Fiscal and Investment Statements published every four years, along with aging considerations. Additionally, New Zealand has introduced a Climate Economic and Fiscal Assessment to assist decision-makers in both the public and private sectors in identifying and managing the risks and opportunities of climate change, facilitating a transition to a low-emissions and climate-resilient future.
The Scottish government provides a carbon footprint assessment of its draft budgets, which estimates the GHG emissions associated with planned government purchases of goods and services.
In Sweden, the government integrates climate targets and budgetary targets, presenting a climate report in its budget bill annually as mandated by law. Additionally, every fourth years, it formulates a climate policy action plan detailing strategies for achieving climate targets.
Source: IMF (2022[28]) and OECD, EU Commission, IMF (2022[26])
Transitioning to carbon neutrality can drive long-term output growth compared to a scenario with no climate action, thanks to substantial investments, enhanced energy efficiency, and increased productivity (World Bank, 2023[2]). OECD analysis indicates that while decarbonizing, investing in green sectors, both physical and human capital, could lead to a net increase in formal employment (OECD, 2023[29]), although certain industries like coal and oil are expected to face job losses. The green transition also presents an opportunity to enhance development in lagging regions and closing regional gaps (as highlighted in Chapter 3) by involving local communities and ensuring the benefits of the transition are equitably distributed. The government Just Energy Transition roadmap aims to close regional gaps and ensuring equitable benefits across diverse areas of the country.
A successful green transition requires diversifying exports and the economy to raise new sources of tax revenues, boosting growth and creating high-quality job opportunities. The government reindustrialisation plans prioritise tourism, culture, agroindustry, and renewable energy to diversify its activities (see chapter 3). A well-executed export diversification plan is crucial for facilitating the green transition, but a comprehensive set of reforms needs to complement it to ensure the success of reindustrialisation and diversification efforts. These reforms encompass improvements in infrastructure, enhanced logistics, continued emphasis on high-quality education and training, measures to reduce informality, and the lowering of both tariff and non-tariff barriers, as discussed in Chapters 3 and 4 of this Survey. A more innovative economy is crucial for supporting Colombia's diversification away from oil and coal. The effective use of science, technology, and innovative solutions can significantly enhance environmental sustainability, drive economic growth, and help the country achieve its net-zero targets.
Renewable energy is a promising option to reconvert the mining regions in the north, as noted above, benefiting from abundant wind and solar resources. Colombia can also leverage its established mining sector to diversify into minerals like copper, nickel, and cobalt, all needed in the global energy transition. The latest National Development Plan 2022-2026 foresees a new mining policy aimed at improving geological knowledge of Colombia’s mineral resources. More exploration and permitting clarity are required to ramp up production, while mining activities must adhere to rigorous environmental, social, and governance standards while benefiting local communities. The bioeconomy presents significant opportunities for Colombia to achieve economic development aligned with decarbonisation goals and the transition in the productive structure, aligned with the National Development Plan.
Fully realizing these opportunities also requires support to those who will need to transition to other jobs. Deploying comprehensive training programmes for displaced workers, equipping them with the necessary skills to access job opportunities in new sectors, is key to minimise the social impact of potential job displacements. It is also required to address the skill shortages in thriving sectors that will probably arise, such as those related to with the deployment of renewable energy parks. For example, repurposing skilled coal mining labour to develop critical mineral industries can ease the green transition. Flexible, short training programmes are needed to address time constraints and labour-market relevance (OECD, 2024[30]). On-site and work-based learning provide practical hands-on experience while allowing workers to get financially compensated, making training accessible. Financial incentives play a crucial role in facilitating training participation, while career guidance is essential for individuals to understand the benefits and risks of transitioning to green employment. For example, the United States and Sweden provide holistic support, including work-based training, financial aid, and career guidance for green jobs. Gender imbalances in the green economy need attention, as women are usually underrepresented. Spain, Austria, and Sweden address this through targeted training and financial support to promote an inclusive green transition.
The labour reform bill being discussed in Congress (see chapter 4) stipulates that all firms undergoing decarbonisation must implement labour reconversion plans for affected workers. The 2019 OECD Economic Survey of Colombia highlights the need for improvements in the quality and pertinence of training systems and public employment services. Additionally, compensatory transfers and insurance programmes can serve as a safety net for workers transitioning to new job opportunities. Facilitating voluntary spatial reallocation of workers may enhance outcomes, especially as job opportunities in growing industries may not be concentrated in regions experiencing job losses.
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