To combat the climate crisis and meet the goals of the Paris Agreement, countries worldwide must undergo profound socio-economic transformations towards carbon neutrality. But what are the social impacts of this transition in Latin America and the Caribbean? How can a just transition be integrated into the climate change agenda? And what actions can governments in the region take to ensure that the shift to net-zero is both fair and inclusive?

As we move towards net-zero economies, significant changes lie ahead, and it’s crucial to address the impacts while ensuring that no one is left behind. The region’s high levels of inequality and informality add complexity, requiring careful consideration to ensure equitable distribution of both benefits and costs. For example, in Latin America and the Caribbean the wealthiest 10% earn 12 times more than the bottom 10%, highlighting the need for policies that prioritise inclusivity.

Transitioning to net-zero will inevitably create winners and losers. Therefore, it’s vital to ensure a fair distribution of benefits and a vigorous mitigation of losses. Our recently launched Just Transition Toolkit for Latin America and the Caribbean offers a set of options for different sectors to implement a fair and equitable transition towards carbon neutrality.

Just Transition in the Energy Sector

Energy stands among the region’s most polluting sectors, accounting for 13% of emissions in the region. The objective is to transition from fossil fuels to renewables, which will lead to shifts in labour demand and investment patterns, affecting everything from exploration and extraction to downstream activities like gas stations. While this transition will create unemployment in some sectors tied to fossil fuels, it will also generate opportunities in renewable energy generation, maintenance, and distribution, fostering demand for skilled labour.

Moreover, the transition will create new business opportunities across the renewable energy value chain, stimulating investment in manufacturing, installation, and maintenance, as well as auxiliary infrastructure such as transmission lines.

Considerations for the Energy Sector

1. Employment and skills

   The transition to net-zero will reshape the labour market. Employment in the renewable energy sector could grow by up to 22% under a decarbonisation scenario. However, this gain may be offset by job losses in fossil fuel extraction and fossil fuel based electricity generation. Reskilling programmes and support for affected workers are critical.The new jobs created as a result of the transition to clean energy may not be evenly distributed among workers of different genders or those with varying skills, and geographical location will play a significant role. Many of these positions will require workers to acquire new skills, such as entrepreneurship for adopting new technologies or technical expertise for maintaining electrified equipment. Gender barriers must also be addressed, as the majority of the new jobs are expected to be in male-dominated occupations, potentially leaving women at a disadvantage unless occupational segregation is addressed. Furthermore, the geographical shift in job opportunities may necessitate reskilling initiatives, job search assistance, or support for internal migration.

   Chile’s Just Transition Strategy in the Energy Sector exemplifies this approach, aiming to transition away from coal generation while prioritising training and job creation in clean energy. Through initiatives like job fairs and entrepreneurship support programmes, Chile is seeking to facilitate the reintegration and retention of affected workers into the evolving labour market.

2. Households and poverty

   Price changes in energy, food, and mobility will impact households differently. Low-income households in the region already allocate a significant portion of their spending to food and energy, making them particularly vulnerable to price fluctuations. While renewable energy adoption may eventually lead to lower and more stable prices, initial shifts away from fossil fuels could temporarily increase the cost of living, disproportionately burdening low-income households. To mitigate these negative effects, targeted interventions, such as cash transfer programmes and investments in poverty reduction and ecosystem restoration, are essential. Specifically, in the energy sector direct cash transfers, coupled with reductions in fossil fuel subsidies or the implementation of decarbonisation measures like carbon pricing, can help to alleviate the financial strain on households. These initiatives could be tailored to the specific needs of households, considering factors such as the number of dependents.

3. Regions and communities

   Communities reliant on carbon-intensive industries, such as fossil fuel extraction, will encounter significant challenges as economic activity in these sectors gradually declines. Despite the potential creation of new jobs in the renewable energy sector, there’s no guarantee they will be located in the same communities or offer comparable wages and benefits. The closure of these industries disrupts the regional value chain, affecting various sectors such as restaurants, hotels, supermarkets, and local industrial production. To mitigate these negative impacts and foster new opportunities, the public sector must implement supportive policies and investments aimed at diversifying local economies and attracting alternative businesses. Strategies may include business cluster development, regulatory enhancements, adoption of green business practices, infrastructure improvements, community compensation schemes, and initiatives to enhance regional public transport and promote sustainable procurement.In Mexico, for instance, following social conflicts arising from the implementation of a roadmap for achieving 50% clean energy, the government introduced legislation to bolster social standards, incentivise consultation processes, and address conflicts with affected communities.

4. Revenues for social investments

   The region faces the significant risk of losing over USD 3,000 billion in oil royalties and more than USD 200 billion in natural gas royalties by 2035, posing a threat to social services provision and poverty levels in areas reliant on high-emission industries. Addressing these challenges and advancing a just transition in Latin America requires short-term strategies to estimate the distributional impacts of reduced fiscal revenues from high-emission sectors and identify alternative funding sources for social investments. In the medium to long term, efforts must focus on creating new revenue streams by attracting diverse businesses (including environmentally sustainable ones), diversifying economic activities, and developing progressive revenue distribution mechanisms to mitigate regional social inequalities.

The journey towards decarbonisation in the energy sector presents immense economic and social opportunities. Yet realising these benefits requires concerted efforts to ensure inclusivity and fairness. Governments must prioritise equitable distribution of benefits, support job creation, and foster low-carbon investments. Collaboration among stakeholders is key to navigating the complexities of this transition. With proactive measures and inclusive policies, Latin America and the Caribbean can pave the way for sustainable and inclusive growth in the face of climate change.

Mariana Alfonso is a sector lead specialist in the Climate Change and Sustainability Division of the Inter-American Development Bank (IDB), where she acts as a focal point to mainstream climate change mitigation and adaptation into the Social Sector’s operational and analytical program. She is currently working on issues of just transition, green jobs, climate shock-responsive social protection programs, among others. 

Alejandra París currently works as communications consultant at the Climate Change Division of the IDB, where she oversees the strategic communication of the bank’s Climate Change Division, giving visibility to the different actions that the IDB carries out to motivate climate action in Latin America and the Caribbean.