The United States’ Easiest Climate Win Is in Latin America

MONTEVIDEO, Uruguay—The South American nation of Uruguay relies almost entirely on renewable energy for its electricity, and it wants to help others do the same. Through a clever bit of alchemy, it plans to use offshore oil platforms to generate wind energy for producing green hydrogen.

That might sound like a dream project for the U.S. government under President Joe Biden, who has prioritized renewable energy production abroad, including in Latin America. But as Uruguay casts about in Washington for loans to transform its oil infrastructure, it has been stymied by U.S. restrictions on lending to so-called high-income countries. “If we had support, we could go much faster,” Ignacio Horvath, CEO of ANCAP, Uruguay’s state energy company, told Foreign Policy.

Uruguay is hardly alone. Most Latin American countries are classified as high or upper- middle income by the World Bank based on per capita income. Guatemala, the Bahamas, and Paraguay all fall into one of those categories. That means, even though Latin America is rich in renewables potential, the region is ineligible for many types of U.S. financing to harness their ample sunshine and wind. That includes Caribbean nations that are suffering severe climate impacts—including intensifying hurricanes and sea level rise—and are eager to continue to lead the global response to climate change.

The U.S. government and multilateral development banks have long-standing rules that restrict lending to Latin America’s high and upper-middle income countries. These hurdles are particularly shortsighted because Latin Americans overwhelmingly recognize the threats from climate change. On average, more than 80 percent of individuals in Mexico, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama consider climate change to be a serious threat. Public opinion will likely become even more favorable as climate impacts—such as the prolonged drought tormenting farmers in Argentina, Brazil, and Paraguay—worsen in the region.

As a result, Latin American governments are generally eager to promote renewables projects, both for economic objectives and to combat climate change. In Chile, Environment Minister Maisa Rojas helped write the last United Nations Intergovernmental Panel on Climate Change flagship report. In Colombia, President Gustavo Petro campaigned on a pledge to discontinue oil exploration, though the sector produces nearly one-quarter of export earnings. In August, the U.N. appointed Grenadian politician Simon Stiell to its top climate post, the third consecutive leader from Latin America and the Caribbean to hold that post.

There is no doubt, however, that Latin America’s governments need a bit of nudging to advance a green agenda. That was evident during the pandemic, as governments poured stimulus funds into traditional industries, including hydrocarbons. It is even more true today, as the region’s recovery is weighed down by a COVID-19 debt hangover, high inflation, a strong dollar, rising interest rates, and food and energy crises. These challenges have left scarce public funds for investments in renewable energy production, electricity transmission infrastructure, energy storage capacity, and electromobility. In most countries, there is still a reluctance to reduce costly fossil fuel subsidies, which disincentive renewable energy projects.

Restrictions on U.S. support for Latin America’s renewables industry also deprive the United States of an important diplomatic tool in Washington’s tug of war with Beijing for regional influence. That is especially true in regard to Latin America’s energy transition, powered primarily by European and Chinese investors and manufacturers of renewable energy technologies and electric vehicles. Argentina is a longtime U.S. partner in South America, for example, but in its high-altitude desert in the northwest, it was China that built the region’s largest solar plant. In nearby salt flats, it is Chinese companies that control much of the lithium coveted by battery and electric vehicle companies.

To be fair, the Biden administration acknowledges this problem. In June, at the Summit of the Americas, U.S. Secretary of State Antony Blinken promised to lobby multilateral institutions to expand financing options for the region’s middle-income economies—beset by development challenges but excluded from many types of international financial support. He repeated that promise during a South America trip last month. U.S. Treasury Secretary Janet Yellen has called for a wholesale reconsideration of how multilateral development banks address issues, such as climate change, that require different approaches than for reducing poverty.

One option for the United States would be to welcome the next Inter-American Development Bank president, to be elected in November, with a capital increase that would expand lending for renewable energy projects. But in the meantime, the United States could help remedy this problem on its own by removing its own barriers to financing for Latin America’s high- and middle-income countries.

Historically, U.S. development finance support was designed to fight poverty. Supporters of that approach point to the immense and growing need in much of the world. In 2020, the pandemic pushed 70 million people into extreme poverty, the biggest single-year increase in decades. The United States has moral and pragmatic interests in reducing poverty overseas.

That said, the newest U.S. development office, the International Development Finance Corporation (DFC), supposedly has a broader mission. Established in 2019, the DFC is designed not only to fight poverty but also to provide alternatives to “state-directed investments by authoritarian governments”—in other words, Chinese loans. It does so through loans, loan guarantees, equity investments, feasibility studies, and technical assistance. Its high profile has led to expectations that the agency will be the primary U.S. tool to compete with Beijing’s Belt and Road Initiative, a priority for the United States and its G-7 allies. It has the capacity to make transformational investments in renewable energy.

Nevertheless, the DFC is required to prioritize low- and lower-middle-income countries, with rare exceptions. The DFC board includes a chief development officer. In Latin America, it does not operate at all in much of the Caribbean or in Chile, Panama, or Uruguay—three democratic U.S. partners that are well positioned for the “friend-shoring” of U.S. supply chains.

There are calls to make the DFC as well as the Export-Import Bank of the United States, more flexible lenders so as to more nimbly battle the China Development Bank and the Export-Import Bank of China. In practice, despite procedural barriers, the DFC already lends regularly to upper-middle-income countries for that purpose, so much so that anti-poverty advocates have complained of its “drift toward Foggy Bottom,” home to the U.S. State Department.

The U.S. Congress has already made at least one explicit exception. In 2019, to reduce European dependence on Russian oil and natural gas, lawmakers permitted the DFC to support energy projects in Europe regardless of a recipient’s per capita income.

It should do the same for renewable energy projects everywhere, and the White House should find other ways to finance renewable energy projects and drive private investment to that sector in all of Latin America, a battleground for great-power competition that has enormous renewables potential and great economic need.

Latin America’s renewables sector is expanding without significant U.S. support but not at the speed and scale necessary to meet the goals of the Paris Agreement. More than a quarter of its energy comes from renewable sources, twice the global average. At the same time, there are countless large-scale renewables projects marooned in boardrooms awaiting financing.

Although Uruguayan officials have come away empty-handed from meetings with the U.S. government, the country’s ambitious green hydrogen projects are moving ahead. China and European governments have expressed interest in furnishing equipment for electrolysis—to split water into hydrogen and oxygen—and for the production and use of synthetic fuels, obtained by mixing carbon monoxide and hydrogen.

But the country hopes to repurpose a vast array of oil industry infrastructure, and its reliance on public funds has slowed that transformation. “We see potential everywhere,” Horvath said.