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Latin America Faces Fiscal Cliff as Oil Revenues Plummet
14 Nov
Summary
- Oil revenues could fall by up to 25% of GDP in major Latin American producers
- Carbon pricing unlikely to offset losses, risking social program cuts
- Region needs to reform taxes, diversify revenue sources to achieve fiscal neutrality
In the face of the global push for decarbonization, major oil-producing countries in Latin America are grappling with a significant fiscal challenge. According to a recent study, six key producers - Bolivia, Brazil, Colombia, Ecuador, Mexico, and Trinidad and Tobago - could see their hydrocarbon revenues fall by as much as a quarter of their GDP over the next three decades under a global net-zero emissions scenario.
Even if these countries adopt ambitious carbon taxes, the revenues generated would only reach less than 1% of GDP in most cases, rising to between 1.5% and 2% in Brazil and Mexico. This prospective "fiscal cliff" emerges in a region where social programs already absorb around 13% of GDP, well below OECD levels, while public investment has declined from 4% of GDP in 2013 to just 2% today. Further revenue cuts would erode already fragile social protections, while increased borrowing risks exacerbating debt vulnerabilities.
The International Energy Agency's "Net Zero Emissions by 2050 Scenario" underscores the scale of the challenge. By 2050, fossil fuels are expected to supply barely one-fifth of global energy demand, compared to four-fifths today. For Latin America's petrostates, this implies rapidly shrinking royalties, export earnings, and tax revenues at precisely the moment the bill for green infrastructure, resilience investment, and energy transition policies comes due.
To address this looming crisis, the region's leaders must focus less on extending the lifespan of oil assets and more on undertaking overdue tax reforms, broadening non-resource revenue bases, and securing meaningful international support. With some of the world's most competitive renewable resources, Latin America is well-positioned to attract investment and build new industries - but only if governments confront the fiscal realities of a post-oil world. Unless decisive action is taken, the region risks approaching carbon neutrality long before it achieves fiscal neutrality.
