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Colombia courts green investors with “new voluntary carbon market”

09 March 2022 Cristina Brooks

Colombia is aiming to become an energy transition investment leader, with plans to attract international investors using a new kind of nature-based carbon credit backed by a taxonomy.

The country has set its sights on achieving global recognition for its carbon offset projects, even as protests lasting for nearly a year have raised questions from international observers. S&P Global Ratings saw the protests as a reason to downgrade its long-term foreign currency sovereign credit rating.

Last year, Colombia's government proposed reforms to fund pandemic-related basic income and relieve national debt, but this led to deadly crackdowns on widespread protests, including road blockades that impacted the country's oil output.

The reforms, which Congress approved in September, are set to be paid for by not only sales tax increases but also privatizations involving majority state-owned oil company Ecopetrol, according to magazine Semana.

Commenting on the protests at the CERAWeek 2022 conference by S&P Global, Colombian President Iván Duque said the country has helped to attract private investment for the energy transition of Ecopetrol.

"There are three P's: post-truth, populism and polarization, so the hydrocarbon sector has been captured by that. There are people always blaming the sector for everything that goes wrong in the energy market," Duque said. "We see that there are populations that want to gain a lot of immanent applauses, and they want to polarize society against the sector, so the statement that I have made in Colombia is that Colombia has a positive story to tell."

Duque noted that the country had faced electricity shortages as a result of weather six years ago, but that this was no longer an issue. "We feel happy that we have ensured energy security, but we have also become a leader in the energy transition [area]," said Duque.

Government innovates "blue carbon" offsets

The government launched the Colombian Voluntary Carbon Market Platform in 2016, although certain existing forestry credits were called "hot air" in a Carbon Market Watch report last year.

Colombia is now turning its attention to innovative voluntary carbon offsets using forestry and marine protected areas, said Duque.

Duque noted that in August, the country met a target of planting 180 million trees, which he says allowed the creation of a "new voluntary carbon market" that should be launched before the end of his term on 29 May.

The new voluntary carbon market will be backed by the country's forthcoming green taxonomy that defines which investments in Colombia are aligned with the country's Paris Agreement goals. "So Colombia has the finances ready, and with the voluntary market, we will be able to consolidate all the re-forestry, all the recovery, and all the newly planted trees in the country so that companies, countries, and ourselves will be able to measure the capturing and we will be able to sell the carbon credits worldwide in a very transparent way," Duque said.

"When one hectare of cacao is planted, three hectares of tropical jungle are destroyed. So if we recover, if we declare, if we protect, and if we build the nature-based solutions, and [pay for] environmental services, this can become a powerful deterrent to the expansion of illegal [deforestation for cropland] around the country," he added.

US non-profit Conservation International is working with tech giant Apple to help market carbon offsets that pay for the conservation of the Cispatá mangroves on the Caribbean coast. The project "opens a path for other blue carbon ecosystems around the world to be added to those markets."

A global working group striving to scale up such "blue carbon" nature-based projects using mangroves includes France, Costa Rica, French insurer AXA, British bank HSBC, and Bank of America, the non-profit announced in February.

Organizations monitoring carbon credit integrity, Voluntary Carbon Markets Integrity Initiative and Verra will also be part of the working group.

Renewables poised for growth

At the same time as growing investment in nature-based offsets, Colombia is also encouraging investment in renewables. By the end of this year, it is targeting 2.8 GW of installed non-hydropower renewable capacity.

While the electricity sector in Colombia mostly relies on hydropower (65%), the country offered investors a 50% income tax deduction for investments in renewables as well as green and blue hydrogen in July. The government has likewise introduced a regulation to require wholesale power distributors to source at least 10% of their power from renewables.

Last year, Ecopetrol also made strides towards sustainability. It has aimed for net-zero carbon emissions by 2050 — targeting a 50% cut in Scopes 1, 2, and 3 CO2 emissions from a 2019 baseline — and laid claim to being the first company in the oil and gas sector in Latin America to do so.

All its targets are for Colombia only, although it also has operations in North America, Brazil, and Peru.

Ecopetrol hopes to attain net-zero through renewable energy development, including through 112.5 MW of renewable energy capacity developed in 2021. The company aims to reach 400 MW of renewable capacity by 2023.

It will also aim to cut fugitive emissions at its facilities while boosting investment in hydrogen, and carbon capture, utilization, and storage.

Ecopetrol has since December sold its first million barrels of carbon-neutral oil, which Duque described as "marvelous." The emissions from its production, extraction, and transportation are offset by carbon credits from Colombian renewable energy projects.

Oil, electricity, energy transition projects

Ecopetrol's investment plan sees it spending somewhere between $4.8 billion and $5.8 billion in 2022, which will go not only to oil and gas exploration but also electricity projects in Colombia. It plans to spend more than $50 million on decarbonization projects and $6 million on the development of pilot projects and studies of green and blue hydrogen for refineries and mobility.

Longer term, the company expects to invest up to $6 billion annually until 2040. For the next two years, 69% will be spent on the exploration and production projects in Brazil, Colombia, and the US.

Ecopetrol said that last year's oversubscribed issuance of $2 billion in bonds to international markets showed investors' faith in its transition strategy.

The company used the proceeds to finance the acquisition of a majority stake in the Colombian government's electric power transmission company Interco Conexión Eléctrica in October, as part of its plan to become an integrated energy company.

The stake gained in this company, as well as higher fossil fuel sales volumes amid increased post-pandemic demand, contributed to Ecopetrol's record net profits in 2021.

Posted 09 March 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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