Because global decarbonization is an existential matter to small island states
When I was eleven, my family moved from Toronto, Canada, to the Caribbean island of Barbados. My parents—originally from Guyana, where I was born and raised until age six—were eager to reunite with the tropical weather and vibrant culture the region is so well known for. They opened a business sourcing and retailing fine jewelry on the island’s south coast, assuming locals would be their primary customers. After a few months, they discovered their main customers were not the island’s locals but tourists—mainly from the UK and North America— interested in high-end, duty-free shopping while vacationing. After one year, they relocated the store inside a popular hotel to be closer to their most significant customer base.
My parents’ experience is certainly not an isolated case; local business owners from coast to coast cater to many tourist customers. The “gem of the Caribbean sea”, as the country is often described, attracted roughly 400,000 visitors last year. According to the UN World Tourism Organization, the industry itself brought USD$600M in 2021, a notable post-pandemic decline but still, making it one of the largest contributors to national GDP at roughly 21%. The other two main drivers are international business and foreign direct investments.
It’s important to remember that, unlike its oil-producing neighbors, Trinidad & Tobago and Guyana, this small island state has few natural resources to leverage for economic development. The service sector, both formal and informal, dominates national GDP growth. According to the United Nations Development Programme, the informal sector—associated mainly with tourism activities—accounts for 30-40% of total GDP. Moreover, the World Travel and Tourism Council data suggests that tourism supports 33% of local jobs. In short, the tourism industry is the bread and butter, or cou cou and flying fish, if you will, of economic growth for the nation and its ~282,000 residents.
The effects of climate change on small island states, in particular, cannot be underestimated. During COP26, Prime Minister Mia Mottley powerfully noted, “1.5 degrees is what we need to survive, 2 degrees is a death sentence” after remarking that “national solutions to global problems do not work.” Now, six months shy of COP28, we are faced with the unsurprising news that the world will indeed very likely pass the 1.5-degree threshold outlined in the Paris Agreement within the next few years*.
It is no secret that large corporations, usually headquartered in developed economies across the global north, are driving the climate crisis. While the popularization of sustainable investing has incentivized corporate sustainability programs and policies, the idea of “valuation over values” arguably still underpins mainstream capital markets. In the global north, government intervention through climate change laws and regulations presents a much-needed accountability mechanism for companies operating in high-pollutant industries, irrespective of the impact on materiality. The introduction of these frameworks is, of course, not without costs. As current economic conditions tighten, the cost of urgent climate change mitigation efforts in developed economies alone may result in a reduction in other budgets, including international development assistance.
As Mottley highlights, global problems require global solutions. If budgetary constraints could impede the flow of public sector capital from developed to middle and emerging economies for the purpose of climate change mitigation, how can this small island state, already disproportionately impacted by the activities of large polluters, make large strides on the climate front while stimulating economic growth? It's a complex question riddled with multiple stakeholder considerations, alongside structural and systemic uncertainties to explore. Here’s my proposal: let’s consider the key contributor to GDP—tourism—and begin with some of the decarbonomics.
It is estimated that $44 trillion of economic value generation, more than half of the world’s total GDP, is dependent, to a moderate or large extent, on nature. In an analysis of industry sectors, the World Economic Forum in collaboration with PwC, finds that although aviation, travel and tourism has less than 15% of direct gross value added dependent on nature, more than 50% of their direct gross value added from their associated value chains is moderately or highly dependent on nature. The tourism industry is made up of multiple key sectors such as accommodations, transportation, recreation and entertainment, and food and beverages. There are also local retailers, such as my parents’ business, that support the industry. Protecting nature via climate change mitigation strategies also protects the industry.
Fossil fuels are the main form of energy generation across the island, with the import of fossil fuels supplying 93% of energy needs as of 2020, pointing to the improvements to energy security that the energy transition could bring to the country. Connections have already been made to renewable energy systems—namely solar—with a capacity of ~88.3 megawatts (11.8% of the projected 750 megawatts needed to facilitate the Mottley government’s goal of 100% renewable energy reliance by 2030). While a promising development, the Barbados Light and Power company, the national supplier, has raised concerns about grid stability resulting from increased renewable energy generating stations. This is to say, more renewable energy production is needed and enhancements to critical infrastructure in order to secure this supply to the grid are vital. It was reported earlier this year that Barbados Light and Power has applied to build utility-scale storage for a total of 60 megawatts across the island. Rate reduction bonds may be an opportunity to boost critical infrastructure developments for the integration of renewables. This scheme would require marginal tax increases to fund increased energy capabilities with the promise of lowered taxpayer costs and economic savings in the long term.
On the supply side, a local investment banker says renewable energy deals are increasing. In 2021, the government reached a deal with Barbados Light and Power that ended the utility company’s monopoly and introduced opportunities for new players to support the low-carbon transition. Independent, foreign-owned renewable power producers have been enticed by local utility tariff systems since the renewable power they develop has $0 marginal costs and can outbid fossil-fueled power. Tariffs also allow utilities to cover operating expenses, capital costs, and internal rates of return. With the ability to finance via debt rather than equity, resulting in a lower weighted cost of capital, independent power producers can operate with lower capital costs, resulting in lower energy costs overall. This means that the introduction of more renewables, which are consistently undercutting fossil-fueled power, to the grid brings greater opportunities for business operations and benefits the local economy in the form of lower electricity prices.
For the tourism industry, private-public partnerships with large independent power producers could bring opportunities for locally- and foreign-owned hotels and other tourist accommodations to be fully powered by renewables. In addition to lowered operating costs, this switch alone could attract a new customer profile—the eco-conscious tourist interested in accommodations that support a low-carbon economy. Reducing energy costs could also enable local goods and service providers to invest in changes to operations that align with the 2030 target. For instance, car rentals.
In 2022, the government reduced import duties on electric – not hybrid – vehicles and created a BDS$100,000 interest-free borrowing scheme for government employees to purchase these cars. Expanding these incentives to car rental service operators could mean higher initial costs for car rental businesses, but also provides an opportunity for greater return on investments in an all (or mostly) electric fleet marketed to eco-conscious tourists. In addition, electric buses can be an alternative for larger tour service providers. Perhaps partnerships with electric vehicle manufacturers could be an avenue for the government to explore in the medium term, particularly as grid capabilities increase.
These considerations are just the beginning of a larger conversation about what it might take to decarbonize an industry that drives significant economic growth in a nation that requires international cooperation and coordination to mitigate the unequal effects of climate change it faces. Government efforts, combined with values-based foreign investors willing to engage with local issues, are a start. But so much more is needed for the nation’s 2030 carbon neutrality target to be viable. What do you think it takes?
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