Breaking Fiscal Barriers: Green Fiscal Rules to Expand Space for Green Investments in Latin American Countries, the Case of Colombia

The climate crisis and the energy transition pose significant challenges for peripheral countries. In the case of Latin America, this situation is exacerbated by regional fiscal and institutional limitations, along with specific challenges in financing large-scale green investments. These vulnerabilities, known as the triple vulnerability, encompass environmental, external, and fiscal dimensions (Bedossa, B. 2023. “Climate-Financial Trap: An Empirical Approach to Detecting Situations of Double Vulnerability.” AFD MacroDev (51): 1–29.), leading to a Financial-Environmental Trap where these three forms of vulnerability interact and reinforce one another. To break this trap and create, instead, a Financial-Environmental Virtuous Circle, we introduce a policy innovation – a Green Fiscal Rule (GFR). This rule proposes excluding green investments from fiscal balance accounting, thereby increasing fiscal space for financing green projects while simultaneously mitigating fiscal and macroeconomic risks arising from the climate crisis. Using the case study of Colombia, we examine the aforementioned restrictions and demonstrate how this innovation can enhance the ability of peripheral countries to pursue a decarbonized economy and energy transition.