How Costa Rica Could Become the Regional Leader in Latin America for Electric Vehicles

There is a huge untapped market for electric vehicles in Latin America. Costa Rica is a regional leader in Latin America, as far as driving much of the innovation behind the electric automotive industry.  It has introduced tax incentives for the industry, which is likely to experience exponential growth in the next two decades. Risks to investors nonetheless remain.

Carlos Alvarado became Costa Rica’s 48th president on 8 May. In his inaugural speech, Alvarado pledged to eliminate fossil fuels from all vehicles by 2021. This pledge will likely inspire automotive investor confidence, due to the country’s growing spectrum of green industries. However, those advocating for an electric vehicle (EV) revolution must appreciate that the rhetoric of an incumbent president does not always match up with the realities of a much more complicated economic and political landscape.

In the country’s “Pura Vida” tradition, Costa Rican officials are proclaiming their intent to make their country a leader in the widespread adoption of EVs over the next few years. While tax exemptions have led to some immediate EV cost reductions, government actors must introduce policies to significantly change the country’s existing infrastructure, or the EV market will struggle to attract widespread support.

In December 2017, Costa Rica’s congress passed the Electric Transportation Bill which established several tax exemptions for electric vehicles. Defined as the Law on Incentives and Promotion for Electric Transportation, the new law came into effect on 25 May 2018. For EV advocates, this spark will unlikely provide the catalyst for insurmountable change.

As there are no local EV manufacturing plants in Costa Rica, the legislation hints at increasing imports of EVs, with tax exemptions helping to offset the higher costs of shipping. One important – yet still unanswered – question is whether this reduction will make EVs more attractive to consumers. As suggested in a report by La Nacionit is estimated that final EV prices will fall only marginally, from an average of $36,720 USD to $31,750 USD.

Another essential component to encouraging greater numbers of EVs is the need for more charging stations and an electricity grid that can support the extra electricity demand. Without these, it will remain difficult to incentivize most consumers to switch from the convenience of the petrol pump. According to a report in El Pais, Costa Rica currently has only 30 charging stations throughout the country. Officials plan to install only a handful more charging stations in 2018.

Market potential

Costa Rican National Registry data reveals that twice as many cars were registered than babies born in 2016, suggestive of a rapidly growing automotive industry. Car ownership is increasing by 5 percent per year, although EVs currently account for only a tiny fraction of the 1.4 million cars on Costa Rica’s roads.  Government officials hope to see 37,000 EVs being driven by Costa Ricans by the year 2022.

While this is a substantial increase from the current number of EVs, it falls dramatically short of inspiring a complete eradication of fossil fuels. To assume greater numbers of Costa Ricans will take up EVs in the time frame proposed by the Alvarado administration, ignores current domestic consumer demand trends.

According to a study by the Estadio de la Region, the country’s public transportation system has so far proved insufficient to satisfy exponential population growth. This has partly encouraged an increase in personal vehicle purchases. While this provides an opportunity for EV ownership, it could also prove to be an Achilles heel to advocates of EV. The EV market has proved uncompetitive to consumers demanding efficient and affordable modes of transportation.

As suggested by Oscar Echeverria, president of the Association of Importers of Vehicles and Machinery (AIVEMA), the transition away from fossil fuels will likely extend beyond 2021 because the Costa Rican market is slow to attract consumers.

Nonetheless, EV growth globally is promising. This bodes well for Costa Rica’s long-term plans of EV integration into its domestic transport system. According to a May 2018 Bloomberg New Energy Finance report, EVs will account for 33 percent of the world’s vehicles and 55 percent of all new cars purchased by 2040.

Remarkably, levels of forecasted EV growth have increased substantially in each year’s report. In the 2018 outlook, analysts predicted there would be 559 million EVs on the road by 2040. This is up from the 2017 analysis which suggested a total of 530 million EVs. Analysts in the 2016 report suggested lower numbers, with 406 million operational EVs expected globally by 2040. This forecasting further adds to the sustainability of long-term investments into EV usage worldwide, and in Costa Rica.

Outlook

The World Economic Forum’s Global Energy Architecture Performance Index (EAPI) monitors key trends in the energy transition of all countries towards “sustainable, affordable and secure energy systems”. Costa Rica is ranked 14th out of 127 nations in the EAPI’s 2017 report. Alvarado’s shunning of fossil fuels in transportation is a bold step towards ensuring that Costa Rica continues to rank highly.

Monica Araya, the head of the organization Costa Rica Limpia, noted the immense opportunity granted through the country’s recent legislation. She suggested that the Electric Transportation Law would be “an exercise in inspiring the people to feel part of this great agenda which will allow our country to overcome the fossil fuel transportation model.” However, this tax exemption law does too little to encourage significant changes in the transportation landscape. Introducing new charging stations and a more efficient electricity grid would greatly help to boost Costa Rica’s  EV industry.

Additionally, 22 percent of total government tax revenue in Costa Rica stems from taxes imposed on fossil fuels. Eradicating this source of revenue by eliminating fossil fuel based vehicles, without significant changes in economic policy, could inspire considerable opposition from legislators.

Costa Rica has been at the forefront of energy innovation and bold environmental pledges for several years. With impassioned rhetoric, Alvarado has planted the seed for further changes in the country’s energy infrastructure. However, an electric vehicle revolution is likely to be less explosive than Carlos Alvarado would have us believe.

As Several Latin American Governments Lead Charge Against Fracking, Will Colombia Follow Suit?

With officials in Colombia grappling with the reality of dwindling oil reserves, fracking has become central to the energy conversation. A balance needs to be struck between environmental and economic needs as a path to energy self-sufficiency is drawn out.

Compared to conventional oil drilling, fracking requires greater investment and brings greater risk. This is exacerbated due to its controversial nature. Environmentalists in Colombia have campaigned heavily against the drilling practice with protests likely to only intensify in 2018.

One Yale University forum provides a global platform for multiple perspectives and analyses of the environmental and social impacts of fracking. On the pro-fracking front, many experts champion fracking for job creation and meeting energy demands. On the other side of the fence, many emphasize the negative impacts on the environment. Platforms such as these provide lessons for the motivations behind hydraulic fracturing regulation. In the context of Latin America, and in particular Colombia, which is in the exploratory stage of unconventional drilling, these lessons are extremely pertinent.

While some countries, notably Canada, China, the United States, and Argentina, have managed to produce commercial volumes of oil and gas from fracking, the practice in Colombia remains at a crossroads. Politicians have been increasingly debating fracking’s economic potential as the country’s May presidential election nears.

Many are worried that with declines in conventional oil production, Colombia could become extremely reliant on imports of oil and other fuels in the coming years. Politicians and oil executives have been seduced by fracking’s potential fix, strongly advocating for fracking with a rhetoric that champions energy self-sufficiency.

In 2014, Colombia’s Ministry of Mines and Energy gave fracking the green light, pending environmental reviews. At the end of 2017, Colombia hosted the Colombian Petroleum Association and attracted investors and oil companies from all over the world. A major topic of discussion at the convention was the final bypassing of restrictions to definitively pave the way for fracking in the country. Four major oil multinationals, ConocoPhillips, Parex Resources, ExxonMobil, and Drummond, have all won tenders for fracking in Colombia and now await the final blessing from President Juan Manuel Santos.

Juan Carlos Echeverry, former head of Colombia’s largest and primary oil company Ecopetrol, has insisted that production from fracking is essential. He suggests that Colombia’s oil production could rise from 100,000 barrels a day to as much as 400,000.

A change in leadership in Ecopetrol has not shifted this outlook. Current CEO Felipe Bayón Pardo emphasizes the fracking potential in Colombia’s Magdalena Medio region, from which oil companies could extract between 2-7 billion barrels of unconventional oil. Pardo underscores the argument of self-sustainability, suggesting that the county’s reserves will double if only 2 billion barrels of oil are extracted from this region. For Pardo, the company’s number one priority is increasing production, and this will only be made possible with fracking.

A political question

With Colombia’s legislative and presidential campaigns well under way, fracking has become a central political question. At the beginning of March, presidential candidates discussed the future of fracking in a debate hosted by the National Business Association of Colombia (ANDI) on the topic of minerals, petrol, and energy. Candidates Germán Vargas Lleras, Iván Duque, and Juan Carlos Pinzó all attended.

Duque highlighted that oil production had fallen from 1 million barrels a day to 800,000. He emphasized the need to exhaust all possible options regarding conventional oil production, and then look to focus on fracking as an alternative. Lleras was of a similar view, iterating that with adequate regulation, Colombia’s Magdalena Medio region could offer “very attractive” potential. Pinzó, meanwhile, embraced the self-sufficiency argument. “How about us depending on Venezuelan or Nicaraguan oil? It is not merely an issue which concerns development and economic opportunity, but there is also a need to evaluate the regional landscape.”

The views expressed by Lleras, Duque, and Pinzó, while only offering a snapshot of the opinions of the political class, highlight how connected the question of fracking has become to economic prosperity and national development. Fracking as a means to ensure self-sustainability in a fragile geopolitical landscape has become one of the most prominent lines of argument.

Voicing concern

All the while, environmentalists rally behind a call for restraint. Activists are continuously protesting the environmental impacts caused by fracking. A recently suspected water contamination in the Colombian Department of Cesar led to a plea for an investigation into the culpability by energy multinational ConocoPhillips, following the company’s exploratory drilling tests in the region.

In the last few years, authorities in several Latin American countries, with Brazil and Argentina leading the charge, have issued ordinances to either prohibit fracking or implement moratoriums on the practice. Many Colombian politicians are championing such policy measures. However, others consider such regulation a gross miscalculation due to its neglect of a potential economic bounty. The debate surrounding fracking in Colombia is moving rapidly, and the result of the presidential elections will most certainly mark a significant turning point in the conversation. Officials must be open to absorbing multiple lines of argument when considering regulation in order to best address the country’s trying energy needs, while also respecting very real environmental concerns.

As originally appears https://globalriskinsights.com/2018/03/colombia-crossroads-energy-fracking/