The letter “Convergência pelo Brasil”, unifies contributions from Ministers of the Economy and Presidents of the Central Bank for a common goal: a sustainable rebuild of the Brazilian economy, with social and environmental responsibility. Read the letter destined to the Brazilian population and its future generations below.

LOW-CARBON ECONOMY: A NECESSARY CONVERGENCE

July 2020

The current COVID-19 pandemic has highlighted the importance of making globally interconnected economies more resilient to shocks with systemic impact. Since World War II, the world had not experienced such a deep crisis starting with the sheer number of casualties and the catastrophic social and economic effects. This learning applies without a doubt to climate change, which represents an even higher risk for the entire planet.

The current scenario has brought to many deep suffering and a sense of anxiety. The loss of employment and income is a reality that will deepen social inequality. The long-term effects of the pandemic will be severe, including a more challenging fiscal environment. To overcome this crisis, we must find common ground towards an agenda that will enable us to resume economic activities and, simultaneously, build a more resilient economy when dealing with climate risks and their implications for Brazil.

Depending on which climate scenario we will encounter, the costs of neglecting climate events - with systemic repercussions - may be significantly higher than those from the current pandemic. In addition, the potential of disastrous effects that climate change can have on financial stability has already led central banks to internalize climate risks in their macroeconomic analyses - according to the Bank for International Settlements (BIS) -, and financial markets to recognize and transparently price such long-term risks. More specifically, the repricing of assets most exposed to climate change and other transition costs, such as financing the transformation of sectors of the economy, will have an increasing impact on private savings and how the capital markets are operating.

Climate scientists and the Intergovernmental Panel on Climate Change (IPCC) have warned of the risks associated with global warming and climate change for a long time. In the last hundred years, the average global temperature has risen by approximately 1.1oC, increasing the frequency and intensity of storms, heatwaves, floods, droughts, and rising ocean levels. Based on evidence and increasingly accurate models, the scientific community has alerted of the irreversible changes to many life forms and severe impacts on agricultural production and living conditions, especially in tropical regions.

The physical risks of climate change are severe. The complexity of transition risks demands governments, the private sector, civil society, and the international community to anticipate the foreseeable long-term negative impacts and to start building a low-carbon economy that is more resilient and adapted to future challenges. The government has an essential role to play in aligning incentives and expectations, creating an environment conducive to sustainable action among the private sector and financial market players. And the growing discipline in the private sector to consider and price environmental risks, including systemic risks, should strengthen the commitment to governance, social, and environmental objectives.

The post-COVID-19 economic recovery offers significant opportunities to promote a low-carbon and sustainable economy, at a time where the world is undergoing relevant and rapid changes in capital and labor markets. Beyond the volume of public spending, the long-term impact of fiscal action will stem from the choice of how this spending will be carried out, stimulating actions that leverage the country's comparative advantages, and contribute to the long-term productivity of the economy and job creation.

Brazil has evident advantages as a low-carbon economy, given the composition of its energy matrix, abundant solar radiation, vigorous agriculture with a massive production of biomass, water resources, and extensive and biodiverse forests. In light of such comparative advantages, the country has every interest in aligning itself with countries that lead the call for a carbon-neutral world economy.

For this reason, we, former Finance Ministers and former Presidents of the Central Bank of Brazil, subscribe to this document and support that Brazil's economic policy management includes criteria for reducing emissions and the stock of greenhouse gases in the atmosphere, and of resilience to the impacts of climate change. These criteria are already -- and will be progressively more -- based on technologies compatible with the increasing productivity of our economy, the creation of jobs, and the reduction of inequality in Brazil. Besides, decarbonization adds value to our economy in the long term, once it is a gradually more demanded attribute by international investors.

To this end, we would like to indicate some principles to decarbonize the Brazilian economy and, simultaneously, boost its productivity. The challenges are not trivial, but we have a clear path to follow.

1. Achieve a low-carbon economy. Public and private investments should support the transition of the Brazilian economy to a net-zero carbon emission standard, which is indispensable to stabilize the global average temperature.

Low-carbon solutions and technologies have already proven to have a high return on investment, as evidenced by renewable energy, investments on energy efficiency, energy-efficient buildings, and low-emission transport modes.

Wind power produced in the Northeast, for example, is not only affordable, but it is already equivalent to almost 90% of the energy consumed in the region. Nearly 20% of our soybean production is already transformed into biodiesel, contributing to the prosperity of rural producers and reducing carbon emissions. Likewise, the digitalization of the economy will enable countless opportunities in new business models of high return and low environmental impact.

A crucial step in the transition to a low-carbon economy is to eliminate fossil fuel subsidies, followed by the promotion of regulatory changes aimed at sustainability, without undermining efficiency.

Stimulating discerning issuance of green financial assets, and including environmental requirements in procurement and on budgeting practices can be instruments to foster a more decarbonized economy.

Expanding international cooperation concerning climate will contribute to aligning public policies and actions jointly supported by the private initiative and civil society to commitments made at the Paris Agreement.

It is essential to mobilize private funding resources for initiatives related to climate change mitigation and adaptation, as well as broaden our ambition for climate action and implement the Nationally Determined Contributions (NDC).

2. End deforestation in the Amazon and the Cerrado. Today, deforestation in Brazil accounts for substantially higher CO2 emissions than our entire industrial sector or the transport sector – even though Brazil has a heavy dependence on diesel-powered road transport. Also, the risk of changes in rainfall cycles originating in the Amazon caused by deforestation tends to negatively affect our agriculture and hydroelectric power production, notably in the Midwest region.

The financial return from deforestation - especially in the Amazon - is, thus, low and certainly negative when we consider, apart from the biodiversity and environmental and climate services, the reputational impact on the country. The loss of deforestation has led several key trading partners and foreign investors in Brazil to strongly express their discontent and concern, which will undoubtedly translate in lower trade and investment flows to the country.

The control for compliance of environmental protection laws is an effective way to mitigate emissions and avoid the misuse of public assets constituted by forests in areas of the Union. It should apply not only for the public land without a specific destination but also for the Conservation Units, and Indigenous Lands established by law. The intensification of the cattle sector and the expansion of agriculture over pasture areas, including degraded ones, allow the supply of our highly demanded products without damaging natural areas. As part of a development strategy for the Amazon, which reflects the advantages and challenges of the region and incorporates urban, rural and forest areas, it is urgent to support a non-destructive and scientifically based use of biodiversity, with greater economic and social returns for the entire country.

3. Increase climate resilience. Brazil already suffers from climate extremes, such as floods and droughts. Improving our climate resilience also brings a sizeable social dividend, as climate extremes tend to affect the poorest populations disproportionately. Most actions that seek to strengthen climate resilience are development measures with high economic and social returns.

In case we do not take action, climate change will exacerbate the effects. Therefore, it is necessary to invest more in expertise to increase the country's climate resilience by identifying our most significant vulnerabilities, assessing the risks, and adapting our infrastructure accordingly, including in urban areas.

The expansion of sustainable investments, such as in the area of sanitation, for example, has a social impact that is equally or even more immediate and relevant than its environmental implications. The so-called nature-based solutions, which include ecosystem-based adaptation, are also promising mechanisms to expand the infrastructure needed to improve our standard of living and manage climate risks.

4. Boost research and development of new technologies. Scientific research and the application of new technologies that provide solutions and promote low-carbon business models are essential ingredients to increase the productivity and competitiveness of our economy, especially in a context of increasing digitalization of the global economy.

In the face of all these challenges and opportunities, we are willing to contribute to the creation of a concrete agenda that makes the low-carbon economy a reality and mitigates the massive risks associated with global climate change. The time demands convergence if we are to build a more sustainable, inclusive, and prosperous future for the current and future generations.

Alexandre Antônio Tombini
Armínio Fraga
Eduardo Guardia
Fernando Henrique Cardoso
Gustavo Krause
Gustavo Loyola
Henrique Meirelles
Ilan Goldfajn
Joaquim Levy
Luiz Carlos Bresser-Pereira
Maílson da Nóbrega
Marcílio Moreira
Nelson Henrique Barbosa Filho
Pedro Malan
Persio Arida
Rubens Ricupero
Zélia Cardoso de Mello