How Oil-Rich Colombia Is Trying to Go Green

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BOGOTÁ—In a giant parking lot on the outskirts of Colombia’s capital, national oil company Ecopetrol is running an experiment.

The over 400,000-square-foot expanse is where Bogotá keeps part of its municipal bus fleet. Hundreds of those vehicles are electric and are powered up regularly with battery chargers. But one bus is fed instead by green hydrogen, a fuel created on-site. Green hydrogen is made with renewable energy and is carbon-free to burn, though using it in buses is expensive with current technology. Government funds helped Ecopetrol partner with Colombian auto parts firms to build the turquoise bus, which will soon be the first of its kind to carry passengers through the capital city.

The bus is one of at least 28 low-emission hydrogen projects under development in Colombia. For the country, whose top export in 2022 was oil, hydrogen could become a greener source of fuel—and revenue. The Colombian Mines and Energy Ministry has projected that low-emissions hydrogen exports could in future decades bring in $5 billion annually—over a quarter of the amount oil exports earned last year.

A key factor to the bus’s development was that “the national government is directly involved, not just with the creation of public policies but with financial support for this project,” said Yeimy Báez, a former Ecopetrol vice president then overseeing low-emissions projects, as she surveyed the lot under the blistering Andean sun in July. While the fuel for the prototype bus was created using electricity from hydropower, the premises will soon be equipped with solar panels to create hydrogen bus fuel. Baez noted that hydrogen projects had turned several former Ecopetrol oil and gas engineers into “workers of the energy transition.”

Colombia’s research and development funding for clean hydrogen is an example of industrial policy—a type of government intervention that aims to grow specific activities within the economy. Industrial policy has gained increasing global attention in recent years as China and the United States have rolled out hundreds of billions of dollars in subsidies and other government benefits for low-carbon business. Other rich countries—from those in Europe to Canada to Australia—are now scrambling to keep up. For developing nations like Colombia, the question is how to do the same when they have relatively little money available to spend up front.

Since Gustavo Petro—Colombia’s first avowedly left-wing president in history—took office in August 2022, Colombian policymakers have sought to plan for a future where a smaller portion of the country’s revenue comes from oil, which accounted for about a third of Colombia’s exports that year.

Petro’s decision to halt the issuance of new oil exploration contracts has made international headlines. But it’s not the only component of his government’s economic transition strategy. Bogotá is also crafting industrial policies that aim to boost activities including biotech, industrialized agriculture, and airplane parts. It’s a marked shift in a traditionally free-market country that has generally shied away from large-scale industrial policies for over 30 years. (The green hydrogen strategy is one of the few such policies enacted by the previous conservative government.)

The success of Petro’s green industrialization push is far from guaranteed. Political instability has slowed the rollout of his policies. And some private investors—whose buy-in is important to industrial policies’ success—say the president’s left-wing agenda has created an uncertain business environment.

After over a year of planning, officials in the Petro government are preparing to announce their flagship suite of industrial policies this month. “We have to do magic with the little that we have,” Colombian Technical Deputy Minister of Finance María Fernanda Valdés said.

The analysts stopped short of providing a full recipe for how to do so, saying it was beyond the scope of their research. They may have also been wary of wading into contentious waters: Industrial policies are tricky to evaluate and have been relatively little-studied by mainstream economists in the past few decades, though that is changing. They have also long been shunned by global agenda-setters such as the International Monetary Fund (IMF). During and beyond the free-trade heyday of the 1990s, the IMF instead told policymakers to focus on priorities that included opening up to international trade and keeping state spending under tight control, a formula often known as the Washington consensus.

Especially since the 1990s, Colombia has aimed to adhere closely to those IMF prescriptions. The country grew an average of 3.4 percent per year in the 30 years prior to the COVID-19 pandemic—a rate above the regional average. But during that same period, Colombia’s productivity remained low and stagnant as an increasing portion of its growth came from oil and coal extraction.

“We were very methodical at opening up and making trade deals,” said Olga Salamanca, a partner at Colombian trade consultancy Araújo Ibarra. But contrary to what Colombian exporters hoped for, “a lot of economic sectors have disappeared.” Economic planning was also hampered by a decadeslong internal conflict that blocked patches of the country from the government’s administrative reach and led much of the public purse to be spent on the military.

Now—as China, the United States, and European powers embrace industrial policies to speed their energy transitions—it makes increasingly less sense for Colombia to spurn them. Industrial policies “are back in developed countries, but also in developing ones,” said Colombian economist Marco Llinás of the United Nations Economic Commission for Latin America and the Caribbean.

While Colombia’s government has carried out some sector-specific policies to boost productivity in recent decades, they did not connect back to the same master strategy, Valdés said. “We want to put an order to this.”

Valdés, Martínez, and their colleagues looked to research by scholars such as Venezuelan economist Ricardo Hausmann of Harvard University, who tracks how countries have changed their exports over time by making gradual jumps to products similar to those in their previous export makeup. One paper that Petro’s planners consulted used a Hausmann-designed methodology to calculate a set of products that would be ideal targets in a reinvigorated Colombian industrial policy, including vaccines, jet motors, and components of X-ray machines.

Overall, the Colombian planners chose five “strategic bets” on which to target their efforts: the energy transition, food, health products, defense, and economic activities beyond large urban centers. Separately, they announced plans to grow the country’s tourism industry.

But how to boost these sectors with limited state coffers? Petro and many of his officials admire the work of globetrotting Italian economics professor Mariana Mazzucato, the founding director of University College London’s Institute for Innovation and Public Purpose. Mazzucato, who advises the Colombian government on its industrial strategy, touts a mission-oriented approach that encourages governments and private firms to work together toward shared goals.

To stay within their budget, Valdés said, the Petro administration aims to redirect public money that is already being spent (such as via government purchases and within state-owned companies) and attract new funds from abroad. Colombia has also sought technology transfer deals. As one example, Petro in May signed a memorandum of understanding with European firm Airbus to explore how Colombian workers could play a bigger role in the maintenance of Airbus equipment on Colombian soil, among other partnerships.

Colombia’s Ministry of Commerce, Industry, and Tourism is planning to publish a detailed policy document this month listing government commitments for all of its strategic bets, including information on how they will be funded. In the health sector, for example, these include plans to invest in three major biomedical hubs that will locate plants for vaccines and medications near academic research sites, ministry consultant Nancy Yadira Atuesta Guzmán said.

To help fund these efforts, Colombia’s finance minister is combining several different government credit agencies so that they can act together as a development bank. In some cases, public spending in target areas is linked to private investment, such as with Ecopetrol’s hydrogen bus developed with private partners. In other cases, the government acts first and hopes private investment will follow.

But attracting the private spending is easier said than done. In some sectors, relationships between private investors and the Petro government have become strained.

Petro was a member of the left-wing urban guerrilla group M-19 in his teens and 20s before it demobilized. While a guerrilla, he earned an economics degree; after demobilization, he served as a congressional representative, senator, and mayor of Bogotá. His successful 2022 presidential campaign featured a turn toward the political center, when he pledged to work within the capitalist system to develop Colombia. It left the business class guessing how much he had truly transformed his identity as an opposition firebrand.

At the meeting, Mazzucato pitched the idea that the Colombian government and private sector could work in a way that was more symbiotic than in the past. “It was a healthily tense exchange,” she said, where both sides discussed “what can be done together.” As part of Mazzucato’s visit, she was welcomed by the Association of Banking and Financial Entities of Colombia, which invited her to speak on the same topic.

The following month, Petro’s newfound working relationship with the centrist political camp delivered him a major win in Congress: the approval of tax hikes for the wealthy and several types of companies. But the bonhomie didn’t last. After Petro tried to advance plans to increase state control over Colombia’s health care system, private industry groups, centrist legislators, and cabinet members pushed back. Petro conducted two major cabinet shakeups in February and April, removing more moderate figures. Fierce battles over labor and pension reform followed.

For some investors, Colombia’s business environment after over one year of the Petro administration remains vexingly uncertain. That’s the case for solar and wind energy companies, which have faced higher government levies since Petro’s tax reform as well as delays obtaining permits, Alejandro Lucio of Óptima Consultants said. The government’s approach “makes these processes slower, not faster,” said Lucio, who formerly directed the Colombia Association of Renewable Energies—Ser Colombia.

On Oct. 5, French energy company EDF Renewables announced it was withdrawing from a solar project near Bogotá due to factors including tax hikes and environmental permitting delays. In the days since, an Environment Ministry official said the ministry was preparing a decree to speed permitting for energy projects. Lucio was not immediately convinced, saying he had to “see it to believe it.”

“The government can have all the plans it wants toward its energy transition,” Sergio Guzmán of Colombia Risk Analysis said. “But without private financing, the possibilities of success are very limited.”

Other voices in Colombia’s business community are more optimistic about the Petro administration’s management and plans. “We’ve welcomed this reindustrialization policy” that is in the works, said Javier Díaz Molina, the head of an exporters alliance, the National Association of Foreign Trade. Policies that support sectors like agriculture and manufacturing could strengthen Colombian exports after years of underperformance relative to the size of the country’s economy, he added.

Martínez touted the government’s progress toward its strategic bets by pointing to foreign direct investment (FDI) numbers. In the first half of 2023, FDI in target areas including manufacturing, agriculture, and electricity had surpassed half of the previous year’s total, as had FDI across the economy more broadly.

Still, a hydrogen bus is generally more of a financial long shot than other possible applications of green hydrogen—such as green fertilizers and shipping fuel—Natalia Castilhos Rypl of BloombergNEF said. Colombian firms intend to explore both of the latter, and Castilhos Rypl said that the country could become a green hydrogen exporter. But she cautioned that the government’s ambitious export revenue projection relies on untested assumptions.

An April study by La Sabana University researchers envisioned Colombia exporting some 7 megatons of green hydrogen annually by 2050. That could potentially bring in billions of dollars per year. But “there are many countries that are looking at this opportunity to export,” Castilhos Rypl added. Currently, she said, Colombia’s low level of installed solar and wind power—key inputs for green hydrogen—puts it at a disadvantage compared to wind- and solar-power rich Chile and Brazil, though it could use hydropower in some cases.

Petro’s industrial policy planners say they understand some strategic bets will pay off sooner than others: Among exports, manufactured goods and agriculture have the potential to grow faster than options like green hydrogen, former Finance Minister José Antonio Ocampo said. Ocampo, who was a key backer of the industrial policy framework as Petro’s first finance minister, said the policies’ success or failure should be judged by the growth of Colombia’s non-oil exports over time.

Colombia’s scrappy approach to industrial policy is still hundreds of billions of dollars behind such policies in the United States, Europe, and China. But in stitching it together, officials are taking a decisive step away from more hands-off economic planning. Among the government and private sector alike, “there is a consensus that you really need this industrial policy,” Salamanca, the trade consultant, said. Though it is limited, “Colombia has some room to maneuver.”(FP News)

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