Photo: Uruguay’s Vice-Minister of Environment Gerardo Amarilla (L) poses for a photo with Global Americans representatives Alejandro Trenchi (C) and Jackson Mihm (R) following an informative conversation.
Two weeks ago, U.S. Secretary of State Antony Blinken issued a statement commending Uruguay’s leadership in mitigating the causes and effects of climate change in the region. On the surface, Blinken’s praise might seem curious or unexpected to North American observers. Yet, despite its relatively small size and location in a distant corner of the Hemisphere, Uruguay stands out as a regional bellwether for climate issues. Indeed, Uruguay, in less than two decades, has completely overhauled its energy sector. Today, renewable energy supplies more than 90 percent of Uruguay’s electrical grid, and the country has emerged as a renewable energy exporter.
Uruguayan civil society, business leaders, and the entire political system—from left to right—have prioritized climate adaptation, transforming the country’s economy into a climate-resilient, green, and sustainable one. Uruguay’s decisive path to renewable energy, sustainability, and climate resilience offers important insights for regional policymakers.
In July, we sat down with Uruguayan Vice-Minister of Environment Gerardo Amarilla to understand firsthand how Uruguay has gotten where it is today and what challenges and opportunities lie ahead.
Part I: Uruguay’s Renewable Energy Revolution
Fifteen years ago, Uruguay’s state-controlled energy sector relied on only two primary energy sources to power its entire electrical grid—hydroelectric energy and fossil fuels. Its lack of diversification made the country’s electricity production extremely vulnerable to climate-induced stresses and oil price shocks. As Vice-Minister Amarilla explained, “When we had droughts or the rivers’ flows were below the normal levels, we had to burn more fossil fuels. We were very dependent on oil.”
Between 1997 and 2007, this exact scenario played out when Uruguay suffered a series of major droughts that severely affected its capacity to generate electricity. Soon its energy demands far outstripped supplies, causing an explosion in prices for business and household consumers. To confront the crisis, the government imposed severe restrictions on energy consumption and spent more than USD $2.8 billion a year (or about a tenth of its 2007 GDP) on fossil fuel imports. Thus, in 2008, all major political factions came together and agreed to ensure energy security, avoid future crises, and restructure the energy sector.
To reduce its dependence on oil, Uruguay needed to take advantage of its natural potential for biomass, wind, and solar power production. “We decided to follow a new path in which the oil price fluctuations would no longer affect us and thus one in which renewable energies were at the center,” recalled Vice-Minister Amarilla. However, to implement the reforms, especially to build wind farms, Uruguay had to develop an innovative financing strategy to raise capital.
With the support of opposition parties, the government decided to embark on an international campaign to attract foreign investors. As authorities analyzed the renewable energy market, it soon became clear that public-private partnerships were the best tool to create a favorable environment for investors.
“Multilateral development banks, such as the Inter-American Development Bank, showed interest in lending money to private companies that invested in wind farms, because Uruguay committed that, once the farms started to produce energy, UTE, the state-owned power company, would buy the energy produced for a prior-agreed period and price,” explained Vice-Minister Amarilla.
During the past decade, Uruguay received more than $8 billion in investments in renewable energy infrastructure. The results are striking. In 2019, renewable energy sources supplied 95 percent of the electric grid: 49 percent came from hydro, 26 percent from wind, 2 percent from solar, and 18 percent from biomass. Today, the country boasts 43 wind farms throughout the country. Uruguay has not only achieved the objective of diversifying its energy sources but has also become a renewable energy exporter. In addition, in 2014, to further assure energy security and reduce financial risks, the Uruguayan government bought, with the assistance of the World Bank, a $450 million weather index insurance plan from Swiss Re, a leading insurance-based risk transfer firm. This mechanism allows Uruguay, if necessary, to receive compensation in the event a major drought severely impacts its ability to produce electricity.
Part II: Climate Risk and Adaption Challenges
Climate change is increasingly threatening the viability of Uruguay’s coastal communities—where 70 percent of the country’s population lives and most of its economic activity takes place. Climate change is also putting pressure on the country’s vital agricultural production—an economic sector that accounts for 10 percent of its GDP and represents its main source of foreign currency. In the past three years, almost half of Uruguay’s territory was under agricultural emergency due to severe droughts.
To confront these challenges, the Uruguayan government is working closely with international partners such as the United Nations, the Global Environmental Facility, and the European Union to implement mitigation and adaptation projects. The most notable efforts are NAP Coast and NAP Cities. These two plans seek to boost the country’s climate resilience by establishing mechanisms to monitor rising sea levels, relocate the most vulnerable coastal communities, and build climate-resilient infrastructure.
Implementing these kinds of projects will be expensive for Uruguay and other countries bracing for climate change impacts. Vice-Minister Amarilla pointed out that even though Uruguay has good access to the international financial system, the international community needs to comply with its commitment to mobilize climate finance to help developing countries. “Developed countries have an ethical obligation to collaborate with countries that are still developing and that want, like us, to develop in a green and sustainable way. It is hard to find these funds and many times, the offers are too small for what Uruguay needs,” emphasized Vice-Minister Amarilla.
To overcome these obstacles, the Uruguayan government is advocating for cheaper multilateral loans for countries with strong environmental policies, as well as promoting innovative financing instruments such as sovereign bonds linked to climate targets. These types of bonds, which private companies often issue, would allow countries to borrow money on the capital markets at an interest rate linked to fulfilling specific environmental targets. “If the issuer meets the target, it will be rewarded with a lower interest rate, but if it fails to meet the target, it would have to pay a higher rate,” explained Vice-Minister Amarilla. In a separate interview, Uruguay’s Minister of Economy and Finance, Azucena Arbeleche, explained that this financial instrument would incentivize countries to meet their climate targets, increase the visibility of their national environmental strategies, attract foreign direct investment, and facilitate access to more international climate finance, such as grants or non-reimbursable funds.
Part III: Capitalizing on Sustainability Trends
As investors and consumers worldwide are increasingly interested in knowing the environmental impact of the products and services they support, building and monitoring end-to-end sustainable supply chains will give climate-conscious producers a leg up in the market.
Uruguay understands this trend, and both its political and business leaders want to make the most out of it. Vice-Minister Amarilla explained that one of Uruguay’s long-term strategic objectives is to assure the world that Uruguay produces green and sustainable goods. “More than 20 years ago, all political parties passed a law stating that Uruguay must be known globally as an environmentalist country. To keep doing this, we must ensure that all Uruguay’s exports have a sustainability certificate. We must guarantee that for the next 300 years Uruguay will keep producing food in a sustainable way.” Accordingly, Uruguay’s Breeders and Packers Meat accomplished a significant milestone when it sold its first carbon-neutral certified beef shipment to Japan. Likewise, Uruguay’s wood industry has been certified by the Forest Stewardship Council, allowing them to reach wealthy markets that appreciate sustainable products and are willing to pay more for them.
The production of green hydrogen is another key strategic plan with huge economic potential that Uruguay is beginning to push. As Uruguay has already decarbonized its entire electric grid, the government sees green hydrogen as another step to break the country’s dependence on oil imports and generate economic profit. Scientists have signaled green hydrogen—produced by splitting water into hydrogen and oxygen using renewable electricity—could be the next renewable game changer, as it can decarbonize entire industrial sectors from transportation to steel production. Vice-Minister Amarilla explained that, as was the case a decade ago with renewable energy development, the government is again promoting public-private partnerships to build the necessary infrastructure. As global demand for renewable energy grows, Uruguay aims to become a large-scale green hydrogen exporter. The government forecasts that by 2040, the green hydrogen market could create more than 30,000 jobs and produce revenues of up to $1.7 billion.
Lasting Conclusions: Building Resilient Infrastructure and Governance Structures
Given rising global emissions, scientists expect the effects of natural disasters and sea-level rise to worsen by 2050, putting people’s livelihoods across the Hemisphere at significant risk. Though leaders cannot predict their next acute crisis, they can assume that climate-related disasters will grow in frequency and intensity. Resilience building, both in infrastructure and governance systems, thus remains the fundamental challenge for policymakers.
Access to climate financing for under-developed and developing countries is vital to accelerate the necessary transformations. However, the resources pledged by developed countries are not coming at the speed required, undermining the ability of all countries to prepare. Moreover, given the elusive commitment from developed nations to mobilize the resources needed, this issue is not likely to be solved in the short term. Hence, Uruguay’s experience could show a path forward for many countries in the region.
On infrastructure, Uruguay represents a useful case study for which technical solutions can work best in building climate resilience. Enacting public-private partnerships with proactive government encouragement is a model many countries in the region, can use to attract investment, build renewable infrastructure, and minimize their dependence on oil imports. Adaptation plans, like NAP Coast and NAP Cities, provide a guide especially for Caribbean policymakers to assess sea-level risks and develop plans for relocation and infrastructure improvements. Finally, decarbonizing supply chains represents another salient strategy to attract foreign investment, especially as U.S. policymakers consider legislation on nearshoring.
Governance factors, too, have helped Uruguayan policymakers implement a forward-thinking vision. Admittedly, not all countries can import Uruguay’s low corruption levels, strong public institutions, and close relationships with multilateral lenders overnight. However, the degree to which the region improves these factors will likely play a significant role in attracting the necessary investments to accelerate the structural transformations needed to address climate change and take advantage of the multiple economic opportunities arising from the green and sustainable economy.
Jackson Mihm is an Associate Editor at Global Americans and the Project Lead for the organization’s High-Level Working Group on Climate Change in the Caribbean.
Alejandro Trenchi is a Research Assistant at Global Americans for the organization’s High-Level Working Group on Climate Change in the Caribbean.