In his recent talk at Brookings, former President Bill Clinton concluded by discussing the implications of high cost energy for Caribbean island nations. He reeled off the costs of electricity in some of the main islands, which range from 35 to 43 cents per kilowatt hour. By contrast, the cost of electricity in the United States averaged 12.26 cents per kilowatt hour in March 2014. He argued this is a win-win situation in which countries can shift to greener sources of electricity, lower energy costs and improve their competitiveness. Not only is President Clinton right on the economic and environmental merits of the case, but there is also a great opportunity to revitalize U.S. diplomacy and security in this neighboring region, as I document in a recent Brookings policy brief.
An Environmental and Economic Burden
Imported energy in Caribbean and Central American countries consists largely of costly refined oil products. These tend to be used in highly polluting applications such as thermal power plants and vehicles. The high cost of energy in the Caribbean is an important obstacle to sustainable economic growth and poverty reduction. Similar challenges face Central America states, where the average cost of energy is lower, but still averages from 15 to 22 cents per kilowatt hour. This is a drag on the competitiveness of economies in the region, for example in the light manufacturing sector in Central America and the tourism sector of the Caribbean where electricity use is relatively intensive. If the Trans-Pacific Partnership comes to pass, Central American states will be competing more directly with low-cost Southeast Asian producers.
In the long run, the high cost of energy in Central American and Caribbean economies also has important security implications. Poor economic performance means fewer jobs in the legal economy, increasing the attraction of participation in the illicit economies of the region, particularly narcotics trafficking. Underperforming economies prompt migration to better performing economies in North and South America. Because these migrants are frequently undocumented, they transit through human trafficking routes that expose them to criminal organizations and other threats to their personal security. And ultimately, low and slow growth reduces state tax revenues, starving security and social services of resources that might help to mitigate these security risks. Not only would improved energy self-sufficiency benefit Central American and Caribbean states, but it would redound to the benefit of U.S. national security by reducing the impetus for migration and enhancing opportunities in the legal economy vis-à-vis the illicit.
The Way Forward
Renewable energy sources, improved efficiency, and even increasingly available natural gas would all reduce costs and carbon emissions in comparison to existing thermal generation plants. Central America in particular should also complete regional electrical interconnections to lower-cost producers in Colombia and Mexico. Yet progress on this transition is blocked by regulatory asymmetries and market fragmentation, disputes among states, and other disincentives for change that keep countries tied to their traditional energy matrix. This is particularly the case among Petrocaribe countries currently receiving subsidized financing for oil purchased from Venezuela. Petrocaribe reinforces dependence on oil from a single source, Venezuela, with all the political and economic risks that implies.
Overcoming present obstacles to a new energy matrix would benefit from U.S. leadership, but would not necessarily require a great deal of additional resources. As President Clinton argued, sustainable energy production that is greener and less costly can be profitable for private investors if the right incentives are in place. In particular, greater symmetry among energy sector regulatory frameworks and standards would help investors deal with what is otherwise a market fragmented by geography and politics.
In the short term, U.S. leadership is needed to help countries in the region hedge against the political and economic costs of shifting away from the present energy matrix, especially for Petrocaribe countries, which may require coordinating support from international financial institutions and regional organizations. In the long run, the United States should continue to work with regional partners to promote energy cooperation and integration where feasible, and to build state capacity to provide fair and consistent oversight of the energy sector. Under these conditions, private investors and regional governments will be able to work together to build a greener and more sustainable energy matrix.
Read the policy brief: Changing Energy Dynamics in the Western Hemisphere: Impacts on Central America and the Caribbean (PDF)