Colombia’s proposed ban on coal mining would spur international lawsuits, deter investment.

BY ENERGY ADVISOR
Inter-American Dialogue

Colombia’s ministry of energy and mines published a proposed bill online on Feb. 16 that would ban all new coal mining contracts and any future exploration. The bill’s authors describe its aim as advancing Colombia’s “decarbonization goals.” What are the strengths and weaknesses of the proposed legislation—and how likely is it to win congressional approval and become law? How would a ban on coal production affect investment in Colombia and the country’s economy? How will the energy sector in Colombia adjust and respond if the bill passes?

Carlos St. James, member of the Advisory Committee of the Latin American and Caribbean Council on Renewable Energy (LAC-CORE): At first glance, Colombia’s proposed bill seems a bold reach toward environmental commitments.It’s the kind of thing that makes investors look kindly toward an emerging economy and makes its president seem to be a new global leader. But it would look better if the bill didn’t include the word ‘expropriation,’ which immediately scares off those same investors, and if it didn’t come across as melodramatic by banning all coal contracts and exploration. Colombia is the world’s fifth-largest coal exporter (oddly enough most of it going to Europe these days because of its shortage of natural gas). It generates a lot of hard currency: coal generated over $1 billion in exports in 2023, and the sector is among the most important for the country’s economy on various levels. So a hard ban would have a noticeable negative impact— especially in the two departments where most coal extraction takes place: northernmost La Guajira and Cesar, also among the poorest areas. International resource extraction companies have indeed taken advantage of Colombia in the past.

But this bill comes across as retribution, not the wisest path for a country wanting to be seen as a regional leader. Latin America needs more countries with a slow and steady path to progress, not ones with radical proposals—however well-meaning for the global environment—that place themselves in a position to fail from overextension.

Cooler heads in Congress may prevail, and a more rational, watered-down version of the bill may pass to everyone’s benefit.

Sergio Guzmán, director at Colombia Risk Analysis: The government introduced its draft reform to the mining code on Feb. 16, advocating for a ban on new thermal coal exploitation contracts. This proposal could significantly affect current operations and deter foreign investment in the energy sector, considering Colombia’s substantial  coal exports. Shorter exploration time frames and stricter environmental regulations will inflate operational costs. Furthermore, the government’s proposal to formalize artisanal small-scale mining through a state-owned enterprise may diminish private sector involvement in the activity. Following public comments, the draft will undergo scrutiny in Congress, likely in the latter half of the year amid competing legislative reforms.

Considering the government is currently planning to pass seven other controversial pieces of legislation (reforms to health care, pensions, education, labor, justice, public utilities and submission of armed organizations), at Colombia Risk Analysis we don’t believe the government has a realistic time frame for the mining law to pass before the end of the year. Colombia’s mining sector confronts substantial risks across various fronts. Rural areas in Colombia are experiencing deteriorating security conditions due to drug trafficking and political violence Also, due to unresolved social tensions hindering constructive dialogue, the mining sector faces significant obstacles. Moreover, potential legal disputes and intensified tax enforcement could disrupt industry stability, alongside economic changes including royalty reforms. The proposed mining law does not address existing risks to the mining sector, instead it proposes more red tape, additional social and regulatory risks, and few incentives for continued exploration and production by large-scale mining firms.

Jose Vicente Zapata, partner, and Milton Montoya, of counsel, at Holland & Knight: The proposed bill banning all new coal mining contracts and any future exploration is currently open for comments on the Ministry of Mines and Energy website and has not yet been submitted to the Colombian Congress for debate. The bill is congruent with the government’s plan to change the Colombian mining model in favor of a public-state mining industry where thermal coal mining would be forbidden. The proposal generates legal uncertainty, exposes consolidated mining companies to legal risks and could significantly affect the economy of regions where mining activity represents more than 30 percent of its GDP, such as the departments of Cesar and La Guajira.

The probability that this bill will be approved in Congress is uncertain and depends on the willingness of the political parties, including detractors and supporters of the mining industry. However, legal initiatives like this discourage the growth of the mining industry and new investments, privileges artisanal and informal mining and, again, will ban the coal thermal industry. The bill also proposes changes that are purely environmental, applying different environmental law principles and criteria to the mining sector.

If the bill passes, Colombia will face a lot of challenges in terms of legal uncertainty for current mining projects, inviting international lawsuits against the Colombian state. The mining industry will become a public industry where private investment will be residual.

Leopoldo Olavarría, partner at law firm CMS Rodríguez-Azuero in Bogotá: While advancing Colombia’s decarbonization goals is laudable, the bill has several weaknesses. If approved, long-term development of thermal coal deposits will become more difficult. This appears to be what the government seeks, despite that  Colombia’s carbon footprint is relatively small. If the bill’s ban is maintained, future  investments  will necessarily decrease. The measure recognizes this, since it contemplates the future design of a transition plan that seeks to transform and replace ongoing activities of mining rights holders. The bill may also negatively affect investors’ perception of legal security, since it contemplates that fines, sanctions and expirations of current mining titles and contracts will follow its provisions.

Moreover, volumes of thermal coal available for export will be reduced, with a negative impact on Colombia’s balance of payments and access to foreign currency. An adverse impact on thermal coal electricity generators, so important for reliability electricity generation in drought years, cannot be ruled out. Energy security, sustainability and affordability are as important as transitioning the energy matrix toward nonconventional sources of renewable energy. There are other means to reduce Colombia’s carbon footprint with fewer undesirable consequences. For example, temporary suspensions of mining rights (without legal changes) will not tie the hands of future governments if circumstances change and Colombia needs to increase energy security and affordability.

The ruling party does not have enough votes in Congress to pass the bill without the support of other parties. This might require recognizing the measure’s adverse consequences and attaining consensus by making changes.

Republished with permission from the Inter-American Dialogue’s weekly Energy Advisor

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