# **5. The global energy transition as a long-term growth factor**

The global energy transition implies a considerable increase in the demand for copper in the following decades, which represents a golden opportunity for the Peruvian economy. The increased mineral intensity from greener technologies, such as renewable energy and electric vehicles, in addition to the new infrastructure needed, will significantly raise the demand for minerals during the next two decades (World Bank, 2020). Recent projections forecast the world’s appetite for copper will be more than double the current global mine production (S&P Global, 2022). Achieving global climate ambitions will thus require a substantial increase in copper supply. Being the second largest copper producer in the world— representing around 10 percent of the global supply—and having the second largest mine capacity (IHS Markit, 2022), Peru’s production would need to double if it were to maintain its share of the global copper market. While this is a highly ambitious scenario, it illustrates that copper could be an important driver for Peru’s long-term growth. The mining sector currently contributes around 10 percent of GDP and 15 percent of total tax revenue. Optimizing the use of fiscal resources from mining is thus also important to potentiate a future copper windfall.

To leverage the energy transition, Peru needs to create the right conditions to attract the necessary investments, guarantee that mineral exploitation is environmentally sustainable, and promote profits that reduce territorial and social disparities. The efficient extraction and processing of copper will require large-scale capital investment and improved technological methods to ensure sustainability. This requires a “Climate-Smart Mining” approach to mineral exploration, extraction, and refining in Peru, which includes a clear strategy for maintaining the country’s position as a major global player in the supply of critical minerals while decarbonizing the mining value chain; improving processing technologies; reducing mining’s footprint on water, energy, and waste. It also requires ensuring human rights and enabling territorial development in mining regions, to create an appropriate political environment for future mining projects.

As above, we use the LTGM-NR to analyze global energy transition growth scenarios in Peru, though now we shock growth drivers in the resource sector. The resource sector dynamics differ from the nonresource sector in three ways. First, production depends on the industry-specific productivity, the stock of physical capital, and the country’s proven reserves of the required natural resource (but not on labor or human capital). Second, the stock of natural resources increases with an exogenous stream of discoveries but depletes via extraction. Third, all production generated in the resource sector is exported at international commodity prices, which fluctuate exogenously and have a direct impact on the income generated by the sector. The LTGM-NR includes a fiscal rule that determines whether extra government revenue from the taxes on copper production are saved abroad, spent on government consumption, or spent on public investment (which has the same effects on growth as private investment). The first two have little effect on growth, though the final “Hartwick” rule can generate substantial extra investment and growth when commodity prices are high.

# **5.1. Supplying the Global Green Transition Scenario**

We construct a Global Green Transition Scenario using the path for future copper prices estimated by Boer et al. (2021). The paper identifies metal-specific demand shocks, estimates supply elasticities, and determines the price impact of a global net zero emissions scenario on metal prices. According to these estimates, in a net-zero emissions scenario, copper prices would increase by more than 60 percent 19