compared to the baseline, peak around 2030,<sup>16</sup> and stay at these high levels for more than a decade. This scenario uses global copper consumption provided by IEA (2021). The impact of such a scenario on Peru’s GDP growth depends on the country’s fiscal policy because it determines public investment, which is a main channel through which an initial shock to commodity prices generates long-term effects on growth. The increase in copper prices raises government revenues, leading to an upsurge in government expenditure. As such, the model-implied long-term trajectory of GDP growth is different depending on whether the increase in revenue is only spent on government public investment (Hartwick’s rule), if windfalls are completely saved (Structural Surplus Rule), or if a share of windfalls are invested, and the rest consumed (Balanced Budget Rule)<sup>17</sup> (building on the baseline).

To achieve Net Zero Emissions (NZE) by 2050 will likely require major innovations in technology and policies that encourage long-term investments to increase supply. In this scenario, we simulate a doubling of long-term copper production in Peru by 2035, which is similar to the copper production estimates for Peru under a Net Zero Emissions scenario provided by S&P Global (2022). In the model this could be achieved with a combined shock: first, higher copper prices drive a higher investment rate as the larger demand generates a plan to increase investment; based on the historical evidence, we use a long-term elasticity of total private investment as a share of GDP to the percentage change in the copper price of 0.25. This scenario entails an increase in production driven by higher investments in the mining sector which would be unlocked from a clearer pro-development policy agenda, rule of law, and an improved political environment.

Second, there is a boost to TFP in the copper sector in the short run as the industry does not operate at full capacity and the global green transition boosts the utilization rate of other inputs; in particular, we assume that through innovation, adoption of new technology and more efficient equipment, the copper sector TFP annual growth rate increases to 1 percent in 2025 and then gradually returns to baseline by 2050.<sup>18</sup> The global energy transition can increase long-term growth in Peru and move the country closer to HI status. The results show that GDP growth accelerates significantly under this Supplying the Global Green Transition scenario (figure 18 below, the orange line is roughly one percentage point higher on average than the baseline in the period 2024-2050). Thus, this would help Peru considerably in achieving its growth target; the energy transition gives more opportunities and fiscal resources to Peru to do the domestic reforms needed to increase productivity, investment and human capital and accelerate economic growth.

# **5.2. Combination of the Supplying the Global Green Transition scenario and domestic reforms**

In this section, we combine the Supplying the Global Green Transition scenario from Section 5.1 and the domestic reforms to increase Human Capital and TFP growth shown in Section 4. The scenario which includes ambitious reforms yields a 5 percent GDP growth on average in the simulation period (Figure 18). Under this scenario, Peru would reach the HI threshold in 2042 (Figure 19).

> 16 Rises in demand are front-loaded and the initial price boom induces a supply reaction.

> 17 This scenario sets the share of investment in total expenditure to 25 percent, which was the observed average in 2000-2019. 18 The baseline for TFP growth of -0.5 percent in the copper sector is based on the evidence from Chile, where the long-run copper TFP has stagnated or even declined over the past decades ("Productivity in the Chilean Copper Mining Industry", National Productivity Commission, 2017).

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