The government of Ecuador raised intriguing questions about Payments for Ecosystem Services a few years back when it offered to avoid drilling for oil in exchange for a carbon payment equal to just half the income the country would earn if it fired up the rigs at then-prevailing prices. EM checks in on this intriguing proposal and invites you to share your views.
7 August 2009 | What would you do if you discovered a lake of oil? And your small, fairly poor country depended heavily upon oil exports?
What if the oil were under a pristine rainforest? In territory controlled by indigenous peoples with almost no contact with the outside world?
Since the discovery of oil in the Ishpingo-Tambococha-Tiputini (ITT) concession in the Yasuni National Park in northeast Ecuador, the government has been grappling with these questions, trying to balance a desire to protect the forest against a desire to benefit from the valuable resource underneath.
In June, 2007, newly-elected President Rafael Correa offered to preserve the rainforest and forego drilling by instituting a ban on drilling in Yasuni – but only if the international community would compensate Ecuador for at least half the forgone oil revenue, or
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$350 million a year for a decade. The details of Correa’s proposal have evolved since then – the latest figure is an estimated $5.2 billion, funded by sales of carbon bonds – but the basic argument remains the same: by leaving the oil in the ground, he says, Ecuador will not only preserve a forest of unparalleled biodiversity, but also avoid the emission of nearly 400 million tons of CO2 that burning the oil would generate.
Promoters of the plan envision it catalyzing Ecuador’s shift away from fossil fuel dependence toward a greener model of development by funding investments in conservation, renewable energy and energy efficiency programs. It also raises intriguing questions about the limits of today’s carbon markets and Ecuador’s ability to make good on the promise to keep Yasuni oil in the ground forever. Recent developments suggest that Correa and the Yasuni team were able to alleviate some of these concerns before a June deadline for action, with Germany committing to support the proposal politically and financially. Hard cash, however, is proving difficult to come by.
A Unique Corner of the World
The Yasuni National Park isn’t just any forest. Besides its natural role as a carbon sink and part of the earth’s “lungs” in the Amazon, it is a marvel of biodiversity – with 2.5 acres serving as home to more than 100,000 species of insects and nearly as many native tree species as are found in all of North America. It’s believed to have been a refuge for animal and plant species during the last ice age, as tropical forest habitats disappeared from higher latitudes.
Yasuni is also home to several indigenous groups, some of which maintain voluntary isolation from the outside world and live in an “untouchable” zone that extends into the park. Indigenous groups have legal control over much of the park, and would have to sign off on any oil deal.
Underneath the park lies a lake of oil. An estimated 900 million barrels, the oil represents nearly a quarter of Ecuador’s reserves and if burned would generate roughly 13 times the country’s current annual CO2 emissions.
Ecuador’s Resource Curse
But Ecuador is a poster child for the paradox known as the “resource curse”, whereby countries rich in natural resources are often unable to dig or drill their way to broad-based prosperity.
Since the end of the 1970s oil boom, Ecuador’s per capita GDP (currently $7500 PPP) has grown an average of just 0.75% per year – about half the rate of countries with similar levels of income. Much of that stagnation can be attributed to the 1999 economic crisis, when Ecuadoran income plunged more than 7%. What rebound there’s been has come from oil and the sustained rise prices since 2001.
Today, crude oil accounts for 60% of Ecuador’s export revenue and 40% of its government’s budget. Giving up even a small portion of future oil revenue in the name of conservation would be a major sacrifice for Ecuador, even though decades of oil revenue mismanagement have left 40% of the population in poverty and most citizens leery of big oil and its slippery contracts. In late 2007, Correa decreed a 99% tax on foreign oil firms’ windfall profits.
Yolanda Kakabadse, former environment minister and member of the presidential commission on Yasuni, emphasizes that the proposal doesn’t eliminate all drilling in Ecuador, nor would drilling increase oil revenue in the short term.
“Over 80% of oil revenues will continue to flow,” she says, and points out that there would be little revenue from Yasuni in the five years it would take to build drilling infrastructure and ramp up extraction.
A Greener Development Model
But Kakabadse believes Ecuador needs a development model that doesn’t depend on fossil fuels. Instead, she wants one “based on … sustainability, a changing energy matrix, and preparing for 20 years from now” when the oil is expected to start to running out. The Yasuni proposal would be the first step towards achieving that goal.
Revenue would be generated by annual sales in carbon markets of Yasuni Guarantee Certificates representing the avoided emissions. Germany has reportedly agreed to allow these certificates to be traded in its domestic carbon market like standard carbon certificates in the ETS system. The funds generated over 10-15 years by sales of certificates for 400 million tons of avoided emissions would be managed in a trust fund outside of Ecuador, with interest invested in renewable energy, conservation, energy efficiency and social programs for the peoples of the Amazon, laying the foundation for a low-carbon economy. But the plan has to get over several hurdles before it gets anywhere near funding its first renewable energy program.
Most fundamentally, it’s not clear that avoided emissions from Yasuni would really be an overall reduction if consumers of oil get their fix from another source. This could hinder widespread acceptance of Yasuni certificates. The more concrete challenge, however, is that volatility in the price of oil reduces the immediate threat of drilling at the same time it undermines a long-term promise to preserve Yasuni.
Cheap Oil and Yasuni
David Bakter, director of Earth Economics, a firm that has helped Ecuador develop the Yasuni proposal, is concerned that the relatively low price of oil could actually undermine the proposal.
“When oil was $140 a barrel,” he says, “those reserves under Yasuni had a lot higher value than they do today.” Investors or donor countries might balk at paying hundreds of millions of dollars a year to keep Yasuni oil underground.
Indeed, the difficulty and cost of extracting and processing the poor-quality “heavy” oil under Yasuni makes it unattractive at today’s relatively low prices. Correa’s wish to keep the oil below ground may “not be granted by the environmentalists” says Roger Tissot, associate consultant with the firm Gas Energía Latin America. “It is going to be granted by market reality” if prices stay low.
National oil companies up to the challenge of working in Yasuni, such as Venezuela’s PDVSA, Brazil’s Petrobras or China’s SINOPEC, may “have put it aside” in the last few months, concedes Kakabadse, “but they have not put it in the drawer.” Given its nearly one billion barrels, Yasuni “is on the table.”
Cheap Oil Won’t Last – Will Yasuni?
Bakter says that the current price “does give us a little more breathing time” to hone the proposal, but notes that “there is nowhere for the price of oil to go but up.” When that happens, any deal to protect Yasuni will become more and more expensive in terms of forgone oil revenue unless carbon prices also rise.
This may not be a problem for the Correa administration, according to Carlos Larrea, a professor of political economy at Ecuador’s Universidad Andina and one of the architects of the Yasuni proposal. He points out that Correa announced the Yasuni project at a time of high and rising oil prices, suggesting that the “position of the government is independent of the price of oil.” In addition, the revenue of bond sales will fluctuate with the price of a ton of carbon on world markets, and is expected to rise with recovery of the world economy and as carbon caps start to take hold.
Investors might need more convincing of the value of Correa’s word, however. In an interview in April, Correa declared that, while Ecuador’s new constitution bestows extensive protection to the natural environment, he is confident that he can successfully obtain permission to drill “from Congress as well as through popular vote” if credible funding commitments were not forthcoming. He assured listeners, though, that if forced to drill “the environmental impact will be minimized”.
Backers of the Yasuni proposal think that this will be a moot point. Germany is on board, and other countries like the UK and Netherlands may follow after visits from the Yasuni commission – Kakabadse says that “there is a lot of enthusiasm” for the proposal “wherever we speak”. In September, for example, the city of Madrid will hold a large concert in support of Yasuni that will be telecast around the world.
Wanted: A Political Magic Eight-Ball
Perhaps the greatest concern, however, is the policy of future administrations, which might not share a commitment to conservation, whether five or 50 years from now. If the price of oil gets high enough, it could be worth going back on a promise not to drill, even if it means liquidating the trust fund and giving up interest income.
“There aren’t a lot of backstops to the promises of one administration, or even the promises of the constitution if circumstances change,” says Jacob Werksman, director of the Institutions and Governance program at the Washington, DC think tank World Resources Institute. In a world of expensive oil, he says it would be difficull to close the gap between the market value of Yasuni’s oil and any funding in place to leave it there. As a result, the permanence of any agreement to forgo drilling in Yasuni is far from clear.
The Carbon Market vs. the Oil Market
Kakabadse is undeterred, and contends that tapping carbon markets to compensate the country for the avoided emissions would be as lucrative as the oil market, once environmental and infrastructure costs associated with drilling are considered.
“In every sense,” she says, Ecuador would “win with the carbon market more than with the oil market.”
Capital from carbon markets is the only serious alternative to oil revenue, according to Roque Sevilla, president of the Yasuni commission. Depending on future oil prices and the resulting fluctuation in forgone oil revenue, payments into a Yasuni trust fund could ultimately total $4 to $12 billion, and “such amounts cannot be obtained from donations or development aid from allies.”
Launching Ecuador’s Green Revolution
But what Ecuador truly needs, says Sevilla, is a “kickoff,” a down-payment for future clean energy investments. In this sense it is unimportant how Ecuador starts down the road to a greener economy, and Yasuni is not the only potential vehicle. Still, along with the symbolic value of forgoing oil, the Yasuni proposal preserves incredible biodiversity, ensures that indigenous peoples are undisturbed, and locks away 400 million tons of CO2. What’s not to love?
In the end, however the cost-benefit analyses work out, whatever the strength of German support, the price of carbon or oil, and the logistical and political hurdles – which are not insignificant – “this is a political decision that governments must make,” says Sevilla. “If they decide in favor of Yasuni, it will work.”
If they don’t, without a principled stand against drilling like Costa Rica’s, it is ironic that cheap oil may be the last bulwark against drilling in Yasuni – Cheap oil could sink the proposal, but cheap oil removes the short-term threat of extraction and thus the short-term need for a proposal in the first place.
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