Market-based conservation
strategies
By Eric Thomas Marshall
INTRODUCTION
As the new millennium
approaches the interest in conservation continues to increase. The threat of dwindling natural resources is
now seen as an eminent fact. For
Liberal and Conservative political factions the importance of preserving the
Earth's biodiversity is becoming clearer.
Industrialized nations are recognizing the need for cooperation with the
countries which contain the remaining rain forest lands. The Debt for Nature concept was one of the
first strategies for preserving endangered rain forest. A high proportion of the world's remaining
tropical forests reside in countries with the highest levels of indebtedness. Swapping offers a great opportunity for the
wealth of the first world nations to support the conservation of resources in
developing nations.
Environmental
special-interest groups as well as those involved in government and private
sector banking have shown increasing acceptance since Debt for Nature swapping
first began more than a decade ago. The
concept demonstrates a capacity for innovation on the part of both the public
and private sectors. Commercial banks,
national governments, and even The World Bank have contributed to the success
of swapping cooperatives around the globe.
Issues of efficiency and sustainability still plague these less
developed countries. More recently the
idea of a C02 emissions credit market has offered new possibilities for
conservationists.
On local and global levels,
emissions credits may facilitate some redistribution of wealth and power. The continued implementation of Debt for
Nature swapping, while establishing an incentive for environmentally sound
policy, should be instituted in conjunction with a comprehensive C02 emissions
credit market system. This type of
action seems to be the most promising strategy for easing economic instability
without endangering the precious resources of the tropical forests. It is in these developing nations that the
world's rarest natural resources reside.
Despite a richness of natural resources nations such as Bolivia,
Ecuador, Brazil, etc. continue face economic stability and national debt. Economic and political stability in the
future may make it possible for environmental conservation activities to expand
and continue through the next millennium.
WHAT IS "DEBT-for-NATURE" SWAPPING?
Debt swapping, in general,
is a common practice in the banking industry.
In recent years environmental conservationists have found new ways to
promote protect their interests use government debts to and financiers have
decided work together to preserve a resource as precious as our tropical rain
forests. Basically there are three
different types of debt swaps:
· DEBT-DEBT swaps are
transactions between creditors who interchange foreign loans.
· DEBT-EQUITY swaps involve
the conversion of external debt (national debt which is owed to foreign
investors) into some type of equity.
Foreigners continue to hold a claim on the debtor nation's resources.
· DEBT-RESCUE swaps ("Buy
Backs") consist of a repurchase of a country's debt in the secondary
market.
Debt for Nature swaps are a specific type of Debt-Equity
conversion which involves the purchase of a developing country's debt, at a
discounted value in the secondary debt market. This outstanding debt is then
canceled in return for environmental action by the nation which held the
debt. At least four different
variations on the theme of Debt for Nature swapping have been proposed(1)
·
conversion
of debt by the central bank into local currency or
local debt (bonds) to be
held by a local environmental projects
·
donation
of debt to a local environmental organization for
investment in environmental
projects
·
purchase
of debt by an environmental corporation to support
environmentally-sound
corporate investments
·
official
debt relief tied to supporting environmental management
THE SITUATION IN LATIN AMERICA
In 1987 the first ever
Debt-Nature swap took place between America and Bolivia. An American non-governmental organization
purchased USD650,000 worth of Bolivia's foreign debt. At that time their total foreign debt totaled approximately USD4
billion; clearly this action was a positive gesture not aggressive action to
wipeout the national debt problem. For
a discounted price of USD100,000, the environmental organization buys the
nation's debt from a commercial bank.
The debt is swapped for "conservation payments-in-kind” (2) equivalent
to the face value of the loan - USD650,000.
In this case the payments consisted of the Government of Bolivia forming
a public-private partnership which included 3.7 million acres of rain forest in
addition to a USD250,000 fund in local currency for the management and
protection of the nature reserve. The
bank agrees to the debt cancellation in good faith that the debtor nation's
government will maintain the management account, while also protecting the
forest reserve land from any further destruction.
Latin America has been a
particularly receptive region for swapping programs. "Many of the smaller debtor countries, such as Bolivia,
Costa Rica, Ecuador, Jamaica..., were fast off the mark in response to this
opportunity, quickly reaching agreements in principle to convert part of their
debt to conservation endowments for stipulated acreage that would be set aside
for conservation purposes.(3) It is no
mystery why nations such as these would embrace the idea of swapping debt. The debt crisis which seemed to explode in
the 1980's for countries across the globe.
Third and Second World nations were hit quite hard. "The mounting pressures of debt
threaten the ability of developing countries to establish environmental laws
and regulatory frameworks for enforcement ... jeopardizes the conservation of
natural resources and encourages the exploitation of the poor.(4)
SWAPPING: NOT THE ENTIRE SOLUTION
* Few commercial banks
creditors can be counted on to make a civic gesture, especially when the
situation is so distant and the benefits to their bottom line are quite
indirect.
* The terms usually involve the creditor accepting a heavy
discount with no assurance that the terms of the agreement will be enforced far
in the future.
* The debtor nation's are likely to seriously consider the use of
funds for conservation purposes if the aid is over and above what they would
otherwise expect to receive. Few aid
agencies have been able to offer this.
* Debtor's also need annual budgetary allotments for the
maintenance of the reserve lands. These
monies can be difficult to secure with inflation and reduced income from the
marketable resources.(5)
Debt swapping is a
significant step in the right direction.
It has not proved to be the answer.
The results have been far too small in scale. The prospects of debt equity transactions single-handedly
reducing the over all debt problem in Latin America, for example, are
non-existent. The volume of debt is far
larger than the value of valuable investment opportunities in the major debtor
countries.(6) Transactions that yield high global benefits and low tangible
benefits for the debtor countries involved have social implications that hinder
the progress of the movement to save
the rain forests. Considering a country
such as Brazil, their national costs would be high considering the loss of
accessibility to exploit the rain forests' resources, while their benefits
would be low in terms of local environmental enhancement. In addition, swaps often include debt
capitalization - partial conversion of debt into local currency bonds to fund
future protection of reserve lands.
This has an inflationary effect on the local economy which further
strains already delicate socioeconomic conditions.
The dynamics of the
debt-for-nature swap may lead to skepticism on both sides of the issue. Although a non-governmental environmental agency
owns the land, typically there is no system established to monitor the future
security of the national forest reserves.
Within these nations of unstable economic and political conditions there
is no guarantee that the agreement made by one administration will transfer to
the successor.
ECONOMICS STRATEGIES
Carbon Credits
There are two main
categories of market-based proposals, as articulated by
William Ruckelhaus:'
1. Those that would oblige consumers to pay the "full
cost" of a resource use, that is, "internalizing the
externalities" and thereby "bending the market system towards
long-term sustainability."
2. Introduce the notion of "environmental
resources" as "capital" on the grounds that "(the refusal)
to treat environmental resources as capital (induces us to) spend them as
income."
Air Emissions Trading
Air emissions trading is an
innovative regulatory compliance concept, based on the notion that the best way
to improve overall air quality is to create a genuine economic incentive for
industrial facilities to reduce the amount of pollutants they emit. Years of experience with the "command
and control" compliance paradigm has convinced regulators that a simple
market-based approach is now needed if we are to achieve greater levels of
environmental protection at a lower cost.
In response, the Environmental Protection Agency developed the trading
concept and encouraged states to establish their own economic incentive
programs.
In an "open
market" system, the commodity being traded is tons, or fractions of tons,
of actual reductions already achieved.
Reductions are measured from a baseline that is the lower of the legal
limit or the current actual emissions.
Air pollution sources can buy and sell discrete quantities of the
contaminants responsible for causing ground level ozone. Oxides of nitrogen (NOx) and volatile
organic compounds (VOC) are the pollutants most frequently traded. Sources with lower-cost control options can
choose to reduce their emissions beyond what the law requires, and sell the
emission reduction savings to another source whose control costs are higher.
Companies willing to
"over control" have an economic incentive to do so, while companies
that don't have viable cost-effective control options can comply with
regulations simply by purchasing emission reductions already made by
others. Most schemes call for these
credit buyers to "retire" a certain percentage of emission reductions
to guarantee a greater net benefit to the environment. Under this system, trades occur prior to
governmental review and approval, thus placing the responsibility for verifying
the quality of the emission reductions squarely on the source that uses them
for compliance. Open market trading
therefore reduces up-front transaction costs and delays, while harnessing
private sector resources to help assure overall quality control.
The number one beneficiary
is the environment, as harmful emissions that contribute to air pollution are
reduced. Industrial facilities are the
prime economic winners - they can purchase credits and use them to improve
their operational flexibility while meeting existing and future air quality
obligations. Firms selling the
reductions obtain additional revenues which they can then use for productive
investments elsewhere. This flexibility
helps both buyers and sellers retain their competitive edge.
KYOTO PROTOCOL
The Kyoto Protocol,
establish in December of 1997 finally gave legal momentum to the
conservationist movement, which had been suffering since the 1980's. In 1990, the Rio Conference was a great
political stride, yet the initiative did little to actually help stop the
destruction of the rain forests, covering 6% of the Earth's surface yet home to
50% of the world's species. One hundred
and fifty nations have ratified the Kyoto Protocol. It is the only realistic policy opportunity to cut the current
deforestation rate, which is accelerating so that in 50-100 years virtually
none of the tropical forests will be left standing. Most conservation scientists agree that this is the best
biological alternative, economically feasible, equitable, and politically
acceptable. By the year 2012, 30% real
reductions in worldwide carbon emissions are projected.
Losing these forests will
have increasing climatic effects. Today
we know that the carbon-based pollution from humans is destabilizing weather
patterns. This start a complex cycle
where deforestation brings about climate change that induces desertification
and the degradation of forest lands, adding to the problem of climate
change. Reducing deforestation rates is
key to significantly slowing climate change.
Also, plans to stop destruction are 3-4 times cheaper than
reforestation, emissions reduction, or carbon fixing from the environment. Article 12 of Kyoto, "Clean Development
Mechanisms", provides the details on how to implement these measures of
preventions.
Forest-Secured Escrow Account
To determine how much money
should be deposited into these accounts a baseline rate of deforestation must
be defined. When actual rates fall
below the initial level a credit is produced.
Credit * Carbon tons * price = Account deposit. In an example given by conservation biology
researcher John O'Niles a country such as Brazil could decrease their rate of
deforestation from 2.5% to 2.3% and generate $600 million in deposits. This value is compared to an estimated
opportunity cost of $150 million (this includes the value of selling the lumber
and all other byproducts of the land.
Despite the hopefulness of this plan, several obstacles still block immediate progress. The greatest of these blocks in the U.S. refusal to ratify. The agreement would require a 6% decrease in overall U.S. emissions. Economics concerns are central to this political "unmomentum". The recent Byrd-Hagel resolution ensured the that Congress would not pass the Kyoto Protocol if it proves to be too expensive or if developing countries do not commit. According to past performance it seems probably that Kyoto will not pass. Public awareness and support of this initiative is the only thing that will shift votes within the U.S. Congress and make Kyoto a global reality.
1 Hansen, Stein. Debt for Nature Swaps Overview and
Discussion of Key Issues. The World
Bank Policy Planning and Research Staff, February 1988, p 3.
2 Ibid.
3 Miller, Morris. Debt and the Environment: Converging
Crises. United Nations Publications:
New
York,1991, p 131.
4 Atkinson, J. GATT: What Do
the Poor Get? Community Aid Abroad
Background Paper No.5. Fitzroy, Australia, September 1994, p 19.
5 Miller, Morris. Debt and the Environment: Converging
Crises. United Nations Publications:
New York,1991, p 132.
6 Rubin, Steven M. Guide to
Debt Equity Swaps. The Economist
Publications: London, September 1987, p 19.