01 December 2014

A big idea from a small country -- or blackmail?

Valeria R writes:*

What is the Yasuní-ITT Trust-Fund?
This is a story about the oil that lies underneath the Yasuní-Biosphere Reserve (one of the most biodiverse place on earth), which is located in the Ecuadorian Amazon. In 2007, the president of Ecuador announced an “historical initiative” in the UN General Assembly. He proposed the establishment of a trust-fund that would fund a UNDP-managed reserve. In exchange for around 3 billion US dollars (about 50% of the expected income from revenues if drilling for oil was allowed), Ecuador promised to not extract oil from under the Yasuní. That initiative ended sadly in 2013 when insufficient funds -- even with significant domestic contributions -- failed to materialize.

Developing countries face a tradeoff between the environment and economic development. This post explains the opportunity cost of forgetting that fact.**

Goals, costs and benefits
The trust-fund would combat climate change, help Ecuador move away from oil-dependence by diversifying its economy and inspire other developing, oil-rich countries. More specifically, the fund money would go to a) the management of, and scientific research in the Yasuní, b) national reforestation program and c) investment in renewable sources of energy. Let’s briefly make a cost-benefit analysis for Ecuador and the world.

Ecuador’s benefits from not-extracting would come from the development of the Yasuní’s eco-tourism industry (studies show in the very long-run it would exceed oil revenues), investing in renewable energy to power the country, and protecting non-contacted Amazonian tribes living in voluntary isolation that may lose their ancestral lands and human rights.

The benefit to the world would have been avoided emissions of 407 million Metric Tons of CO2 (as much as Brazil and France’s emissions combined in one year), allowing the Yasuní’s primary forests to capture CO2, and protection of unique biodiversity capable of advancing science and medicine.

The failure of the Yasuní-ITT initiative means the loss of these benefits and thus the arrival of their costs.  The state has turned its rhetoric to ‘fighting poverty with oil money’, but Ecuador has much more to lose. The Yasuní are now threatened by oil pollution, illegal poaching, and death of isolated-tribes through spread of diseases or clashes.

The decision to drill has resulted in fierce opposition from civil society (the Yasunidos demanded a referendum to revoke the decision in vain), increased the chance of a 'resource curse' and Dutch disease, and legal and physical conflicts with indigenous-rights groups.

Bad timing and publicity
The big question -- considering how 3 billion US dollars is pocket money for big economies -- is why the initiative failed? The impression of blackmail was not helpful. Ecuador should have emphasized the economic and global value of keeping the oil underground. Looking abroad, we can also see that the 2007 arrival of the global financial crisis did not help.

Bottom Line: Resource-rich countries with human and economic development needs cannot always make decisions compatible with international goals.

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, other perspectives, data sources, etc.

**Most information was extracted from official documents including “Programa para la conservación y manejo sostenible del Patrimonio Natural y Cultural de la Reserva de la Biosfera Yasuní” by María Cristina Vallejo, FLACSO SEDE Ecuador.

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