Sell the Oil Deposits! A Financial Proposal to Keep the Oil Underground in the Yasuni National Park, Ecuador

Santiago J. Bucaram, Mario Andres Fernandez, and Diego Grijalva

INTRODUCTION

The Yasuni National Park (YNP) is a protected area located in the Amazon region of Ecuador and is recognized as one of the most biodiverse regions in the world (Bass etal. 2010). In 1989 it and much of its adjacent area were designated by UNESCO as a Biosphere Reserve (UNESCO 1989). In recent years, the YNP has received much attention due to the media exposure of the Yasuni-ITT Initiative. This Initiative, announced in 2007 by the Ecuadorian government, proposed a moratorium on oil activities in the Ishpingo- Timbococha-Tiputini (ITT) blocks within the YNP, in exchange for US$3.6 billion in compensation over a period of ten years. The compensation was supposedly in recognition of the supply of environmental services generated by the YNP from which the entire planet benefited. The Initiative was initially celebrated as an innovative proposal that offered an alternative to global environmental problems as it would promote the transition from the current development model, based on oil extraction, to a new strategy based on equality and sustainability (Acosta, Gudynas, and Vogel 2009; Larrea and Warnars 2009; Rival 2010; Vogel 2010).

The financial mechanism of the ITT Initiative involved contributions to the Yasuni Trust Fund, and may have taken the form of debt-for-conservation swaps, emission permit auctions or conservation projects, and donations from governments, multilateral organizations, non-governmental organizations, private companies, and individuals (United Nations Development Group 2010). In exchange for the contributions, the Ecuadorian government would issue Yasuni Guarantee Certificates (YGCs), which were documents with a face value equal to the contribution in US dollars. The YGCs were intended to represent ‘avoided emissions’ (measured in metric tons of CO2e) from keeping oil underground. The avoided emissions were calculated as the ratio between the contribution and the then current price of the European Union Allowances (EUA) from the Leipzig Carbon Market. The maximum total amount of YGCs to issue would be 407 million tons of CO2e corresponding to the estimated emissions produced from extracting oil from the ITT field. The YGCs did not earn interest and did not have an expiration or maturity date as long as the government maintained its commitment to not exploiting the oil reserves. Any contribution below US$50,000 was considered a donation and no YGC would be issued. By 2013, only US$336 million had been pledged (about 9 per cent of the target compensation) and US$13.3 million actually delivered (0.37 per cent of the target compensation), leading President Correa to terminate the Initiative, arguing that the international community had failed to embrace it.

Some authors, however, argue that the original ITT Initiative is still a coherent and innovative proposal to address climate change (e.g., Vallejo and Friant 2015), and that the failure of the Initiative was not due to poor design but to poor implementation by the policy makers in charge (Pellegrini et al. 2014). Despite the purported advantages of the Initiative, Pellegrini et al. (2014) indicate that its demise depended to a large extent on the inability of policy makers to identify and resolve tensions between the proposal and the institutions that facilitated it; and, the high reliance of the Initiative’s implementation on exogenous dynamics (e.g., oil prices) that were not explicitly considered.

Other authors like Haddad (2011) argue that the Initiative took the form of a compensated moratorium, where the compensation was estimated with respect to foregone oil revenues rather than the environmental benefit accrued. Likewise, Harstad (2012a) considers that the Initiative and the oil moratorium could be viewed as the Ecuadorian government holding a hostage (the YNP) and demanding a ransom (the target compensation), so that if the ransom was not received, oil extraction would start. Therefore, the whole Initiative appeared as an arbitrary exercise of power where the stronger party (the Ecuadorian government) demanded a ransom from the rest of the world, who had no alternative but to comply (Williamson 1983).

The objective of this chapter is twofold. First, we conduct a feasibility analysis of the ITT Initiative and show that it was severely flawed from its inception. Subsequently we use the price discounting framework of Bucaram, Fernandez, and Grijalva (2016) to assess the revenues that would have hypothetically occurred from the trade of YGCs. We conclude that the ITT Initiative was in fact poorly designed and was bound to fail. Second, we develop a financial approach for a ‘New ITT Initiative’. We propose the sale or leasing of the rights of extraction of the oil deposits in the YNP as a feasible strategy to keep the oil underground and, consequently, to protect the YNP’s ecosystem services. This financial approach is much more transparent and simplified than the ITT Initiative, and could be easily implemented through existing market mechanisms. Thus, our proposal does not require the creation of financial instruments such as the YGCs, it disregards inaccurate concepts such as ‘avoided net emissions’, and demonstrates the redundancy of the Initiative with respect to the Kyoto Protocol instruments. We finally emphasize that the Initiative, as originally designed, should be discarded and further efforts should be addressed to the adoption of our new, more useable Initiative.

 
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