FEASIBILITY ANALYSIS OF THE ITT INITIATIVE

This section provides a comprehensive analysis of the flaws of the ITT Initiative as a climate change mitigation instrument and as a financial tool to raise the compensation necessary to motivate the Ecuadorian government to prioritize conservation over oil extraction.

The modelling assumptions are as follows. First, we assume YGCs are financially and operatively equivalent (i.e., fungible) to the Certificates of Emissions Reductions (CERs). The CERs are financial instruments associated with Clean Development Mechanism (CDM) and Reducing Emissions from Deforestation and Forest Degradation (REDD+) projects, which have a payoff structure (i.e., cash flows) similar to the YCGs. That is, CERs are the best proxy or twin security to value the YGCs. This assumption relies on paragraph 26 of the Terms of Reference (TOR) of the Yasuni-ITT Trust Fund of July 2010 (United Nations Development Group 2010), which states, ‘the YGCs will also include the metric tons of CO2 avoided according to the price, at that date, of the European Union Allowances (EUAs) in the Leipzig Carbon Market... ’. Furthermore, paragraph 27 of the same document asserts that ‘if in the future the world carbon market accepts the YGCs as equivalents of Emission Permits, the government will issue YGCs for sale to private and/or public entities in mitigating greenhouse gas emissions... ’. These statements show a clear and explicit expectation by the Ecuadorian government that the YCGs could become equivalent to the EUAs traded in the European Union Emission Trading Scheme (EU ETS). However, as EUAs are electronic certificates distributed by European governments to firms in the industrial sector, EUAs are by definition not equivalent to those of the YGCs. Hence, we use the CERs for the purposes of our analysis.

Second, we assume donors are rational utility maximizers and, given scarce financial resources, they will choose the best use of their money by evaluating all the alternatives. Donors then use the carbon market as a means to decide the scale of their donations. Third, we assume the Ecuadorian government commits to keeping the oil underground as long as the compensation is incentive-compatible, that is, if the compensation is equal to or greater than US$3.6 billion. Fourth, for the sake of conducting an analysis of the best-case scenario, we ignore the fact that YGCs represent neither a portion of the oil reserves nor avoided carbon emissions as purported but are, in practice, the representation of nothing more than a bona fide promise from Ecuador to refrain from exploiting the ITT block. This simplifies the analysis and allows us to approach the problem from a financial perspective and to obtain an upper bound valuation of the YGCs.

 
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