Global Trends by Martin Khor

Monday 20 September 2010

Leaving oil in the ground to fight climate change

A new initiative to fight climate change and conserve forests by leaving oil in the ground has taken off in Ecuador, which hopes that other countries will contribute to a fund and share the costs of forgoing oil revenues.


What would a country’s leaders do if oil reserves were discovered beneath the tropical rain forests of that nation’s premier national park?

The government would naturally be in a dilemma.   If the forests are destroyed to extract the oil, the country and the world would lose the national park and its biodiversity-rich forest.

Moreover, the extraction and use of the oil would release a lot of carbon dioxide into the atmosphere, contributing to climate change.

But if oil were to be left in the ground in order to protect the forests and avoid emissions, the country would lose a lot of export earnings and state revenues that could be used for development.  Economists call this an opportunity cost.

Given the dominant priorities and values of the modern world, in which economics and business are put above the environment, most countries would chop the forests, destroy the park and extract the oil.

Last week, I heard a real case of a developing country facing this very dilemma and putting up an alternative approach to resolving it.

Ecuador is a South American country with a small population of 13 million that has been blessed by nature.

It has four major ecological regions -- the coast facing the Pacific Ocean, a set of islands in that ocean, the Andes mountains in which its capital city Quito resides, and the Amazonian forests. 

In Quito, at the Ministry of Patrimony (which is in charge of the country’s environment), Professor Carlos Larrea Maldonado explained to me Ecuador’s unique initiative to leave the

large oil reserves in the ground at the country’s Yasuni National Park in return for international funds.

The funds, which are partly to make up for the loss of oil revenue, would be used  by the country to conserve its forests, develop renewable energy, and promote social development.

Dr. Maldonado is a professor of social and global studies at the Simon Bolivar University, and was asked by the government to develop the Yasuni-ITT initiative.

The country’s President, Rafael Correa, announced at the United Nations that Ecuador had decided to maintain the crude oil (discovered in the ITT (Ishpingo-Tambococha-Tiputini) field located in the Yasuni National Park) indefinitely underground.

This was in order to put social and environmental values first, while other ways would be found to obtain economic benefits for the country.

In the initiative, the international community would contribute at least half the revenue that the State would have received by extracting the oil, while the government would assume up to half of the opportunity cost of keeping the oil in the ground.

The Yasuni Park is one of the most important and diverse biological reserves in the world.  It covers about a million hectares, and the ITT field is about 20% of the total park area.

There are 846 million barrels of recoverable oil reserves found in the ITT field, which are estimated to yield revenues of US$7.25 billion (at present value) to the state.

The government plans to leave the oil in the ground, and continue to conserve the Park.  This would also avoid an estimated 407 million tonnes of carbon dioxide emissions that would have been generated by burning the ITT oil.

The 407 million tonnes may be valued at US$8.07 billion, according to the current prices of carbon dioxide traded in the European carbon market (US$19.81 per tone of carbon dioxide).

Under the Yasuni-ITT initiative, Ecuador proposes that the international community contributes at least US$3.6 billion into a trust fund administered by the United Nations Development Programme.

Thus, of the US$7.25 billion of oil revenue foregone, the government would bear half the cost while an international fund contributed by foreign governments and private donations would bear the other half.

The fund’s capital will be invested in renewable energy (hydroelectric, geothermal, wind and solar) projects in order to overcome Ecuador’s dependence on fossil fuels that cause climate change.

The interest earned from the fund would be used to conserve forests in 44 protected areas, help small farmers reforest and manage a million hectares of forests, promote energy efficiency and social development.

The UN is supporting the project, with the UNDP already establishing the trust fund.  Last week the first contribution of US$200,000 was made by ChileEcuador hopes that many European countries as well as the US will contribute significant amounts.

Ecuador hopes that this initiative will be a “pilot project” that could be recognized by the UN Climate Convention as an example of “avoided emissions”.

So far, the UNFCCC has recognized the avoidance of deforestation as contributing to the mitigation of climate change, and developing countries can apply for funds under its system to conserve the forest and for reforestation.

Ecuador hopes that the UNFCCC will also recognize “keeping oil in the ground” as another method to avoid emissions and which can provide funds for developing countries.

It is proposing, with the Yasuni-ITT initiative as a first example, that a new mechanism by set up to fund developing countries that leave fossil fuel reserves located in environmentally or culturally fragile areas underground indefinitely.

According to criteria worked out by Prof. Maldonado and his team, the countries that fulfill the conditions, besides Ecuador, include Malaysia, Indonesia, the Philippines, India, Papua New Guinea, Brazil, Colombia, Venezuela, Bolivia, Peru, Costa Rica, Democratic Republic of Congo and  Madagascar.

The Yasuni initiative has received support for many famous individuals including Nobel Prize winners (such as Desmond Tutu and Rigoberta Menchu), former political leaders (Mikhail Gorbachev of Russia and Fernando Cardoso of Brazil and Felipe Gonzales of Spain) Prince Charles, and many international organizations such as UNASUR (South American Union of Nations), the Organisation of American States and environmental and indigenous peoples’ NGOs.

It will be interesting to see how far the message of the Yasuni Initiative eventually travels, and whether more such initiatives are taken by other countries in a move to conserve forests, leave oil or coal in the ground, and fight climate change, with the countries concerned and the international community sharing the costs and benefits.