Ecuador wants 'carbon bonds' to save forest

CarbonPositive,
Sunday, 9 August 2009

While the UN, World Bank and NGOs work away at creating a new international carbon payments mechanism to save the world’s remaining rainforests, Ecuador has been trying a variation on the theme – carbon bonds.

The bonds would be issued over a government guarantee that oil won’t be extracted from the Yasuni National Park in the Ecuadorian Amazon and its forest and biodiversity preserved.

The project would deliver a total of 407 million tonnes of emissions reduction savings, primarily from the avoided extraction and burning of 850 million barrels of oil under the reserve, and the protection of forest. There would also be significant benefits in biodiversity conservation and protecting the way of life of two indigenous groups living traditionally in the forest.

Working in a similar way to tradable carbon offset credits generated in return for emission reductions, the Ecuadorian government envisages issuing Yasuni Guarantee Certificates linked to the price of offset credits on the European carbon market.

Revenue from bond sales would offset the royalties foregone to oil companies in locking up the reserve permanently. If the oil reserve were to be exploited at some future date, the bonds would be cancelled and the government would be legally bound to return the proceeds, plus interest.

Ecuador’s President, Rafael Correa, has called on developed countries – governments and companies – to commit to buy the bonds, saying if the international community doesn’t come to the party the debt-strapped country will have no choice but to allow the oil field to be developed.

The bond sales would take place over a ten-year period with revenue being earmarked for investment in sustainable energy to ween the country of fossil fuels.

Correa first proposed the Yasuni-ITT Initiative two years ago but the fall in the price of carbon has meant initial estimates of $11 billion in revenue have been progressively scaled down. As of July 2009, the government said it was now looking for $3 billion.

The US-based World Resources Institute has welcomed the concept in principle but expressed concern over carbon leakage. That is, should emission reductions be recognised in this plan when, in the short term at least, the demand for the oil from the field is likely to be just filled from supply elsewhere. This would mean no real emission savings.

The German government is considering a contribution of $25 million but it, along with other prospective investors, has concerns over whether the Ecuadorian government might allow some drilling if it could only sell some of the bonds. The WRI says the proposal is significant and acceptable only if no exploration takes place in the Yasuni-ITT fields.

Encouraged by the German interest, Ecuador is now seeking a group of initial backers to demonstrate global interest in the proposal, Remi Moncel, from the WRI’s climate and energy programme, told Carbon Positive.