What is “debt-for-nature” swapping?

Research provided by Pearl Rains-Hewitt
www.behindmyback.org

Posted 8/30/2014

 

Market-based conservation strategies

By Eric Thomas Marshall

WHAT IS “DEBT-for-NATURE” SWAPPING?

  • DEBT-EQUITY swaps involve the conversion of external debt (national debt which is owed to foreign investors) into some type of equity.  Foreigners continue to hold a claim on the debtor nation’s resources.

 Environmental special-interest groups as well as those involved in government and private sector banking have shown increasing acceptance since Debt for Nature swapping first began more than a decade ago.

Despite the hopefulness of this plan, several obstacles still block immediate progress.  The greatest of these blocks in the U.S. refusal to ratify. 

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AND THEN THERE IS THIS…. ( snippets of a  22 page report)

Clinton and Al Gore’s mess on climate change etc

 

http://www.uni-potsdam.de/u/sprinz/doc/Hovi.2012.WhytheUnitedStatesDidNotBecomeaPartytotheKyotoProtocol.EJIR.pdf

 

 

Why did the United States not become a party to the Kyoto Protocol?

 

A seemingly obvious answer is that Kyoto’s design gave it practically no chance of US

Senate ratification.

 

In addition to the requirement of 67 votes to ratify international treaties, the US

Congress must pass enabling legislation to ensure fulfillment of a treaty’s objectives.

 

Because of supermajority procedures in the Senate, such as the filibuster, significant

policy shifts often require a three-fifths majority (60 votes) to pass.

Consequently, votes on enabling legislation potentially face a supermajority hurdle that centrally placed veto players can exploit.

During the Kyoto negotiations, it was reasonably clear that the climate-

change issue caused conflicting positions in the Senate not only because of partisan

politics, but also because of deep regional differences.

Senators representing states at risk of suffering economic loss (job losses or higher energy prices) increasingly perceived it as politically difficult to support a global climate treaty that would result in domestic federal legislation to price carbon emissions. Coal, oil, manufacturing, and agricultural states were generally negative to carbon pricing, and to Kyoto in particular. Politicians from such states voiced these views in pivotal congressional debates, most significantly in debating Byrd–Hagel

 

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In July 1997, five months before the Kyoto meeting,

THE SENATE passed the Byrd–Hagel resolution (hereafter ‘Byrd–Hagel’), stating that:

 

the United States should not be a signatory to any protocol … which would (A) mandate new commitments to limit or reduce greenhouse gas emissions for the Annex I Parties, unless the protocol … also mandates new specific scheduled commitments … for Developing Country Parties within the same compliance period, or (B) RESULT IN SERIOUS HARM TO THE ECONOMY OF THE UNITED STATES.

 

Byrd–Hagel was not legally binding; rather, it was a sense-of-the-Senate resolution.

However, while Senate ratification requires a two-thirds majority, Byrd–Hagel was

passed by a 95–0 vote. Thus, to achieve ratification, the US administration would have had to change the minds of at least 67 senators ― a formidable task.

 

Unsurprisingly,

President Bush, when repudiating Kyoto in February 2001, echoed the requirements of

Byrd–Hagel: ‘I oppose the Kyoto Protocol because it exempts 80 percent of the world,

including major population centers such as China and India, from compliance,

AND WOULD CAUSE SERIOUS HARM TO THE US ECONOMY.’

2

Bush also referred to Byrd–Hagel directly, stating,

‘the Senate’s vote, 95–0, shows that there is a clear consensus that the Kyoto Protocol is an unfair and ineffective means of addressing global climate change concerns’.

 

That Byrd–Hagel was passed by the US Senate several months before

the Kyoto meeting makes this outcome all the more puzzling. Indeed, Cutajar (2004: 63) terms it ‘something of a mystery’. We try to shed light on this mystery

three explanations of why the  United States did not become a party to Kyoto.

 

Explanation 1 argues that delegations in Kyoto mistakenly thought the US Senate was bluffing when adopting Byrd–Hagel.

 

Explanation 2 contends that Europeans preferred a more ambitious agreement without

US participation to a less ambitious agreement with US participation.

 

Finally,

explanation 3 suggests THAT IN KYOTO THE CLINTON–GORE ADMINISTRATION had already given up on  achieving Senate ratification, and therefore essentially pushed for an agreement that would provide them a climate-friendly face

 

In the Senate, THE CLINTON–GORE ADMINISTRATION’S acceptance of the Berlin Mandate caused anger, frustration, and a feeling of not being heard on a major issue (e.g. SEE SENATOR INHOFE’S STATEMENT, US SENATE, 1997B). As the Kyoto negotiations progressed, and this sense of not being consulted continued, the idea of a sense-of-the-Senate resolution developed.

Sending a powerful signal, Byrd–Hagel made sure the president knew about the senators’ concerns, and became a red flag against US acceptance and ratification of Kyoto. In the upcoming sections, we show how participants and observers perceived Byrd–Hagel’s impact on the outcome of the Kyoto negotiations.

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Market-based conservation strategies

By Eric Thomas Marshall

 

WHAT IS “DEBT-for-NATURE” SWAPPING?

  • DEBT-EQUITY swaps involve the conversion of external debt (national debt which is owed to foreign investors) into some type of equity.  Foreigners continue to hold a claim on the debtor nation’s resources.

Environmental special-interest groups as well as those involved in government and private sector banking have shown increasing acceptance since Debt for Nature swapping first began more than a decade ago.

Despite the hopefulness of this plan, several obstacles still block immediate progress.  The greatest of these blocks in the U.S. refusal to ratify.  The agreement would require a 6% decrease in overall U.S. emissions.  Economics concerns are central to this political “unmomentum”.  The recent Byrd-Hagel resolution ensured the that Congress would not pass the Kyoto Protocol if it proves to be too expensive or if developing countries do not commit.  According to past performance it seems probably that Kyoto will not pass.  Public awareness and support of this initiative is the only thing that will shift votes within the U.S. Congress and make Kyoto a global reality.

 

Market-based conservation strategies

By Eric Thomas Marshall

 

INTRODUCTION

 

As the new millennium approaches the interest in conservation continues to increase.  The threat of dwindling natural resources is now seen as an eminent fact.  For Liberal and Conservative political factions the importance of preserving the Earth’s biodiversity is becoming clearer.  Industrialized nations are recognizing the need for cooperation with the countries which contain the remaining rain forest lands.  The Debt for Nature concept was one of the first strategies for preserving endangered rain forest.  A high proportion of the world’s remaining tropical forests reside in countries with the highest levels of indebtedness.  Swapping offers a great opportunity for the wealth of the first world nations to support the conservation of resources in developing nations.

Environmental special-interest groups as well as those involved in government and private sector banking have shown increasing acceptance since Debt for Nature swapping first began more than a decade ago.  The concept demonstrates a capacity for innovation on the part of both the public and private sectors.  Commercial banks, national governments, and even The World Bank have contributed to the success of swapping cooperatives around the globe.  Issues of efficiency and sustainability still plague these less developed countries.  More recently the idea of a C02 emissions credit market has offered new possibilities for conservationists.

On local and global levels, emissions credits may facilitate some redistribution of wealth and power.  The continued implementation of Debt for Nature swapping, while establishing an incentive for environmentally sound policy, should be instituted in conjunction with a comprehensive C02 emissions credit market system.  This type of action seems to be the most promising strategy for easing economic instability without endangering the precious resources of the tropical forests.  It is in these developing nations that the world’s rarest natural resources reside.  Despite a richness of natural resources nations such as Bolivia, Ecuador, Brazil, etc. continue face economic stability and national debt.  Economic and political stability in the future may make it possible for environmental conservation activities to expand and continue through the next millennium.

 

WHAT IS “DEBT-for-NATURE” SWAPPING?

 

Debt swapping, in general, is a common practice in the banking industry.  In recent years environmental conservationists have found new ways to promote protect their interests use government debts to and financiers have decided work together to preserve a resource as precious as our tropical rain forests.  Basically there are three different types of debt swaps:

 

  • DEBT-DEBT swaps are transactions between creditors who interchange foreign loans.

 

  • DEBT-EQUITY swaps involve the conversion of external debt (national debt which is owed to foreign investors) into some type of equity.  Foreigners continue to hold a claim on the debtor nation’s resources.

 

  • DEBT-RESCUE swaps (“Buy Backs”) consist of a repurchase of a country’s debt in the secondary market.

 

Debt for Nature swaps are a specific type of Debt-Equity conversion which involves the purchase of a developing country’s debt, at a discounted value in the secondary debt market. This outstanding debt is then canceled in return for environmental action by the nation which held the debt.  At least four different variations on the theme of Debt for Nature swapping have been proposed(1)

 

  • conversion of debt by the central bank into local currency or

local debt (bonds) to be held by a local environmental projects

  • donation of debt to a local environmental organization for

investment in environmental projects

  • purchase of debt by an environmental corporation to support

environmentally-sound corporate investments

  • official debt relief tied to supporting environmental management

 

THE SITUATION IN LATIN AMERICA

 

In 1987 the first ever Debt-Nature swap took place between America and Bolivia.  An American non-governmental organization purchased USD650,000 worth of Bolivia’s foreign debt.  At that time their total foreign debt totaled approximately USD4 billion; clearly this action was a positive gesture not aggressive action to wipeout the national debt problem.  For a discounted price of USD100,000, the environmental organization buys the nation’s debt from a commercial bank.  The debt is swapped for “conservation payments-in-kind” (2) equivalent to the face value of the loan – USD650,000.  In this case the payments consisted of the Government of Bolivia forming a public-private partnership which included 3.7 million acres of rain forest in addition to a USD250,000 fund in local currency for the management and protection of the nature reserve.  The bank agrees to the debt cancellation in good faith that the debtor nation’s government will maintain the management account, while also protecting the forest reserve land from any further destruction.

Latin America has been a particularly receptive region for swapping programs.  “Many of the smaller debtor countries, such as Bolivia, Costa Rica, Ecuador, Jamaica…, were fast off the mark in response to this opportunity, quickly reaching agreements in principle to convert part of their debt to conservation endowments for stipulated acreage that would be set aside for conservation purposes.(3)  It is no mystery why nations such as these would embrace the idea of swapping debt.  The debt crisis which seemed to explode in the 1980’s for countries across the globe.  Third and Second World nations were hit quite hard.  “The mounting pressures of debt threaten the ability of developing countries to establish environmental laws and regulatory frameworks for enforcement … jeopardizes the conservation of natural resources and encourages the exploitation of the poor.(4)

 

 

SWAPPING: NOT THE ENTIRE SOLUTION

 

*             Few commercial banks creditors can be counted on to make a civic gesture, especially when the situation is so distant and the benefits to their bottom line are quite indirect.

 

*             The terms usually involve the creditor accepting a heavy discount with no assurance that the terms of the agreement will be enforced far in the future.

 

*             The debtor nation’s are likely to seriously consider the use of funds for conservation purposes if the aid is over and above what they would otherwise expect to receive.  Few aid agencies have been able to offer this.

 

*             Debtor’s also need annual budgetary allotments for the maintenance of the reserve lands.  These monies can be difficult to secure with inflation and reduced income from the marketable resources.(5)

 

Debt swapping is a significant step in the right direction.  It has not proved to be the answer.  The results have been far too small in scale.  The prospects of debt equity transactions single-handedly reducing the over all debt problem in Latin America, for example, are non-existent.  The volume of debt is far larger than the value of valuable investment opportunities in the major debtor countries.(6) Transactions that yield high global benefits and low tangible benefits for the debtor countries involved have social implications that hinder the progress of the movement to save the rain forests.  Considering a country such as Brazil, their national costs would be high considering the loss of accessibility to exploit the rain forests’ resources, while their benefits would be low in terms of local environmental enhancement.  In addition, swaps often include debt capitalization – partial conversion of debt into local currency bonds to fund future protection of reserve lands.  This has an inflationary effect on the local economy which further strains already delicate socioeconomic conditions.

The dynamics of the debt-for-nature swap may lead to skepticism on both sides of the issue.  Although a non-governmental environmental agency owns the land, typically there is no system established to monitor the future security of the national forest reserves.  Within these nations of unstable economic and political conditions there is no guarantee that the agreement made by one administration will transfer to the successor.

 

ECONOMICS STRATEGIES

 

Carbon Credits

There are two main categories of market-based proposals, as articulated by

William Ruckelhaus:’

  1.             Those that would oblige consumers to pay the “full cost” of a resource use, that is, “internalizing the externalities” and thereby “bending the market system towards long-term sustainability.”
  2.          Introduce the notion of “environmental resources” as “capital” on the grounds that “(the refusal) to treat environmental resources as capital (induces us to) spend them as income.”

 

Air Emissions Trading

Air emissions trading is an innovative regulatory compliance concept, based on the notion that the best way to improve overall air quality is to create a genuine economic incentive for industrial facilities to reduce the amount of pollutants they emit.  Years of experience with the “command and control” compliance paradigm has convinced regulators that a simple market-based approach is now needed if we are to achieve greater levels of environmental protection at a lower cost.  In response, the Environmental Protection Agency developed the trading concept and encouraged states to establish their own economic incentive programs.

In an “open market” system, the commodity being traded is tons, or fractions of tons, of actual reductions already achieved.  Reductions are measured from a baseline that is the lower of the legal limit or the current actual emissions.  Air pollution sources can buy and sell discrete quantities of the contaminants responsible for causing ground level ozone.  Oxides of nitrogen (NOx) and volatile organic compounds (VOC) are the pollutants most frequently traded.  Sources with lower-cost control options can choose to reduce their emissions beyond what the law requires, and sell the emission reduction savings to another source whose control costs are higher.

Companies willing to “over control” have an economic incentive to do so, while companies that don’t have viable cost-effective control options can comply with regulations simply by purchasing emission reductions already made by others.  Most schemes call for these credit buyers to “retire” a certain percentage of emission reductions to guarantee a greater net benefit to the environment.  Under this system, trades occur prior to governmental review and approval, thus placing the responsibility for verifying the quality of the emission reductions squarely on the source that uses them for compliance.  Open market trading therefore reduces up-front transaction costs and delays, while harnessing private sector resources to help assure overall quality control.

The number one beneficiary is the environment, as harmful emissions that contribute to air pollution are reduced.  Industrial facilities are the prime economic winners – they can purchase credits and use them to improve their operational flexibility while meeting existing and future air quality obligations.  Firms selling the reductions obtain additional revenues which they can then use for productive investments elsewhere.  This flexibility helps both buyers and sellers retain their competitive edge.

KYOTO PROTOCOL

The Kyoto Protocol, establish in December of 1997 finally gave legal momentum to the conservationist movement, which had been suffering since the 1980’s.  In 1990, the Rio Conference was a great political stride, yet the initiative did little to actually help stop the destruction of the rain forests, covering 6% of the Earth’s surface yet home to 50% of the world’s species.  One hundred and fifty nations have ratified the Kyoto Protocol.  It is the only realistic policy opportunity to cut the current deforestation rate, which is accelerating so that in 50-100 years virtually none of the tropical forests will be left standing.  Most conservation scientists agree that this is the best biological alternative, economically feasible, equitable, and politically acceptable.  By the year 2012, 30% real reductions in worldwide carbon emissions are projected.

Losing these forests will have increasing climatic effects.  Today we know that the carbon-based pollution from humans is destabilizing weather patterns.  This start a complex cycle where deforestation brings about climate change that induces desertification and the degradation of forest lands, adding to the problem of climate change.  Reducing deforestation rates is key to significantly slowing climate change.  Also, plans to stop destruction are 3-4 times cheaper than reforestation, emissions reduction, or carbon fixing from the environment.  Article 12 of Kyoto, “Clean Development Mechanisms”, provides the details on how to implement these measures of preventions.

 

Forest-Secured Escrow Account

To determine how much money should be deposited into these accounts a baseline rate of deforestation must be defined.  When actual rates fall below the initial level a credit is produced.  Credit * Carbon tons * price = Account deposit.  In an example given by conservation biology researcher John O’Niles a country such as Brazil could decrease their rate of deforestation from 2.5% to 2.3% and generate $600 million in deposits.  This value is compared to an estimated opportunity cost of $150 million (this includes the value of selling the lumber and all other byproducts of the land.

Despite the hopefulness of this plan, several obstacles still block immediate progress.  The greatest of these blocks in the U.S. refusal to ratify.  The agreement would require a 6% decrease in overall U.S. emissions.  Economics concerns are central to this political “unmomentum”.  The recent Byrd-Hagel resolution ensured the that Congress would not pass the Kyoto Protocol if it proves to be too expensive or if developing countries do not commit.  According to past performance it seems probably that Kyoto will not pass.  Public awareness and support of this initiative is the only thing that will shift votes within the U.S. Congress and make Kyoto a global reality.

 

1 Hansen, Stein.  Debt for Nature Swaps Overview and Discussion of Key Issues.  The World Bank Policy Planning and Research Staff, February 1988, p 3.

2 Ibid.

3 Miller, Morris.  Debt and the Environment: Converging Crises.  United Nations Publications: New

York,1991, p 131.

4 Atkinson, J. GATT: What Do the Poor Get?  Community Aid Abroad Background Paper No.5. Fitzroy, Australia, September 1994, p 19.

5 Miller, Morris.  Debt and the Environment: Converging Crises.  United Nations Publications: New York,1991, p 132.

6 Rubin, Steven M. Guide to Debt Equity Swaps.  The Economist Publications: London, September 1987, p 19.

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