Ecuador: Paying to keep oil in the ground

Ecuador’s President Rafael Correa is often dismissed as a radical leftist. Such has been the response to his proposal that the world pay him not to extract oil from Yasuni National Park in the western Amazon. Yasuni is home to almost 850 million barrels of oil, or 20% of Ecuador’s reserves.

A closer look at Correa’s proposal reveals that it comes straight out of an economics textbook, and makes perfect sense.
Ecuador has a national income of $7,500 in purchasing power terms, and the top 20% of Ecuadorans have more than half that income. More than half of Ecuador lives on less than $2 per day.

From where Ecuador sits on the global poverty and inequality ladder, the benefits outweigh the costs of extracting the oil. However, take into account the value of the park to the rest of the world, and the benefit-cost ratio shrinks. Its only rational then to ask the world to help pay for what it values.

In Ecuador’s case, the net benefits of the project are projected oil revenues minus the costs of extraction. A conservative estimate is that exploiting the oil would bring in $5.7bn in present value terms, or 10% of Ecuador’s GDP.

Cutting down the forest to extract oil could cost the country in terms of the other uses of the land that generated income, such as tourism, as well as in losses of biodiversity and carbon dioxide. Many of these benefits, however, may accrue to those outside Ecuador.

Ecuadoran economist Carlos Larrea has a model that tries to estimate some of the broader costs and benefits.

Yasuni is considered the most biodiverse park on the planet and has been named a Unesco Biosphere site. One hectare in the park has more species of trees than all of the United States and Canada combined. In addition to all sorts of flora, one can find ocelots, giant ant-eaters, white bellied spider monkeys, manatees and more.

Given that the park is one of the most diverse places in the world, there is a chance it could house the key to some future wonder drug and bring in even higher receipts than the oil. Finally, the park is home to the Waorini, an estimated 20,000 indigenous peoples who have a livelihood and culture that cannot be priced.

What ups the ante is climate change.

Guardian