Buying The Environment: Debt For Nature Swaps
The Problem
The greenhouse effect, once a subject of purely scientific inquiry, is rapidly emerging as an important public policy issue.The U.S Congress reportedly devoted mare time in 1987 To hearing on climate issues and sought international cooperation in limiting climate change and to work within the united nation to promote the early designation of an international year of global climate protection. The world meteorological organization and the United Nation Environment Program recently decided to form a joint panel to study the potential imputs of and responses to the climate change. And in a related area, 49 nations meeting in Montréal in September of 1988 approved an international protocol to limit production of chloroflurocarborns and chemicals that in addition to trapping heat in the atmosphere, destroy stratospheric Economic and social Commission for asia and pacific included in their summit communiqué an initiative to”promote broad cooperation in the increasingly important area of global climate and environmental change.”
A Cause For Concern
Why are the politicians so concerned about a problem that as far as the man on the street is concerned, hag yet to appear? The basic reason is that they have been convinced by scientists studying the problem that if we continue on our present course we may substantially alter the earth’s climate with major economic, social, political and environmental consequences. As the environment issues begin to impact energy and economic policies, concerns about efficiency and equity are bound to surface.These concerns may be centered on issues as to how much should be paid to protect the environment and who should pay. In the U.S this debate has been waging since the first clean air Act, when consumers in the Midwest faced much of the burden of the cleaning sulfur dioxide from power plant emissions.
Carbon dioxide and the greenhouse effect have raised concerns over the destruction of world’s rain forests. This is primarily due to positive effects the forests provide to the global ecosystems. The in habitants of the amazon jungle could well be the wholesalers of the future. This has been highlighted by attempts in the U.S to trade some emissions reduction for planting trees in latin America.
The concern generated in the industrialized world for the survival of the rain forests in the developing world, have led to conflicts regarding development assistance, and has begun to impact lending by major institutions. However all this being done in an ‘environment’ with little information and less understanding of the interactions of the global environment , and of the economic-environmental relationships. One of the major developments of late have been the debt-for nature swaps developed for some countries and proposed for others. These are attempts to ‘play’ to protect the environment.
Debt for Nature’ Swaps
The world wild life fund has been instrumental in promotion ‘debt-for-nature’ swaps. It has used private funds to buy Latin American debt at a discount, then receive credit in local currency from the host government, which it then donated to local conservation groups in the foreign country. The conservation groups would then purchase rain forest land and set aside as a preserve. This has been successful in a few small and limited cases. The world wild life fund entered into debt-for-nature agreements with Ecuador and costa Rica. In the former case, they agreed to purchase a foreign debt with a face value of $1 million for $0.3 million. These would be exchanged for local currency bonds at a premium.
In Spite of the growing interest in these swaps, many obstacles remain to expanding their role. Foremost is the fact that the large U.S money center banks, who have the greatest debt exposure, have little incentives to participated in these programs. If a bank donated $1 of debt, it is allowed a tax credit of 34 cents. But if the bank sells the debt at 50 cents of 17 cents. The total grain would be 67 cents, at environmentalists argue that there are many aspects of the swaps that need to be considered carefully if the program is to take place on a larger scale. One aspect is the question of how much debt should be cancelled to induce the country to adopt a sustainable forest management policy. The answer depends to a larger extent on how the government perceives the debt. If it feels that the debt is a insurmountable problem that can never be repaid anyway, the incentives of these swaps are small. Lacking in all this, is both an accounting framework for keeping track of environmental inputs and outputs (in a manner similar to economic accounting), and more importantly a way of measuring the value of the rain forests, All the discussions regarding debt-for-nature paying to protect the forests, or investing to slow destruction of the forests are going to require some financial justification.
