How Much Would the World Pay for Biodiversity? Nothing, Really

10 September 2013, 2003 EDT

Just a week ago, NPR’s Planet Money reported:

“The government of Ecuador has abandoned a plan that would have kept part of the Amazonian rainforest off limits to oil drilling. The initiative was an unusual one: Ecuador was promising to keep the oil in the ground, but it wanted to be paid for doing so.”

The deal was offered to the world by President Rafael Correa in 2007. Ecuador would leave oil under the Yasuni National Park, a biodiversity hotspot, in exchange for a payment of 3.6 billion US dollars. The country offered to save a global public good — biodiversity is not only cute, but also good for the global environment and a potential resource for biotechnology — in exchange for a payment to compensate the opportunity cost of not drilling the oil.

Why did the plan fail? The problem was that donors were not willing to pay. By the end of 2012, the fund set up for the payment had only 6.5 million dollar in it — less than 0.5 per cent of the total requested by Ecuador. This is not a particularly impressive achievement. There was so little money in the fund that Ecuador had no reason to expect a deal with the world.

From an international relations perspective, the problem is interesting. One possible explanation for the lack of a deal would be a commitment problem. Perhaps donors did not trust Ecuador’s commitment. Even if donors had a lot of faith in President Correa — this may or may not be true — it would be hard for him to tie his hands so that no future government of Ecuador would ever drill the oil. Even if the donors were willing to pay 3.6 billion US dollars for saving Yasuni for perpetuity, they would not do so if they worried about commitment.

The other explanation would be that donors simply were not interested. In today’s economic environment, money does not grow in trees, as Ecuador recently learned. Although 3.6 billion dollars is not a fantastic amount of money, it is enough that any government willing to contribute a large part of it would face tough questions at home in the current economic situation. So, Ecuador’s 2007 gamble may have failed because of the global economic turmoil of recent years.

Finally, I can also offer a self-serving explanation for this. In a recent paper, Patrick Bayer and I  analyze bargaining over global public goods between donor and recipient countries. In the model, a recipient offers the following deal to donors: “if you give me money, I will implement a project that generates global public goods, such as biodiversity conservation.” We show that if donors are organized multilaterally, recipients have incentives to gamble by making aggressive demands. Ecuador’s offer is expensive enough that it could have been a calculated gamble that failed because the Ecuadorian government failed to predict the financial crisis and the severe political constraints that prevent donor governments from being generous. That’s what we call “The Dark Side of Multilateralism.”

It’s important to remember that the three factors above could all be true at the same time, and that’s how I see the situation. On a more fundamental level, the current international system does not have the institutions needed to provide high levels of global public goods. This is not just an environmental problem. We don’t have the institutions needed to produce collective security, act effectively on global financial crises, liberalize trade to promote development, or mitigate climate change.