Webinar Summary: Financing Tropical Conservation – Debt-for-Nature Proposals for Ecuador and China

By Rebecca Ray

As part of the Spring 2022 Global China Research Colloquium, Carlos Larrea, Professor of Social Science at the Universidad Andina Simón Bolivar in Ecuador, shared his vision for a debt-for-nature swap between Ecuador and China, wherein portions of debt would be cancelled on the condition of allocating saved funds for conservation investments.

After a half-century of economic volatility and environmental damage from petroleum dependency, Ecuador is faced with a looming debt crisis and the pressing need to diversify its economic base in a more sustainable direction.

Ecuador’s President Guillermo Lasso recently visited China, and the two countries agreed to begin formal debt renegotiations. On the occasion of this visit, Dr. Larrea, with co-authors Jesús Ramos and Andrés Arauz, have developed a proposal for a debt-for-nature swap between Ecuador and China.

Larrea, a technical advisor to the Yasuní Initiative, a groundbreaking proposal to conserve Ecuador’s tropical forest by halting oil production in exchange for a portion of the expected economic losses in financial support from high-income countries, began his presentation by explaining the uniquely rich biodiversity of Ecuador’s Amazon rainforest. In particular, the Yasuní national park hosts overlapping biodiversity hotspots for mammals, birds, amphibians and plants, even in comparison with the rest of the Amazon basin, making Ecuador among the most biodiverse countries on Earth.

Maps of ongoing deforestation show that over the last half century, one of the top drivers of Ecuadorian deforestation has been oil production and the growth of the oil frontier into previously dense forests. This tendency has worsened in the last decade, and primary forest loss is rising quickly as a result.

Turning to the country’s economic context, Larrea explained that the last 30 years of Ecuadorian economic growth can be divided into three chapters. First, from the 1980s to the 2000s, Ecuador suffered economic stagnation associated with structural adjustment reforms and fiscal austerity. The subsequent decade, characterized by sharply rising oil prices, saw remarkable economic growth. But after oil prices peaked in 2014, the country has suffered an economic crisis and sharply falling incomes. The International Monetary Fund (IMF) expects the economy to begin growing again over the next few years, but even so, per-capita income is expected to be about 10 percent lower in 2026 than peak levels in 2014.

Throughout the commodity boom and the subsequent crisis, Ecuador’s foreign debt grew precipitously to support an ambitious infrastructure expansion agenda. A partial debt cancellation in 2008 temporarily lowered debt levels, but since then they have skyrocketed again. In the years immediately following the cancellation, Ecuador had few options for financing, and for the rest of the commodity boom, China became the country’s most important creditor. Currently, Ecuador’s debt with China amounts to roughly $5 billion.

Furthermore, the country’s oil reserves are limited. With declining production and increasing imports of refined petroleum products like gasoline, Ecuador is expected to become a net petroleum importer within the next seven years. Given this seemingly endless cycle of commodity booms and busts, and the looming end of Ecuador’s oil era, it is paramount for Ecuador to develop alternatives to petroleum dependency.

For these reasons, Larrea and his coauthors developed two concrete debt-for-nature swap proposals to address Ecuador’s Chinese debt burden and the threats to its rich tropical biodiversity.

The first proposal would make $421 million available for Ecuador to commit to reducing deforestation by 47 percent over the next decade, through a combination of satellite monitoring, incentives for sustainable economic development and enforcement of conservation law. The authors estimate 200,000 hectares of forest would be saved and 117 million tons of carbon dioxide emissions avoided.

An additional, more modest measure entails forgiveness of $19.2 million in debt to allow for targeted biodiversity conservation through and around the Ikiam Amazon University, which was established with Chinese support. The funds could be used to expand biodiversity research through Ikiam and bolster conservation efforts at the nearby Colonso Chalupas reserve.

Taken together, the proposals envision cancelling $440 million in Ecuador’s debt to China, or roughly one-tenth of the current $5 billion balance. Both proposals can help Ecuador begin to pivot towards a sustainable economy. They draw on the highly successful history of the Amazon Fund, an agreement between Brazil, Norway and Germany, wherein from 2005 to 2012, Brazil was able to reduce its deforestation by 84 percent with $1.2 billion in external support. The project is the most significant success in conservation among Amazon basin countries, although this progress has recently been reversed under current Brazilian President Jair Bolsonaro.

Key to the Amazon Fund’s success was its integrated approach to conservation. It combined advanced forest monitoring, enforcement of anti-deforestation law, expansions of protected areas and Indigenous territories, incentives for the development of sustainable uses of forest resources and external support. This model could work very well in Ecuador or across Amazon-basin countries.

These proposals are timely, coinciding with a widespread push by Chinese policymakers to prioritize environmental sustainability in international finance and investment. In fact, China established the Kunming Biodiversity Fund to pursue exactly this type of project. Furthermore, China has already shown itself willing to renegotiate Ecuador’s debt, with the payment suspension negotiated in 2020. By reducing the outstanding principal, a debt swap could guarantee future repayments, while prioritizing shared conservation goals.

Ultimately, such a deal would need to be contextualized within a broader conservation strategy across the Amazon basin. The Amazon is the largest remaining rainforest in the world, providing climate regulation and carbon sequestration for the whole planet. However, all eight Amazon countries have seen rising levels of deforestation. Without significant effort to halt this trend, the region may reach a tipping point in which degraded forest supports less rain and the area is converted to drier, less biodiverse savannah. Thus, eliminating Amazon deforestation must be a global priority, larger than any one debt renegotiation.

A thoughtful discussion session followed Dr. Larrea’s presentation, with questions ranging from broad visions to concrete implementation steps. Regarding potential social costs of halting deforestation, Larrea emphasized the need to foster better opportunities for sustainable activities, such as ecotourism and agroforestry. Small scale household land clearing by newly arrived migrants is a significant cause of deforestation, so any successful strategy will need to work with local communities to cultivate a post-extractivist development strategy.

Regarding projections for Ecuador’s increasing demand for imported petroleum fuels, Larrea explained that his proposal is part of a broader push to support a sustainable, low-carbon economy. Ecuador has very strong solar energy capacity, as well as high capacity for small dams, wind and geothermal. Ecuador is in an ideal position for replacing its oil-based energy system and supporting transitions away from fossil fuel dependence in its trading partners by also reducing its fossil fuel imports.

Clarifying his comments on biodiversity services, Larrea explained that his proposal does not rely on offsets, which may simply shift biodiversity losses to other areas. Instead, it builds on the vision of the Yasuní Initiative to consider biodiversity as a resource to protect and nurture, rather than simply as an opportunity cost of lost potential extraction revenue.

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