strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
 / Winter 2009 / Issue 57(originally published by Booz & Company)


The Thought Leader Interview: Gretchen Daily

The Costa Rican story goes back to the late 1980s, when this Central American country had the highest deforestation rate in the world. It was liquidating more than 4 percent of its most valuable capital asset each year. Costa Rica is a very small country — at the time it had about 3.2 million people — but some remarkable public leaders were elected, such as Óscar Arias and José María Figueres. In 1986, Arias appointed the country’s first minister of energy and environment, Alvaro Umaña; they shifted policies toward tax incentives for forest restoration and toward debt-for-nature swaps (in which a nongovernmental organization [NGO] arranges for a developing nation’s foreign debt to be reduced in exchange for environmental protection).

In 1997, Costa Rica established the first national payment system for ecosystem services. The government set up a central fund that was dispersed to participating landowners who agreed to protect or restore their tropical forests for a 15-year contract period. The fund now covers 10 percent of the land in the country, and the program is being modeled elsewhere.

S+B: Where did the money come from?
DAILY: A variety of sources. Some of it was private donations from people seeking to preserve rain forest. The national electric power utility [Instituto Costarricense de Electricidad] also invested. It needs forested slopes, especially in steep areas, to limit the rate of sedimentation growth behind hydroelectric dams. Hydropower accounts for 85 to 90 percent of Costa Rica’s energy production and consumption, and the nation also exports electricity.

The government put in place a 15 percent gasoline tax, used solely for this fund. It used loans from the U.K.’s Government Economic Service and the World Bank. And it invited companies with an interest in the country to pay in, if they felt they would gain from the availability of water and other resources. For example, some beer companies participated. So did some NGOs like World Wildlife Fund.

Only very low payments were offered to landowners — about $50 per hectare per year — and the fund’s sponsors expected a modest response that would give them time to work the kinks out of the system. But immediately they were vastly oversubscribed. They discovered a market for ecosystem protection that no one had been aware of. The recipients were largely private landholders who gave up the opportunity to grow coffee, sugar, pineapple, or rice, or to raise cattle, in favor of these conservation payments, because they saw that their land would be more valuable in the long run. In fact, the program is still oversubscribed, and they’re scrambling to build it up and make it more robust.

Around the same time, in 1997, Costa Rica also put in place the first national program of carbon tradable offsets. It is now one of two countries with the lowest rates of deforestation in the tropical world; the other is Bhutan. Many other countries are developing similar programs, especially in Latin America: Mexico, Brazil, Colombia, Ecuador, and El Salvador.

S+B: What about China?
DAILY: The impetus there was the massive flooding of the Yangtze River in 1998. It displaced or otherwise affected 250 million people and resulted in damages of $20 billion, particularly to major economic centers downstream. Thousands died. The Chinese Academy of Sciences and the insurance company Swiss Re investigated the cause. They discovered that flood risk was exacerbated by extensive deforestation in the upper reaches of the water basin.

So the Chinese government set up a suite of programs called eco-compensation, designed to convert vast areas of cropland back into forest and grassland. They also imposed a logging ban throughout Yunnan Province, in southwest China, which they’ve just renewed. Through this and similar programs, they have committed to spending the equivalent of $100 billion in eco-compensation.

Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.