04 January 2011

A Novel Plan or Green Extortion?

The FT today reports of a "novel plan" by Ecuador which has proposed to forgo drilling 846 million barrels of oil under the rainforests of Yasuni national park.  A decision not to drill requires payments of $3.6 billion over 10 years, which represents the Ecuador government's estimate of half revenue that it would raise if drilling were to occur.  Ecuador has not offered to forgo drilling for the other 2.7 billion barrels of oil it has in reserves. The plan does not fit under any existing international scheme, such as REDD, and has seen limited international support so far. 

At first glance, the numbers seem questionable to me -- $3.6 billion for 846 million barrels of oil works out to $4.25 per barrel.  At this price the world's entire reserves of about 1.2 trillion barrels could be bought for about $5 trillion, or considerably less than 1% of global GDP over 10 years.  The economics make no sense from the standpoint of achieving environmental objectives.  On the other hand, it seems like a good deal for Ecuador, which can tout its green credentials at the same time.  Perhaps this is why a country like Norway, which has already invested billions in forest preservation, has decided to look the other way.