There are some policies that are obviously correct from both environmental and economic viewpoints, but which are nevertheless difficult to implement. The elimination of fossil fuel subsidies is such an example. This year, the Bolivian government expects to spend at least US$750 million on direct subsidies to diesel (62%), gasoline (27%) and Liquefied Petroleum Gas (LPG) (10%) use (1). Apart from dramatically reducing funds available for public investment, these subsidies also encourage contamination, congestion and deforestation (2), all of which mean substantially higher social costs than the direct costs of the subsidy itself. The beneficiaries of the subsidy are dominated by the agro-industry in Santa Cruz, which profits greatly from the combination of cheap diesel and cheap land. Thus, the subsidy is by no means pro-poor, and a lot of the benefits are even lost to neighboring countries, as their nationals rent cheap land and use subsidized fuel for growing crops in Bolivia. For example, more than 70% of the area dedicated to soy production over the last decade is in the hands of foreigners (3). The Bolivian government realizes all this and has tried, unsuccessfully, to eliminate the fuel subsidy.
A possible alternative to reducing fuel subsidies would be a tax on large scale deforestation. It would be similarly beneficial, especially if the revenues are used to promote sustainable productive activities in rural communities that are committed to living well in harmony with nature. According to simulations made using a simulation tool called CISS-Bolivia (4), a tax of $1000/ha on large-scale deforestation could raise more than 200 million dollars per year in revenues (5) and cause a reduction in deforestation of about 21% (equating to about 60,000 ha of forest saved annually or 20 million tons of reduced CO2 emissions per year). If those tax revenues are reinvested in sustainable rural communities under the condition that they do not deforest further, it could reduce deforestation by about 27% (reducing CO2 emissions by about 35 million tons per year) and increase the incomes of the poor in these rural communities by about 25%.
However, most of the benefits from reduced deforestation in Bolivia accrue to the rest of the world, mainly in the form of reduced CO2 emissions (which in turn would help reduce the risk of catastrophic global warming). In addition, reduced deforestation would tend to put upward pressure on food prices due to the reduction in supply of agricultural products, implying a possible adverse effect on the urban poor, which would have to be compensated for. Thus, it is reasonable to suggest that Bolivia be at least partially reimbursed for the costs of reducing deforestation.
If we complement the locally collected deforestation tax revenues with an international compensation of $10 per ton of reduced CO2 emissions, Bolivia would have a total of about $580 million in tax and compensation revenues per year to invest in sustainable rural development. Together these positive and negative incentives would cause a reduction in deforestation of 36%, a reduction in emissions of 40 million tons per year, an average increase in the income of all the poor in the country of about 21% and an increase of 33% for the poor benefitting directly from the reinvested revenues (see Figure 1).
Figure 1: Environmental and socio-economic effects of combinations of taxes and positive incentives.
Source: Results from CISS-Bolivia v. 2.1.
This last policy, combining positive and negative incentives and external financing, would be clearly beneficial for the country in terms of sustainable development and poverty reduction, and it would provide the financing necessary to put action behind the good intentions of the new “Ley Marco de la Madre Tierra y Desarrollo Integral para Vivir Bien” (6) .
However, it would imply a massive redistribution from the rich to the poor, so it is going to be met with considerable resistance from powerful people. Furthermore, it is not the only possible development strategy. Powerful factions within the government are planning to reduce poverty and create employment through infrastructure projects, land grants and expansion of the agricultural frontier—a strategy that would be highly incompatible with the policy outlined above.
Bolivia thus stands at a cross-roads and has to decide which route to choose. While the new Ley Marco de la Madre Tierra indicates the road to living well in harmony with nature, almost all the money, including the $750 million fuel subsidy mentioned at the beginning of the article, are going down the other road.
Although removing fossil fuel subsidies and implementing a tax on deforestation makes good economic sense for the government, it would require considerable political will and power to actually implement these policy changes. Currently, neither the will nor the power exists in Bolivia, but the prospect of a billion dollars of non-reimbursable external financing could potentially help create the necessary political will.
Failing to do so could amount to an economic, social and environmental disaster for Bolivia. Neighboring Brazil has smartly realized that they can earn billions of dollars in compensation for reduced deforestation within their own territory, while at the same time expanding soy bean cultivation in Bolivia where land is dirt cheap, diesel is heavily subsidized and taxes and regulations are non-existent. Thus, our neighbors are benefiting both from conservation and from agriculture, while Bolivia is footing the bill both financially and ecologically.
Do you think that the international cooperation should support the Bolivian efforts to implement a mechanism for reducing deforestation? Leave a reply below.
Lykke Andersen is the Director of the Center for Economic and Environmental Modeling and Analysis (CEEMA) at the Institute of Advanced Development Studies (INESAD), La Paz, Bolivia.
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(2) Bolivia has one of the highest per capita deforestation rates in the World, implying that its carbon emissions per capita are at the same high level as in the United States.
(3) Gandarillas, Marco (2011). La extranjerización del territorio en Bolivia. En Petropress. No 25. May-June.
(4) Andersen, L. E., Busch, J., Curran, E., Ledezma, J. C., J. Mayorga & P. Ruiz Junco (2012). Conservation Incentives Spread Sheet – Bolivia (CISS-Bolivia). Version 2.1, <http://www.conservation.org/osiris>, Downloaded 9 September 2012.
(5) Notice that this tax is not unreasonable considering the much larger subsidy the sector currently receives.
(6) This Framework Law for Mother Earth and Integral Development for Living Well was approved by Congress (Asamblea Legislativa Plurinacional) on the 31st of August 2012 and prescribes a new development paradigm for Bolivia aimed at living well in harmony with nature.