A recent study has analyzed how a donor can motivate a resource owner to conserve a natural resource at the lowest cost. In conclusion, conservation by lending is the best and least expensive option for a donor who is willing to pay for nature conservation.
The study was conducted by Bård Harstad, a professor of economics at Stanford University together with professor Kjetil Storesletten, University of Minnesota. Bård Harstad was the latest speaker at EfD Central America Seminars, in which he shared the main results of his research work titled Conservation by Lending.
Bård Harstad explained that "with conservation by lending we refer to a loan that is given to a government, and the loan contract specifies that the loan must be repaid with interest rates if the forest cover falls. The interest rates should be so high that the government prefers to conserve, and with conservation, the loan will never have to be repaid."
Who can benefit?
Donors as well as forest-managing governments can be beneficiaries of the adoption of this type of instrument.
"We show that conservation by lending leads to the most conservation per dollar. It is more effective and less expensive than traditional REDD+ and PES", said Harstad.
"We also show that both the donor and the recipient government can benefit from conservation by lending relative to the traditional REDD+ and PES schemes."
Can secure future conservation
The implementation of this instrument can lead to the conservation of forests, and also secure conservation in the case of a new government.
"Conservation by lending" will allow today's government to "tie the hands" of future governments that might be less conservation-friendly because the loan (and the accumulated interest) will make it expensive for a future government to permit deforestation, and the repayment can't be done before, only if a situation of deforestation occurs".
Harstad and Storesletten also considered the possibility of default.
Any borrower can be tempted to default on debt, and if borrowers fail to pay their debts, it limits the size of the loans that can be given. If the government's cost of default is large, then the loan that can be given is so small that it should be combined with grants (or with traditional PES or REDD+) in return for conservation.
"In addition, the instrument can also be designed so that it is robust to shocks and uncertainty, such as forest fires, recessions, or unintentional defaults," said Bård Harstad.
To know more about his research, we invite you to read the preliminary version which is currently under revision: Conservation by Lending
Written by Marianela Argüello L.