E242: Revamping debt for nature swaps could support resilient food systems

In today's discussion, we will explore the application of debt relief to large investments in environmental sustainability, which can also support local development, including more resilient food systems. This is particularly timely, given the juxtaposition of enormous debt burdens with increasing environmental commitments by developing countries. Debt for relief swaps, such as financial forgiveness for cash strapped countries if they invest those funds to support global environmental goods, have been around since the 1980s. However, they haven't achieved their full economic or environmental potential, says Duke University Economic and Environmental Policy Professor Alex Pfaff. Smart reforms to improve debt relief programs can allow nations to help themselves and fulfill commitments to preserve the planet. Pfaff and colleagues described needed reforms in a recent analysis in a policy forum for the journal Science, also summarized in Foreign Policy magazine. His co-authors are sustainability expert Elizabeth Losos and conservation professor Stuart Pimm from Duke University. They note that global society has now learned lessons, not only from past debt for nature swaps, but also decades of evaluation of climate change of environmental and development policies.

Interview Summary

I have to say, having read particularly the Science piece, it is clear and it's very straightforward and accessible. But the other thing, it's hopeful. And I think in this moment of climate concerns, it's great to know that there's some ways to possibly move forward. I'd love to hear some more about this. If you don't mind, would you just describe a debt for nature swap? I gave a little bit, but I'd love to hear your consideration of it.

What you said is right. And I'll just agree with you first that we're definitely in a time when doing the right things could help a lot. One of my motivations is a little bit of fear in there, which is, if we don't take the opportunity we look back later and regret it. Which is one of the reasons why we're out there trying to bother people to do what we think would be more effective.

So, coming to the definition. A debt for nature swap, as you said is like it sounds. It's an agreement to forgive debt that countries owe on one condition - that they invest part of that money in some form of investment in nature. It's often been conservation. That was often thought of in terms of species or biodiversity at the time. But nowadays that would include thinking about storing carbon because of climate concerns, and then linking to your use of the term resilience in agriculture - for sure this also could be thinking about a climate adaptation.

Can you give us some examples of countries that have done this? What does this look like on the ground?

Yes, and the history, as you say, is that it started in the 1980s. And we really want to tip our cap to Tom Lovejoy who invented this at a time when, again, as you laid out, but it, at that time, was also true. There was huge amounts of debt and huge concerns about conservation, and it was a pretty simple idea. That it is a potential source of money to invest where the countries can help themselves, as you said, by getting rid of really quite crippling debt - tremendous amounts of interest are being paid on those debts - but also be helping the globe by investing in nature. So countries recently done, for instance, Ecuador has done a very big one recently. Belize has done one that's quite well spoken of. Those are different sized countries, different sized problems, which, as you can imagine from your own work, the institutions matter a lot. But there's been a long string and a long history of willingness to try. And I guess the last thing is that willingness started to go down when, as you summarized, it wasn't really working for the debtors who weren't really getting that much relief in their point of view for a lot of time bargaining. And it wasn't really working perhaps for nature. It wasn't having necessarily the impacts that one might have hoped. So, I think the question now is can we reform them? Because we do still have a big debt problem and we have some big nature problems.

Thank you for sharing that. And it's really fascinating to know that this is not a new idea. It's been around since the 80s. And this hope that I mentioned earlier suggests that there can be ways to make this debt for nature swap work better. I would love to understand what you want readers to take away from the reforms that you all suggest in the article.

Yes, and the punch line at the high level is it makes sense. It hasn't worked as done to first order. Of course, some things have worked. But simple reforms based on things that we have learned over the last few decades could make them work a lot better. So that's the high level. To get a little more detail the four things we say in those articles are the following. You gotta raise the scale. It has to be consequential relative to the scale of debt. Otherwise, it's not worth it for those countries. I think, and we think, and I'll give you the third condition in a moment, but I think for those countries also you have to emphasize local choice and sovereignty. Because there's a real sense of, geez, why are these conservation NGOs coming in telling us what to do in our country? I think there's clear gains to be had from letting local actors decide how to achieve global goals.

Now, the next thing you say is why if they are choosing, well how are they going to be oriented towards achieving global goals? So that's our third condition. You actually have clear measures of outcomes, and you only give relief conditional on measured improvements. That's a huge difference. That really has been more of a process bargain in the past. You will allocate some money to protected areas. Okay, that's fine, but there's actually a very famous fund which allocated money to Brazil. People have shown that Brazil just pulled the money out and spent it on other things that they were spending and just replaced it with the external money. So, then funding [for nature conservation] didn't go up. Or you could say, draw many new protected area circles on a map. Okay, but drawing things on a map doesn't really necessarily get you anything at all. And even defending a place that wasn't going to disappear doesn't get you anything because it wasn't going to disappear. So, there are many stories that in evaluations like I do of environment and development policy, we’ve seen a lot of things that sound sensible but don't really do that much in the end. Great, fine, here's a nice combination. We're going to measure the outcomes. But then you can do whatever you want, right? You can do whatever you want. If for you, you want to expand energy access, but you want to invest in renewable energy, great. A different country wants to stop using agriculture in a particular area and move it to another area, right? Another country wants to intensify agriculture and raise productivity even while leaving space for forests, and the knowledge, the preferences and the right to choose that I think and we think are naturally left with the countries in question who 1) has more information, and 2) are probably the right source of priorities for what matters locally, and if they don't find it interesting. These deals aren't going to happen again. You might then say, why are we just doing what they want? Because you're only giving relief when you measure actual global goals. Once you do that, once you switch to measuring outcomes, you should let people choose what's sensible for them.

Last thing, once you're measuring, as I've mentioned, there's a bunch of different goals you could imagine, right? If I get two NGOs, they don't even have the same goals for species. Forget climate change, forget climate adaptation. There are all these things that people would like to be helpful with. So take, for instance, a project that might save old forests. That probably helps with water quality downstream. It probably provides habitat for species, it definitely stores carbon, and when blocking rainfall that comes torrentially with climate change, it probably helps resilience and washing out of soil for agriculture. What's our last point? When you're counting outcomes, add together all the good ones, because then a project like forest gets points for all four of those. And you do this stuff that's efficient on multiple fronts instead of going left hand, right hand in an uncoordinated fashion. So those are our four suggestions.

That's really helpful. And having spent time with international trade and issues on regulations, one of the things that I've learned is permitting or allowing sovereignty and allowing nations to make decisions, one is politically important, but on the sort of economic side of it, there is something critical about countries knowing their own costs and own, if you will, demands. And allowing them to make those determinations is critical for an efficient and actually politically feasible approach. Is that a fair assessment?

I agree completely. You know agriculture much better than I do. But that description to me fits perfectly. You can come in and say you've got all sorts of good ideas. And even things that are good ideas won't go across because you came in and said them in an annoying way. And then, as you said, [local] folks have better information on what their costs are, better information on local benefits, they could probably design a locally incentive compatible version of what you thought you knew was good. It might have been kind of good but with the local information and interest, it becomes better and then thus more likely to happen. And that's better for the globe as well. I completely agree.

This is great. You've mentioned agriculture a couple of times, and I'd like to hear a little bit more about how you think debt for nature swaps can affect the food and agricultural systems in a country. Especially given the agricultural practices have some significant impacts on the environment and or can be affected by the environment, and particularly climate change.

Completely. Yes, I think it's because of that. Exactly. So, if I had to think of why this environmental resource paper is a fit in agriculture, it's because of what you said. That agriculture bumps up against the environment, so to speak, makes use of nutrients in the soil, sometimes involves the clearing of the land, and bumps up against the public. As climate changes, it really changes the ability to do agriculture in terms of temperature, rainfall, all those things. So, I think just for instance, if we go across all the World Bank labeled low-income countries of the world, the priority on climate adaptation under rainfall shifts versus climate expansion into forests, which could be replaced by climate intensification through more fertilizing and more pesticide use, so that agriculture takes less room but has higher yield. Those priorities are going to vary massively. I think agriculture is a fantastic sector, and it's not been a surprise that you said the things you did to think about the value of measuring the global goal and allowing the local choice.

In some places over fertilization is a huge problem. Not only do you not get more productivity, but you waste money, and you ruin water supply. Some places, pesticide use is an issue and is drifting across and killing plants and other fields. Some places, it's not. And who's the expert on that? Probably the local agricultural extension agents, right? And the local ag agency. So, to me, agriculture is a fantastic, illustrative sector. Not the only one, but an important one. Where the kind of things you said about the value of local information and choice come through in making a big financial swap like this potentially work for everybody.

Thanks for this example. It is great to hear this piece that did have a clear environmental focus, recognize that there is a place for the food system to be a part of that conversation. So, thank you for sharing that. You know, the debt for nature swap is a useful financial tool to support environmental causes, as I just said. And as an environmental economist, how do you use a market-based approach to address environmental challenges? And what, if any, drawbacks do you see to this approach?

In a way this is a form of market-based approach. I agree with you. It's certainly about prices and incentives. And looking around the world, I'm not sure if this is why I'm an economist, but I certainly do think people respond to incentives and that's important. That said and you said drawback. First, I'll just go with alternative to start. Prices are not the only thing people respond to, right? Institutions matter a huge deal. Even the set of opportunities that are available tend to be constructed in ways that are not price or market driven. You know, prices are wonderful. If you have a hundred identical firms and you're trying to figure out who has the lowest marginal cost of reducing carbon emissions. Fab, let them figure it out. Market will do well. Maybe not as fabulous in thinking about the distribution of rights locally between indigenous groups, small farmers, and large multinational corporations, right? Maybe that's not really a market price thing. And we might even get around to values. There are times when people don't really want to operate in a price space. And they're going to have to deal with incentives. But think about preexisting values on conservation, and when those are achieving the same goals as a price would, you don't have to try to wander in with a new market. I think that's fair as well.

I think of incentives as one super important tool. Far from the only one and somewhat in the spirit of our discussion of local knowledge. The right tool blend is an important part of the story as well.

Alex, I have to say, you've ventured in some spaces I'm really happy to hear you talk about. This idea of incorporating values and recognizing that the local knowledge matters - this is not something that we, as economists in our modeling world alone can solve the problem. It is going to take talking to people and learning their needs and learning even the bits about their culture to say what works for them in this moment. So, thank you for sharing that.

You're welcome for that.

In your analysis, in the team's analysis, you all argue for key reforms for debt for nature swaps. What other approaches would you consider to address these large environmental concerns?

I think ‘other’ but also complimentary. I'm in the sense that these are very high-level transfers, right? Here's a bunch of money. Please do something right. And as I said earlier, if we tell them what to do, we don't have a great track record. So, now we're going to maybe measure, right? One of our suggestions is to measure the outcomes. How are they going to get to those outcomes, right? So, there's a whole bunch of tools on the environment and the development policy side, which are also part of the source of learning over the last three or four decades. There's been a real push in a lot of fields, not necessarily to only be like medicine and do randomized control trials, etc., but there is some of that. But also just collect some data on what happened. Please try to figure out if when you do a policy, it actually achieves something.

Besides values, my meta story these days is we have to allow that learning is a good thing. There's a lot of people who seem to not want to even want to ask whether what they did worked because somehow, it's embarrassing. And I feel like we have to move as a world to the humility of learning by doing. And that's just what everybody does. And that means when I did something, half of them worked and half of them didn't. It's a really good idea to learn as fast as you can which ones didn't. So that's a super general speech, not quite to what you asked, but it applies to every tool I've ever known.

So, regarding protected areas - do they always have impact? No. I have a lot of work on that. Can we start to, over 30 years point, to where they have impact? Yes. Could we have measured outcomes? We could have, but we didn't back then. So, could we still use traditional tools like use a protected area, but look at past studies of when they had impact and start to see that it makes sense when they did and when they didn't? Yes. Same thing for payments for ecosystem services and any number of other tools.

BIO

Alexander Pfaff is a Professor of Public Policy, Economics and the Environment at Duke University. He studies how economic development interacts with natural resources and the environment. His focus is designing environment and development policies to support choices by individuals and groups that protect nature, reduce damaging environmental exposures, and improve livelihoods.