Costa Rica’s path to Ecological Economics

How we gave Costa Rica’s forest value

Before becoming Costa Rica’s first Minister of Environment and Energy in 1986, our national parks and forest policy were part of the Ministry of Agriculture, where they were completely overshadowed by agricultural interests. As I took on my new role, I saw it as my responsibility to give nature a voice, and attempt to address environmental externalities. 

The first critical issue I faced was that standing trees had no economic value in Costa Rica. You could obtain a loan using land, a tractor, or a cow as collateral, but living trees were considered worthless. This system encouraged deforestation, resulting in a loss of about 1% of our forested areas annually.

Realising the urgency of reversing deforestation, we focused on giving value to standing trees for private landowners, on whose land most of the deforestation was taking place. This required restructuring forest incentives and significant investment to address the climate externality.

Costa Rica’s fiscal incentives for reforestation

From failure to success

In 1979, Costa Rica introduced a system of fiscal incentives for reforestation. Despite the programme’s great intentions, it was not a success. The programme primarily benefited corporations and wealthy individuals, not nature.

What happened was that landowners would cut the native forest on their land, sell the timber, and then apply for state subsidies for replanting. If granted, they would receive a tax incentive of $2,000 per acre for planting exotic species. It became clear that participants of the programme were in it for the tax deductions, not for (re)growing our forest.

While landowners grew their wealth, the forests and wildlife suffered, as did the state. Replanting forest takes a lot of time and is at least 10 times more expensive than protection.

Revamping Forestry Initiatives: A New Approach

Recognizing the program’s shortcomings, we revamped it in 1986 with a new Forestry Law. Under my tenure as Minister, we shifted focus to protection of existing forests (80%) rather than reforestation (20%). We started offering soft loans and grants for small landholders (1 to 5 hectares), aiming to scale up reforestation efforts quickly.

Leveraging existing cooperatives and agricultural organisations as intermediaries, we implemented a repayment plan with loans disbursed over a 5-year period. 50% of the loan would be provided in the first year to establish the plantation. The innovative aspect of this strategy was that successful growth and health of the trees by the end of the fifth year served as collateral, allowing for loan papers to be torn up. Remarkably, this approach resulted in a remarkable 97% repayment rate. 

Our approach succeeded! We were able to give economic value to the standing forests of Costa Rica, and catalysed rapid demand growth. Furthermore, it laid the groundwork for Costa Rica’s pioneering debt-for-nature swap mechanism, which further bolstered conservation efforts.