Perverse Subsidies and Extractive Industries

(Image Source: National Geographic)

Internalizing Environmental Costs and Promoting Sustainable Development in Suriname and Guyana

Clinic: uOttawa-Queen's Joint Clinic, Spring 2017

Beneficiary: Conservation International

Executive Summary

Read and download the full report here.

Suriname and Guyana host some of the most pristine rainforests in the world and are rich in biodiversity. Both countries are covered to over 75 percent in rainforest, which is home to thousands of different species of flora and fauna. They are also rich in natural resources. Conservation International (“CI”) has formed partnerships with the governments in both Suriname and Guyana to provide guidance on the sustainable development of the extractive industries. The primary sectors concerned are logging, mining, and oil and gas.

Recognizing that the development of these sectors will potentially offer significant economic benefits to Suriname and Guyana, TradeLab’s memorandum makes recommendations with respect to legal frameworks and mechanisms that the governments of Suriname and Guyana can use to ensure the sustainable development of these sectors, and in particular, to protect the environment and biodiversity.

Our research first approaches the problem by conceptualizing the uninternalized costs that the extractive industries impose on their host countries as perverse, hidden subsidies. Perverse subsidies are costs borne by the government to remedy environmental damage associated with the development of the extractive industry. Because these costs are not internalized by the industry, the industry has no incentive to avoid environmentally destructive behaviour, which lends these subsidies their perverse character. The subsidies are hidden because they do not take the form of direct transfers of funds from the government to the industry. This memorandum thus seeks to identify where these costs arise and how the drafting of environmental regulation and concession agreements can internalize these costs so that they are not borne solely by the government.

Following a review of academic literature and industry guidelines, our research then identified five types of environmental impact: land costs, air and water quality costs, biodiversity costs, human costs, and climate change:

Costs to the land includes damage and changes to natural landscapes both in the short and long term brought on by infrastructure developments associated with extractive industries.
Costs to water and air quality includes chemical and pollutant damage to air and water quality that will impact local and regional biodiversity.
Costs to biodiversity are closely related to changes in the land, as well as air and water quality concerns. As a result of these elements, the biodiversity of plants and animals in the area may shrink.
Costs to human experience and living conditions includes changes to qualify of life that the individuals in the region will fact.
Climate change includes the global environmental impact that the extractive industry has. Underlying all of the above concerns is the reality that extractive industries are a major cause of carbon emissions and pollution. This exacerbates all of the above concerns on a global scale.

In order for Suriname and Guyana to be able to draft environmental legislation and negotiate appropriate concession agreements, it is important to be aware of specific environmental concerns common across all extractive sectors.

Further review of academic literature, existing concession agreements, and environmental legislation led us to identify ten best practices or “essential elements” in environmental legislation and investment agreements, which help to minimize government responsibility for the costs of preventing, mitigating and remediating environmental damage in these areas. The following essential elements, or best practices, serve to prevent environmental damage:

Environmental impact assessment: Requiring an environmental impact assessment be successfully obtained before the development project is approved.
Monitoring mechanism: Ensuring mechanisms are in place throughout the development project which can assess ongoing environmental damage.
Precautionary principle: Supporting actions being taken even when cause and effect relationships are not fully established scientifically.

The following essential elements serve to mitigate environmental damage:

Transparency and information sharing: Ensuring that all obligations and decisions in environmental assessment and monitoring are clearly defined and communicated;
Independent institutions and agencies: Requiring all decision-makers involved at each stage of an environmental administrative process must operate at arm’s length from the investor or political and personal interests;
Third-party stakeholder participation: Giving civil society and minority groups a chance to participate in decision-making on development projects impacting the environment;
Regulatory flexibility and autonomy: Ensuring governments preserve their right to enact environmental regulations according to their usual political process;
Incentives for corporate social responsibility: Encouraging any activity by extractive industries promoting or benefiting conservation.

Essential elements that address the remediation of environmental damage are as follows:

Polluter pays: Ensuring that polluters pay the full costs of repairing any environmental damage resulting from its activity, including any costs of mitigation, prevention and control in which it can play a part;
Compensation for victims of environmental damage: Guaranteeing that the investor will pay compensation for harm to persons, property and wildlife.

By including these elements in the regulatory frameworks and future concession agreements, the governments will have a starting point for negotiation where the costs of extractive industries are shifted back onto the private enterprise both in the regulation, and the agreement. We recommend that the governments of Guyana and Suriname take into account these best practices when they negotiate with foreign investors and include them in both regulatory and concession frameworks.

Finally, we have also recommended a dispute resolution scheme to be included in concession agreements to ensure compliance both with environmental regulations, as well as the terms of concession agreements. We recommend that the governments of Guyana and Suriname ensure that their concession agreements be enforceable against the investor, and that they include mechanisms to ensure that the investor will be able to pay damages in the case of a dispute. In particular, we recommend that Guyana and Suriname do not contract with shell companies, which have no assets to pay for damages.

We also recommend that the governments of Suriname and Guyana enact robust domestic legislation and regulations to provide enforcement options to prevent, mitigate or compensate environmental damage as required. A robust set of tools allows governments the flexibility to choose the right option for each situation. The governments should also ensure that contractual agreements they enter into do not contain stabilization clauses that remove their ability to enhance domestic legislation.

Read and download the full report here.

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