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Economic and financial instruments for sustainable forestry in Colombia

D. Gaviria

Diana Gaviria, former Chief of he Environmental Economics Division, Colombian National Planning Office, is now with the Ministry of the Environment, Bogotá, Colombia.

A short analysis of a dynamic situation, based on a paper prepared for the Workshop on Financial Mechanisms and Sources of Finance for Sustainable Forestry, held in Pretoria, South Africa, from 4 to 7 June 1996.

A view of natural tropical forest In Colombia

Colombia's experience with economic and financial instruments for sustainable development dates back to 1959, when the country's first environmental and development authorities were created. The most significant of these instruments are: water and forest user charges, air and water effluent charges, transfers from the electric power sector for watershed conservation, and royalty transfers to regional environmental authorities (for a more detailed analysis of these instruments, see Gaviria, 1996).

Nonetheless, before the approval of Law 99 of 1993, which created the Ministry of the Environment and the National System for the Environment, most of these instruments were just "compensatory financial instruments". They sought compensation for environmental damage associated with the use of different natural resources and the discharge of effluent and emissions, but were not designed to and did not modify the behavior of the deteriorating or polluting agents. A common denominator of all of these instruments is that they did not operate as part of an integral strategy to attain specific environmental goals, nor did they have a clearly defined role in the achievement of environmental objectives.

Law 99 modifies these instruments by extending their application throughout the country and explicitly incorporating an economic rationale into their design. This article briefly describes the financial instruments which existed before Law 99 and the new challenges Colombia faces in this area.

Financial instruments for sustainable forestry before 1993

In 1974, the Colombian Natural Resource Code defined several financial instruments for sustainable forestry, the most important of which are watershed charges and forest user charges, fees and levies. In addition, the decrees creating several regional environmental authorities created transfers from the electric power sector for watershed protection. The country's fiscal reform laws created tax breaks for reforestation several years ago. Most of these instruments were primarily used to generate resources for the environmental sector and were understood primarily in that context.

The Natural Resource Code by which water user charges were defined did not specify a method for their calculation. This led to the definition of suboptimal prices for water and a large variation in the value of charges set by the different regional environmental authorities. In all cases, these charges were calculated on the basis of the water allocated or licensed by the authority to the user, although different price scales were used depending on whether the water was given a domestic, industrial or energy use. In most cases, the price of each litre of water was fixed independently of the amount of water consumed and did not take into account the supply and demand of the resource in the region. In doing so, the consumers did not have any incentive for using this resource more efficiently. The value of the fee did not internalize the economic and social costs of water use. Thus, prices were inappropriately low; for example, the Cauca Valley Authority charged less than 0.5 pesos/m³ and the Tolima Authority charged its users less than 0.1 pesos/m³.

Additionally, before the approval of Law 99, these fees were only charged to people or organizations which profited from the use of water. The government and utility companies were exempted from these charges. The government's decisions and projects did not contemplate environmental costs associated with water supply and use.

As in the case of water, there has also been a relatively long tradition of forest charges and fees in Colombia. Like other instruments, these forest charges had a fundamental drawback: their role as part of an integral forest policy was unclear. This lack of clarity led to their erratic and inconsistent application in Colombia's different regions. While the faulty design and misuse of these forest charges has contributed to the deterioration of the resource, it is important to clarify that there are many more important causes for deforestation in Colombia. Among these are inequalities in the land tenure system, colonization pressures and the forest concession system.

In Colombia, forest use charges are in turn made up of several types of fees. The first type corresponds to a "national participation charge", a fee equivalent to up to 30 percent of the price of the wood sold at the nearest market to the extraction site. According to this system, higher quality or rare woods, because they are more expensive, are subject to a higher fee. The second type of charge is destined for specific uses. The first of these is the resource renovation fee, the second is for forest research and the third is for technical administration services. These three charges have a fixed value, regardless of the type of wood harvested. This has created incentives for the harvesting of finer and rare woods in as much as the charges represent a relatively smaller percentage of the market price of "finer" woods. Under these conditions, the charges and fees have promoted the excessive exploitation of finer and rare types of wood and the destruction and abandonment of more "ordinary" wood. In addition, the renovation and technical assistance fees have exempted users from their responsibilities in renewing and sustainably harvesting the resource.

Another deficiency of the charges is that they are levied according to the volume of marketed wood and not according to the volume of wood allocated to the user or actually harvested. As a result, there has been little incentive for forest industry to optimize the production process; since the user is only charged for the wood taken to market, it does not matter how much wood is wasted in the process. Additionally, the wood can be removed from the forest with little consequence, since the important factor is what is declared at market. Lower charges in private forests have also promoted illegal harvesting of public forests through the use of forest harvesting permits for private property.

Colombia's Low 99 created the Ministry of the Environment In 1993

As with water charges, the Natural Resource Code did not specify the method for defining rates of charges. The autonomy of the different authorities in setting rates has increased the inconsistency of the user charges in the different regions of the country. This has created incentives for the overexploitation of forests in certain regions where the charges were lower and has also generated a situation where loggers use cheaper permits, obtained in one part of the country, to justify the exploitation and transport of wood in other pans of the country.

Additionally, these low forest charges have protected the forest industry in Colombia for many years. The low value of the charges has also created disincentives for the forest industry to process wood more efficiently. Deficient monitoring and control systems have also permitted large-scale evasion of charges. Finally, since some of the authorities depend on forest charges to subsist financially, the system has created perverse incentives for authorities to grant permits and levy harvesting charges in order to function.

Colombia has had modest experience with tax breaks for reforestation. Investments in reforestation are deductible on an annual basin from income and income taxes. These tax breaks, while not as successful as in other countries such as Chile, have promoted a relatively healthy forest industry in the country.

In addition, Law 56 of 1981 created an interesting situation which has contributed to reforestation efforts and watershed management in certain areas. Law 56 required electric power companies either to transfer 2 percent of their gross sales to a specific environmental authority or to invest the equivalent in watershed protection agencies. Several studies point to an effective use of these resources.

Post -1993 financial and economic instruments for sustainable forestry

Law 99 (1993) modifies, complements and develops many of the financial instruments and sources of financing for sustainable forests mentioned above. In the case of economic instruments, the difference between the newly created instruments and those created by the Natural Resource Code is that there is a clear intention of making them true economic instruments for the sustainable use of resources. In addition, Law 99 broadens the scope and areas of application of these instruments. Other important instruments are created, such as an obligation to channel 1 percent of all investment in infrastructure that uses water towards the protection and control of the respective watershed. Other innovative aspects of the Law are its definition of mechanisms for developing more systematic charges, the extension of benefits to all regional environmental authorities and the creation of an obligation for all users, including the government, to pay user and effluent charges. The Law also clearly introduces the concepts of depreciation of natural resources and regional and social equity and allows for greater regional autonomy in their design. This is particularly the case for water user and effluent charges.

The Ministry of the Environment has not yet defined these new water user charges. Nonetheless, past experience highlights the need to use water charges as a true economic instrument that internalizes social and economic costs for the depreciation of the resource. It is also important to design these instruments as part of an integral water policy, and ensure that their design and application contribute to maintaining the supply of the resource and generate incentives for its rational use. To obtain this, the design of water user charges must contemplate water supply and demand at a regional and local level, mechanisms to charge for the volume of water consumed and not only for the amount of water licensed and increases in the marginal cost of water as consumption increases. The proceeds from these water user charges will be used by the regional environmental authorities to conserve and reforest the watersheds. One promising possibility is that part of these resources might be used as an incentive for farmers and landowners to contribute to the conservation of water sources.

Colombia's Council of Ministers recently approved the country's first official Forest Policy. This document defines the basis for the development of new forest charges as one of the tools for an effective forest policy. These charges will be complementary to other measures such as the definition of national quotas for forest harvesting, the development of monitoring and information systems, the promotion of participatory planning processes and the creation of a permit and concession system to ensure the sustainable development of Colombia's forests.

The charges should have a clear method of calculation and should not create incentive for the selective overexploitation of finer and rarer forest species. In order to correct suboptimal pricing, these charges should be internationally competitive, especially with regard to our neighbouring countries. Additionally, there should be no differences in the charges assessed on wood from public and private forests. The difference in charges between regional authorities should come only as a result of a regionally defined supply and demand, the capacity for forest regeneration and the ecological and social valuation of the forest at a local level. Finally, it is important to develop effective monitoring and policing systems to prevent evasion, promote reinvestment in actions that benefit the forest and promote the commitment of the user in the renovation of the resource.

Shortly after the introduction of Law 99, the Colombian Congress approved an incentive for reforestation, known as the Certificate for Forestry Incentive (CIF). This incentive subsidizes 50 percent of the cost of reforestation with exotic species and 75 percent of the cost of reforestation with native species. During the current Administration, the government's goal is to reforest 160000 ha with this subsidy. In 1995, the subsidy contributed to the reforestation of 2578 ha. The CIF has been directed primarily towards medium-sized owners - the average plot size to benefit in 1995 was 50 ha. In addition to the CIF, the government promotes reforestation through several subsidies financed with loans from the Inter-American Development Bank (IDB), the German Reconstruction Credit Institution (KfW) and the World Bank. Nonetheless, the different conditions of various incentives have created confusion among communities and users. In other cases, one subsidy has proved to be more attractive to beneficiaries, thus generating conflict over resources. This situation is in the process of being corrected.

In the country's recently approved fiscal reform law, the Administration approved a similar incentive for forest conservation. The incentive provides for compensation to landowners for the direct and indirect costs of conserving forest ecosystems which have not been significantly disturbed. The government, with the participation of non-governmental organizations (NGOs), is currently defining the incentive and has budgeted US$ 1 million for its promotion during fiscal year 1997. In this same fiscal reform, the environmental sector successfully eliminated some, but not all, of the disincentives for conservation and pollution control. The lesson from past incentives is that the Colombian Government must consult potential beneficiaries and develop related information and dissemination campaigns.

In addition to these economic instruments, Colombia has substantially increased the budget for the environmental sector. The More Water Programme, which provides for watershed protection and reforestation, and the More Forests Programme have been allocated US$ 98.6 million and US$ 25 million, respectively, for 19951998. The Strategic Ecosystems Programme will benefit from US$ 72.2 million. These figures include funds from two international loans from IDB and the World Bank, the latter being primarily directed towards policy reforms and research for the forest sector as well as for reforestation programmes. Further, the regional environmental authorities will generate resources for the environment to a value of US$ 1.24 billion during the same time period, of which US$ l50 million will be transferred from the electric power sector for reforestation and management of the country's watersheds. Colombia's National Environmental Fund (FONAM), Fund for the Amazon (FAMAZONIA), National Royalty Fund (rondo Nacional de Regalias) and an NGO trust fund (ECOFONDO) also have important resources for the forest sector. All of these efforts will undoubtedly contribute to the conservation of Colombia's forests in the next several years.

Appropriate forest use charges, to be developed under the new Official Forest Policy, will be en important tool in curbing forest degradation in Colombia


Gaviria, D. 1996. Los instrumentos económicos y financieros para la gestión ambiental en Colombia: uno mirada retrospectiva con lecciones para el futuro. Bogota, Colombia, National Planning Office.

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