Climate change: Ahead of the curve and at the back of the line

Euromoney’s meeting is in Puriscal, the eponymous town of the fourth-largest canton in the province of San José, close to a large, crumbling cathedral that is being reclaimed by nature. 

The building is still an imposing sight, but trees now take advantage by growing in (and widening) the cracks in the walls that were opened by a series of earthquakes in the 1990s. In 2009, a health notice ordered its demolition, but there has been no movement to either its destruction or rehabilitation in the following years.

From the nearby headquarters of Cooperpuriscal, a farming cooperative that was established by the ministry of environment and energy (Minae) and is financed by a mix of public funds and local private businesses, we head further up the mountain. 

We are driving to a finca – a smallholding, which in this case has 26 cows. The finca’s residential building sits at the side of the road and does not hint at the modern construction to the back: brushed steel gates and fences contain healthy-looking cows that mill around on a perfectly-level concrete floor that drains down to a sluice. 

The representative from Cooperpuriscal explains the overall structure that has recently been installed and (after another visit to a neighbouring finca) is clearly created to a template. All of the cows’ waste is captured in solid form in a structured production chain that produces organic, rich compost for use on the farm and for sale. The slurry gets washed into a polythene-covered tank that generates enough gas for the farmer to power the whole site. 

The retained compost boosts the yield on the farm’s crops, which now supplement the cows’ grazing on pastures, which increases and stabilizes milk production. Meanwhile, the milking process uses modern equipment and feeds directly into a hygienic, on-site tank that is emptied every two days by the cooperative’s dairy lorry.

The result is vastly better dairy production, lower carbon emissions and self-sufficiency. The cooperative also helps the network of fincas (25 and counting) sell by creating a single brand, dealing with the stores and turning the milk into other dairy products in its modern pasteurizing plant. The plant has been constructed using cutting-edge technology on the outskirts of the town and now processes around 10,000 litres of milk every day.

The owner of the first finca, Sevvilo Jimenez Montero, says the project has increased the profitability of his farm and made it more efficient to run. He had to put up about one-third of the cost of the development (mixed with cash and subsidized access to five-year credit from Banco Nacional), with the other two-thirds coming from Minae and the cooperative. As Montero shows Euromoney around the small site, he seems as pleased with the improvements as he is bemused by our interest – and our clearly unsuitable footwear.

The finca project is part-adaptation (the more efficient processes boost yield and water capture and storage lessens the fincas’ exposure to climate variability) and part prevention (carbon-releasing gases are captured and used rather than emitted). But elsewhere on the same mountain slopes the concept of climate change is less theoretical: the slow ascent of the best-yielding coffee plants to higher altitudes, as well as the changing nature of the diseases that can blight coffee production, can be clearly traced over the last 25 years. 

Back in the capital San José, Edgar Gutiérrez, the minister responsible for Minae, says he dislikes the terms ‘climate change adaption’ and ‘climate change prevention’, saying these are both different sides to the same coin of ‘climate action’, which he says is a more useful way to view Costa Rica’s approach to climate change. 

And it is a long-standing history, pre-dating the famous moment in 2005 when then-president Oscar Arias committed his country to becoming carbon neutral by 2021. The country is still committed to that target, although changes to the way carbon capture is now calculated make adherence within the next four years uncertain (the country’s forests are predominantly older trees that use less carbon than younger ones). 

Gutiérrez says his country’s journey to climate change leader followed its time as an environmental “predator”, when aggressive farming expansion saw the country’s forested area fall to 27% in the 1980s. But shocks to this economic model – a meat import embargo from McDonalds and a slump in coffee prices – led politicians to seek a more diversified approach to developing the economy.  

Gutiérrez says the government is also now focused on the target of ensuring that carbon emissions peak by 2030 and it aims to have negative carbon emissions by 2050. Aware of the vulnerability of the dollar-earning tourist industry, the government introduced regulations aimed at stopping and ultimately reversing deforestation. Now somewhere between 52% and 54% of the land is covered in forest and the aim is to peak around 60% in the coming decade.

Gutiérrez also says the long-term shift was underpinned by the country’s investment in education, which was boosted by its decision in 1948 to disband its armed forces. Since then, an environmentally friendly outlook became an ingrained part of the country’s political culture. Protecting the environment and wide-reaching, proactive regulation is now an accepted part of life in Costa Rica. 

The new aggressive carbon-based targets have meant the government is now working on ways to tackle its biggest challenge – transportation. The private car fleet has doubled in the last 20 years and the transport sector is now responsible for 44% of net greenhouse gasses in the country and 81% of all fossil fuel consumption. New tax incentives are being drafted to encourage the use of electric cars. But as the country is also facing some big financial challenges, can it continue to add to its regulatory burden and finance new carbon-cutting subsidies?

In July this year, a local newspaper, the Costa Rica Star, ran a story on the comments made about the country’s fiscal situation by the OECD’s director of economics. Alvaro Santos Pereira, Portugal’s former economy and employment minister, used strikingly non-diplomatic language as he summarized the OECD’s report about Costa Rica’s economic situation. 

“Costa Rica is playing with fire,” he said. “Without reforms, the country’s fiscal situation could become a threat… it is urgent to stabilize the public accounts. Costa Rica has much to lose if the reforms that are currently in progress are not approved. Weak fiscal performance can hurt foreign direct investment inflows. It has been shown that FDI inflows are highly sensitive to internal conditions. Therefore, further deterioration of Costa Rica’s fiscal situation could undermine its comparative advantage vis-à-vis other emerging countries in attracting and even maintaining FDI, potentially weakening its successful growth model.”

In August, president Luis Guillermo Solis announced measures to limit government spending and issue debt in the international capital markets to limit domestic liquidity constraints, but the impact will be marginal. If the international sale occurs, it will be the first from Costa Rica since 2015. 

But despite the apparent inability of the political class to find a consensus on the country’s financial problems, there appears to be little threat of a spill-over into its aggressive climate commitment.

“The political commitment to our [climate change] policies is not going to go away because of our fiscal problems,” says Costa Rica’s minister of foreign affairs Manuel Antonio González Sanz. “We have had difficult situations in the past.”

And yet González Sanz mixes in subtle warnings with reassurance regarding the durability of the country’s climate-related goals. 

“We have to recognize that we have, in the past, received assistance from other countries,” he says. “And that’s one aspect to this challenge. We are now considered a middle-income country, and the international community needs to change the paradigm otherwise countries that have moved forward in such a clear way, like we have, are going to be going backwards very soon, because from the financial point of view the fiscal deficit we have is not sustainable.”

González Sanz employs an analogy to underline his country’s precarious state in regards to fighting climate change. 

“The way I see it is the river is ahead of us and we want to get to the other side. There are some countries beginning to set off to cross the river and there are some, like Costa Rica, that are in the middle of the river. We are now in the turbulent waters and the risk of moving further forward is very high. We need somebody to pull us to the other side. It’s not that we are just putting our hands out for grants – we want to work with everyone. But what we don’t want is to be excluded because of our relative success.”

A joint study by the Guatemala-based Central American Institute for Fiscal Studies and the Dutch development organization, Humanist Institute for Development Cooperation, found that between 2013 and 2016 Central America received just 0.7% of global climate finance. Of that total Honduras received the largest proportion, $70.2 million dollars (nearly 33%), while Costa Rica received $35.5 million (17%), Nicaragua $32.2 million (15%), Guatemala $13.2 million (10%), El Salvador $32.7 million (16%) and Panama $20.6 million (6%).

The region’s relatively low level of support belies its low per capita income levels and the vulnerability of the region to climate events. 

“Central America is one of the most vulnerable regions in the world. That has to be recognized – we are a very narrow strip of land between two masses of water. On one side is the Pacific Ocean and the other is the Caribbean and the Atlantic. Those produce a lot of potential for disasters,” says Gutiérrez. He says that last November the effects on the country of Hurricane Otto cost $183 million – equal to 0.35% of annual GDP.

“These extreme climate events will become more frequent with climate change,” says Gutiérrez, while the Intergovernmental Panel on Climate Change estimates the cost to Costa Rica could be about 0.5% of GDP a year within a decade.

“We have to test the commitment of the developed countries in particular to put these climate change funds in place,” says González Sanz. “The $100 billion [agreed by the United Nations’ Climate Change Conference in Paris last year] is just a starting point. That’s not going to be enough to solve this issue. There are going to be more than 150 countries trying to reach the same cake, so it’s definitely not enough.”

As well as with the scale, there is also a problem with the speed and cost of multilateral funds that are being created to finance climate change adaption and prevention. 

“Even if these funds materialize, we have to expedite the process of accessing these funds,” he says. “It is very troublesome and very slow. The criteria are not very clear, and that is a discouragement because the country wanting to access those funds needs to invest a lot in terms of paperwork and experts and travelling. And then not to see the results as fast as is needed is very discouraging – because this isn’t a problem that is going to happen in 50 years. It is a reality now. So if you are going to put funds in place, countries need to be able to access them as soon as possible.”

He says he hopes that the Paris Agreement ‘rule book’ will be finished by 2018 and that “we can then move on to the practical”. 

In the past, Costa Rica has worked extensively in this area with bilateral projects – with notable donor countries (‘partners’ is now the preferred term) being Germany and Spain. A sprinkling of bilateral initiatives remains, and González Sanz points to the visit of German environment minister Barbara Hendricks in July, when a $15 million donation was announced. 

“$15 million isn’t going to solve our problems, but it’s a very important message that Germany is sending in terms of commitment to our goals and the world not forgetting about us, because at the moment most of the aid goes to Africa.”

González Sanz also says that while most activity is now at the global level, there is an important role for other international organizations such as the Vulnerable Twenty Group (V20): “It is important to use organizations such as this to bring together developing countries who are working together. The more voices that we have, the stronger we are, the louder our message is to the developed countries.”

However, while Costa Rica will strive to access international funds, its environmental mission will be won or lost in the domestic market. González Sanz says that the country needs to continue to work towards a lasting balance between its commitments and competitiveness. 

“The private sector complains that the electricity in Costa Rica is too expensive, but what is the real long-term cost of producing energy with coal?” he says. “I understand the position expressed by companies; they are focused more on profits and we need to be competitive and we have some very expensive standards. So we need to find that balance and that should be reached by being more efficient in terms of production process. You can compensate for our costs by providing first-world services and providing security.”

Standard & Poor’s analyst Cesar Barceinas says Costa Rica’s ability to diversify its economy has been one of its strongest features in recent years. The tourism industry, accounting for 12.6% of GDP in 2016, has moved up the value chain, and the country now targets “wellness” vacations. The country’s average stay, at 12 days, is one of the longest in the world and Gutiérrez says 80% of the dollars earned in the sector go to small businesses.

“Natural reserves constitute 20% of its territory, which has made Costa Rica one of the main destinations for eco-tourism, in some ways compensating for the negative impact that its zero carbon dioxide emissions plan to 2021 could have,” says Barceinas. “This plan started in 2015 and, overall, has not affected its growth rate, which indeed increased to 4.5% in 2016 versus an average of 3.1% between 2013 and 2015.”

The country also has a clear intention to monetize its climate change credentials and is marketing its coffee to consumers, primarily in Europe, basing its pitch on the country’s lofty environmental goals. The approval of a Nationally Appropriate Mitigation Action is the first such agricultural accreditation in the world. This, it hopes, will mitigate competition on price from other producers such as Vietnam. 

Other initiatives aim to use Costa Rica’s carbon-related credentials to boost employment and further diversify the economy. The government is launching its ‘Green Hub’ project to attract new revenue streams to the country.

“We cannot give money to other countries, but we have a lot of human talent – our technicians and our professionals are very good,” says González Sanz. 

The aim is to encourage new carbon-friendly technologies and businesses to set-up in a country that is at the forefront of reducing carbon. This would validate Costa Rica’s strict environmental regulation and allow others to benefit from the expertise and knowledge being built up in the country. 

Costa Rica generates almost all of its power with renewables and the marketing collateral being pitched to public and private organizations around the world describes the country as “a unique set of circumstances which make it the ideal country-scale laboratory for decarbonization.”

An example of that innovation is an attempt by the government to set up a carbon-trading scheme to bring in revenues from international companies wishing to offset their carbon emissions by buying into Costa Rica’s decarbonization. 

In 2013, the country announced plans to sell 16 million tonnes of carbon credits over the next eight years – a private-sector solution to fund its 2021 carbon target. The country sold 1.2 million tonnes of off-setting to the World Bank as part of the country’s Forest Financing Fund that priced carbon at $5 a tonne.

“It was a very good idea, but this market is very small and it never got the international recognition we need,” says González Sanz. “We are not going to change the whole structure of the world economy and introduce carbon trading by just putting a few countries together. But we continue to emphasize this concept – at the time we didn’t have the Paris Agreement and we didn’t have much international momentum. Maybe it was an idea that was too advanced, too progressive and the time wasn’t right. But we can always pick it up and relaunch it.”

This final comment strikes at the heart of Costa Rica’s approach to climate change finance. It is prepared to develop and innovate national plans, but these will only be truly compelling if they are supported by the international community. Costa Rica’s tactics may change – and it may have a severe test in the coming years thanks to its inaction on fiscal and debt policy – but the commitment does not appear to be wavering. 

That goal will ultimately be achieved through a mixture of projects that target the adaption and prevention of climate change throughout the Costa Rican economy, from the large-scale carbon trading projects to those targeting subsistence farming. And while the national carbon goals are being met, many of these projects will also be enhancing the lives of individuals and communities in mountain ranges that are a long way from Paris.