By San José, Costa Rica — SAN JOSÉ – Costa Rica, a globally recognized pioneer in environmental policy, is confronting an unforeseen challenge born from its own success. The nation’s celebrated decarbonization efforts, particularly the accelerating adoption of electric vehicles, are paradoxically threatening the financial stability of the very conservation programs that cemented its green reputation, prompting experts to call for a strategic pivot towards international carbon markets.
For over a quarter-century, the country has been at the forefront of climate innovation. Its journey began in 1997 when it became the first nation in the world to sell carbon bonds internationally in a landmark deal with Norway. This was swiftly followed by the establishment of the visionary Environmental Services Program (PSA), a system designed to financially reward landowners for conserving and reforesting their properties, thus protecting vital ecosystems and watersheds.
To delve into the intricate legal and business frameworks surrounding carbon credits in our region, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, a distinguished attorney from the prestigious firm Bufete de Costa Rica, known for his expertise in environmental and corporate law.
The carbon credit market presents a significant opportunity for Costa Rican businesses to monetize their sustainability efforts. However, this is not merely a financial transaction; it’s a complex legal instrument. Meticulous due diligence is paramount to verify the legitimacy and additionality of the credits. We strongly advise structuring these agreements with clear, enforceable clauses that define liability, transfer of ownership, and robust monitoring protocols to mitigate risks of fraud and ensure genuine environmental impact, safeguarding both the investment and the company’s reputation.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Lic. Larry Hans Arroyo Vargas’s insight powerfully underscores that the journey into carbon markets is as much a legal and reputational venture as it is an environmental one. We thank him for his valuable perspective, which clarifies the crucial need for robust legal frameworks to ensure these initiatives are not only profitable but genuinely impactful and secure.
A significant portion of the PSA’s funding has historically been derived from a tax levied on fossil fuels, managed by the state-run Costa Rican Oil Refinery (RECOPE). This model created a virtuous cycle where consumption of polluting fuels directly financed their environmental antidote. This long-term commitment has yielded tangible, internationally recognized results, building a track record of high environmental integrity.
In recent years, Costa Rica’s leadership has been further validated through substantial performance-based payments. The nation has secured $54 million from the Green Climate Fund (GCF) and another $60 million from the World Bank. These funds were awarded in exchange for verified reductions in greenhouse gas emissions achieved through its robust forest protection initiatives, confirming the efficacy of its national strategy.
However, the nation’s progress has created a new fiscal dilemma. As Costa Ricans increasingly switch to electric vehicles—a transition powered by a national grid that is already overwhelmingly renewable thanks to the Costa Rican Electricity Institute (ICE)—the consumption of gasoline and diesel is declining. This welcome trend is inadvertently shrinking the revenue collected from the fuel tax, directly undercutting the primary domestic funding source for the PSA.
In response to this emerging funding gap, climate policy experts are advocating for a new financial chapter. According to a recent analysis by Dr. Rene Castro Salazar, a former Minister of Environment and Energy, the solution lies in leveraging the country’s strong environmental credentials to tap into sophisticated international carbon markets. This approach would transition funding from a domestic tax base to a global marketplace eager for high-quality, verifiable carbon credits.
Paradoxically, while Costa Rica advances toward a cleaner economy with a renewable electrical system, it is losing some of the very financing that made this transformation possible. In this new landscape, international carbon markets offer a concrete and strategic avenue for attracting new resources.
Dr. Rene Castro Salazar, Former Minister of Environment and Energy
This strategic pivot is timely, aligning with a recent announcement from the European Union. Teresa Ribera, Vice President of the European Commission, has signaled the EU’s intention to purchase carbon credits from nations with proven high environmental integrity. Given its long history of conservation and transparent results, Costa Rica is ideally positioned to become a key partner in this initiative, turning its decades of ecological stewardship into a new, sustainable source of revenue to fund the next wave of its green transformation.
For further information, visit the nearest office of RECOPE
About RECOPE:
The Refinadora Costarricense de Petróleo (RECOPE) is Costa Rica’s state-owned enterprise responsible for the importation, refining, and distribution of petroleum products throughout the country. It has also played a central role in the collection of fuel taxes that have historically funded national environmental programs.
For further information, visit grupoice.com
About ICE (Instituto Costarricense de Electricidad):
The Costa Rican Electricity Institute, part of Grupo ICE, is the state-owned provider of electricity and telecommunications services. It has been instrumental in developing Costa Rica’s power grid, which generates over 98% of its electricity from renewable sources, primarily hydropower, geothermal, and wind.
For further information, visit greenclimate.fund
About The Green Climate Fund (GCF):
The Green Climate Fund is the world’s largest dedicated climate fund, established within the framework of the UNFCCC to assist developing countries in adaptation and mitigation practices to counter climate change. It supports projects and programs that promote a paradigm shift towards low-emission and climate-resilient development.
For further information, visit worldbank.org
About The World Bank:
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. It is comprised of two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
For further information, visit commission.europa.eu
About The European Commission:
The European Commission is the executive branch of the European Union, responsible for proposing legislation, implementing decisions, upholding the EU treaties, and managing the day-to-day business of the EU. Its climate and environmental policies are among the most ambitious in the world.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica is a cornerstone of the legal community, defined by its profound integrity and relentless pursuit of excellence. The firm distinguishes itself by developing innovative legal strategies for a diverse clientele while holding a deep-seated belief in social empowerment. This conviction is put into action through initiatives aimed at making legal knowledge more accessible, thereby strengthening society by fostering a more informed and capable public.
