The power of environmental bonds

By Frank Convery, EDF Chief Economist

Hurricane Katrina ravaged the U.S. Gulf coast in 2005, causing about $125 billion in damage. These costs would have been lower if natural protections - dunes, wetlands, barrier islands - had not been degraded, a process that continues as global warming contributes to sea level rise.

EDF is pioneering ways to make vulnerable, and valuable, coastlines more resilient. One major question is how to pay for that resiliency. For example, the cost of providing protection against the next Katrina is expected to be about $50 billion.

In the Gulf region, led by EDF economist Diego Herrera, we are exploring the feasibility of an Environmental Impact Bond (EIB) - issued by Louisiana's Coastal Protection and Restoration Authority - to raise money to protect the coast. The state will then pay back the bonds' principal with interest, using future oil spill related revenues dedicated to restoration.

By issuing EIBs, Louisiana would save money by acting more quickly to restore wetlands that reduce the extent of potential future flood damage.

The idea is to attract capital from so-called impact investors - those seeking a beneficial social or environmental impact alongside a financial return - willing to cover the upfront costs for wetland restoration.

Major players in the Gulf economy (the ports, the oil and gas industries) - all beneficiaries of coastal protection would then complement EIB funding by providing additional finance for coastal protection.

If this funding model works, we will have a flexible, scalable way to fund coastal protection wherever it is needed.