Stochastic hydro-financial watershed modeling for Environmental Impact Bonds

Abstract

Abstract Soil erosion, poor water quality, and degraded ecosystems impose major cost burdens and challenges for stormwater managers. We present a stochastic hydro‐financial watershed modeling framework for designing an Environmental Impact Bond (EIB)—a new form of financing for comprehensive, watershed scale interventions. EIBs provide capital for interventions that is repaid over time with interest by stakeholders who experience reduced costs (savings). The EIB is also structured so stakeholders and investors share the reward of cost savings. The framework estimates cost savings from interventions and accounts for aleatory and epistemic uncertainty in costs, which in turn impacts the financial terms of the EIB. In particular, we show a method to reward investors for taking on the risk that interventions fail. The framework is applied to a transnational pollution and sedimentation problem on the U.S.‐Mexico border and has broad applicability for a wide range of environmental problems.

Source: resolved