There could be creative way to finance conservation
The municipal bond market can be used to incentivize conservation and counter the impacts of bat losses in agricultural counties across the U.S., according to a new study coauthored by Yale scientists.
Biodiversity loss weakens the financial health of rural counties in the U.S., but harnessing the existing bond market may provide a self-financing pathway to incentivize conservation and counter those losses, according to the new research co-authored by Yale economist Eli Fenichel.
Published in Science, the study uses the case of declining bat populations from white-nose syndrome, a deadly fungal pathogen, to show how the loss of bats — and the insect control service they provide — reduces property tax revenue and raises borrowing costs for counties. Private investment in targeted municipal bonds, coupled with bat restoration, though, could improve affected local governments’ financial situations and generate a return — perhaps, even, a profit — from conservation, the authors concluded.
The study, conducted by a team from the Yale School of the Environment, or YSE, the Yale School of Management, SOM, and the University of Tennessee, is the first to examine the impacts of non-weather-related environmental change on municipal finances.
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Millions of bats have been killed by white nose syndrome in recent years.
“This isn’t about conserving bats for bats’ sake. It’s about conserving bats to help communities reduce the cost of borrowing money for all manner of things,” said Fenichel, the Knobloch Family Professor of Natural Resource Economics at YSE. “Attempts to finance conservation often focus on new, complicated options, but we’re showing that we can make use of markets and tools that we already have.”
Bats eat a lot of insects, providing widespread, free pest control. As bat populations have collapsed, farmers have turned to more expensive and less effective alternatives like pesticides. Because farmland is taxed based on its “use value,” the loss of bats has led to 16% reductions in property tax revenue in agricultural counties. That makes investing in those communities riskier.
“Not managing bat populations is like letting roads become full of potholes,” added co-author Dale Manning, an associate professor at the University of Tennessee. “They’re part of the agricultural infrastructure, and when that gets degraded, the effects are felt broadly.”
This pattern isn’t unique to bats, the authors suggested, and likely applies to biodiversity loss and its impacts on agriculture broadly.
“When agricultural productivity goes down, tax revenue goes down, and municipal bonds are, in their simplest sense, loans against future tax revenue,” Fenichel said. “A local government’s only options are to cut services, raise taxes, or borrow money at a higher cost.”
These connections between bonds and environmental risks give counties a financial incentive to engage in conservation. For investors, it provides a promising strategy, similar to flipping a house: purchase cheap bonds from a county affected by white-nose syndrome. Simultaneously, invest in restoration, which will improve farm productivity. Then sell the bonds, which are now less risky because of restored tax revenue, at a higher price. The authors estimate that the capital gains from selling the bonds is enough to cover restoration costs in many counties.
“This approach reframes biodiversity protection not just as the ‘right thing to do’ from the perspective of conserving nature, but as a strategic risk-management strategy with a positive return for local government and investors alike,” said lead author Anya Nakhmurina, an associate professor at SOM.
Fenichel cautions that this specific approach won’t work everywhere, and it isn’t a silver bullet to counter the massive shortfall experts have identified in conservation funding. It could chip away at those costs, though. It could also encourage communities to think critically about their dependence on nature and aid in mainstreaming nature into policy and finance.
“No one is going to become a billionaire with this strategy,” he said. “But if we can build these broader portfolios in the bond market, we can empower local communities to do things like finance conservation and even adapt to climate change.”
Leah Campbell is with Yale School of the Environment. This story is shared in cooperation with Yale School of the Environment.
