Permanent Forest Bonds: A pioneering environmental impact bond for Aotearoa New Zealand

Abstract

Section 1: The challenge is to establish permanent forest on vulnerable land throughout New Zealand, especially erosion-prone land and waterway margins (see Boxes 1 & 2). Leaving this land unforested hinders the nation’s long-term prosperity by degrading national environmental assets and increasing future carbon liabilities, which together, undermine New Zealand’s highly valued green reputation. Section 2: The proposed solution is a world-pioneering Permanent Forest Bond which belongs to the wider classes of green and climate-aligned bonds. The innovation is not only to fill a funding gap for budget-constrained government entities, it is to shift the environmental spending paradigm so that the New Zealand Government pays for positive environmental results rather than services. This shifts the risk of a successful intervention from taxpayers to private investors, who are compensated in return for taking the risk. Section 3: The foundations for the Permanent Forest Bond are based upon the idea of an Environmental Impact Bond, built upon pay-for-performance contracts. First conceived by David Nicola in a 2013 report, there have not yet been any bonds issued in New Zealand under this instrument. However, there are examples emerging in the United States, including a Forest Resilience Bond currently under development (see Box 3). Section 4: The Environmental Impact Bond is an extension of a Social Impact Bond, of which there are now over 60 issued worldwide. However, the impact bond model is better suited for environmental impacts than social impacts, particularly because measurement is less controversial and better established (see Box 4). Section 5: Although there is not yet any empirical track record for Environmental Impact Bonds, there is now an emerging empirical and evaluative literature on Social Impact Bonds. This literature is surveyed to anticipate the various advantages and risks of adapting this structure for establishing permanent forest. Section 6: A major advantage of Environmental Impact Bonds over Social Impact Bonds is the preexisting science and economics of monitoring and valuing environmental assets. This section draws upon existing literature on ecosystem services to identify the potential expenses, revenue streams and avoided costs that can be negotiated as part of a Permanent Forest Bond. Sections 7 & 8: A Permanent Forest Bond is an eminently feasible proposition. The impact bond structure is well suited to aligning the long-run costs and benefits of establishing forest (or not) on vulnerable land.