Urban Institute
Policy Assistant

Louisiana considers an environmental impact bond to fund coastal restoration

November 15, 2018 - 8:56am

Environmental impact bonds (EIBs) are innovative financing mechanisms that leverage private funding to address environmental challenges. Washington, DC, Baltimore, and Atlanta implemented EIBs to fund improvements in their sewer systems and provide better public spaces for many urban residents. In a first-of-its-kind application of this model, Louisiana is considering an EIB focused on wetland coastal restoration. This pilot demonstration is the result of a partnership between the Environmental Defense Fund and Quantified Ventures, along with guidance and input from Louisiana’s Coastal Protection and Restoration Authority (CPRA).

The challenge of coastal erosion

Louisiana’s coastal land is disappearing as wetlands become open water, threatening communities that are no longer protected from storm surges. CPRA estimates that over the next 50 years, Louisiana’s coast could lose up to 4,120 square miles, in addition to the 1,900 square miles that have already been eroded since the 1930s. The loss of coastline can lead to flooding and other dangers to infrastructure, risking up to $138 billion in assets and $53 billion in economic disruptions as the consequence of a single storm.

To combat this erosion, Louisiana created a Coastal Master Plan (CMP) that pledges $50 billion to help restore the coast over 50 years. However, the process is costly, the state does not have enough funding to fully implement the projects described in the CMP, and coastal restoration becomes more expensive over time as more land erodes. Though Louisiana expects an influx of future funding from the payout from the Deepwater Horizon oil spill litigation, this funding will only be gradually available over the next 15 years.

An EIB as a solution

In light of these particular funding challenges, Louisiana is exploring an EIB as a way to finance coastal restoration. The cost for the initial coastal restoration projects would be repaid by the future payment from the Deepwater Horizon settlement money as well as future oil and gas production revenues. This way, the state could undertake these efforts immediately, rather than waiting several years for the settlement money (at which time the cost of restoration will have increased). The EIB would also include performance incentives, much like those in pay for success (PFS) projects, that provide an additional payment to investors if there are greater environmental outcomes than initially expected.

The bond would cost $41.6 million—including both the principal and interest payments—compared with the $57.6 million that it would take to fund the project directly in 10 years. The repayment for “over-performance” would be between $3.5 million to $8 million. When moving to transaction structuring, the parties would decide on other key elements of the EIB, such as the investors and the exact payment triggers.

What makes this EIB unique

The scale of this EIB would be significantly larger than what others have pursued (Baltimore’s EIB is $6.2 million and Atlanta will fund $12.9 million in infrastructure projects). Additionally, while other localities have primarily explored EIBs for combined city sewer systems, Louisiana’s EIB would be the first attempt at using the financing mechanism for large-scale coastal restoration. In contrast to other PFS projects that fund social programs based upon outcomes that can be difficult to obtain, coastal restoration outcomes could be more achievable and less risky. Louisiana plans to use the impact bond model not to offset program risks, but to leverage future funding in order to make a more immediate impact—highlighting the potential that public-private partnerships have to address time-sensitive issues and finance large-scale, expensive environmental initiatives.

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