Strategic research to improve environmental outcomes of impact investment strategies on land and in the sea

Award Period
to
Award Amount
$250,533
Agency Name
The Builders Initiative
Award Number
2019-31
PI First Name
Steven
PI Last Name
 Gaines
CO-PI
Darcy Bradley
Christopher Costello
Area/s of Research
Ecology and Evolution
Abstract

The Environmental Market Solutions Lab (emLab) is an interdisciplinary team of economists and scientists based at UC Santa Barbara dedicated to bringing market-based solutions to the world’s most pressing environmental problems. Our team conducts rigorous research and works with a global network of partners to ensure our findings drive the creation of novel financial instruments, policy solutions, and management reforms that address the unique and pressing environmental challenges we face today. Given our market-based approach to environmental problem solving, one of our priorities is bridging the gap between scientific research and impact investing. Thus, we are excited to propose two research projects that highlight the potential for better institutions and financial mechanisms to address the diverse natural resource management challenges. The development and implementation of new, innovative institutions will provide untold opportunities for impact investment to improve both environmental and financial outcomes. Therefore, we believe the Builders Initiative can capitalize on this work to guide future investments in environmental solutions.

 

With increasing climate variability and the proliferation of new data streams and technological advances, we now have both the need and the tools to develop new institutions that will allow us to effectively address the most pressing environmental challenges we face. The rapidly changing world we live in calls for an entirely new landscape of policies and management instruments that are more flexible, precise, efficient, and proactive than those created in decades past. emLab is particularly interested in thinking carefully about two novel solutions that could become promising investment targets for the Builders Initiative. One solution would help mitigate risk and uncertainty in North American fisheries, and the other would efficiently reduce nutrient pollution in ocean regions such as the Gulf of Mexico.

 

To understand the viability of such new institutions—both in terms of their investment potential and their ability to achieve specific social and environmental objectives—we must first identify the conditions under which they would be effective. To do so, we have developed a set of research questions to tackle. The insights we gain from these projects will lay the groundwork for advancing these new institutions in North America, and ultimately around the world.

 

1. Evaluating existing and novel strategies for improved risk-mitigation in fisheries

 

Environmental factors have a strong bearing on fisheries productivity, and climate change is already altering these factors in numerous ways. For example, inter-annual variability in harvest is increasing, and this in turn is driving greater fluctuations in economic returns for stakeholders throughout the fisheries supply chain, including fishers, processors, and investors. Recent studies suggest that climate change may also increase the frequency and intensity of extreme environmental events, and this would only exacerbate variability in returns.

 

We propose two ways for addressing this challenge. First, we will develop new scientific and economic models to provide useful information to resource harvesters, owners, and investors about the uncertainty they face. Second, we will use these statistical analyses to explore the potential efficacy of new financial mechanisms to help invest and make decisions under emerging changes in uncertainty. Guided by tools and theory from finance and economics, emLab will develop new financial strategies for fisheries investment and management in which owners, managers, employees, and investors optimize across a portfolio of covarying stocks, rather than individual species. One of our key research questions is: what is the appropriate geographical scale needed to capture the potential portfolio benefits from fisheries with different climate driven dynamics? North America can serve as an important geography to explore these issues. Can effective instruments be developed within individual countries--or do they need to be international in scope? The spatial patterns in the statistical analyses of resource dynamics are key to addressing these questions.

 

We will explore the potential performance of these new portfolio-based financial strategies against the suite of existing financial strategies currently utilized in fisheries (e.g., government payouts) or in similar sectors (e.g., crop insurance in the agricultural sector). We will evaluate several metrics of performance:

 

  • Who benefits from different strategies?
  • Does the financial solution also promote sustainable fishery management?
  • At what scale does each strategy need to be implemented to be effective?
  • What are the costs associated with each strategy?

 

A key motivation for this work is that in addition to mitigating risk, a new set of financial instruments could also guide impact investments in fisheries and allow for more adaptive management in an increasingly uncertain world.

 

To answer these questions, we will first document existing and new risk management strategies for the fisheries sector. Next, using the best available data, we will determine the nature of interannual variability experienced by fisheries across the globe. We will then develop a bioeconomic model that both incorporates this variability and allows us to examine the potential biological and economic implications of different risk management strategies, using North America as the focal case study. This effort will lay the groundwork for designing effective risk management strategies for fisheries in different contexts.

 

2. Seaweed aquaculture: A nutrient pollution-mitigation strategy worth pursuing?

 

Earlier this summer, the National Oceanic and Atmospheric Administration released its latest forecast for the Gulf of Mexico hypoxic zone – or ‘dead zone’ – to be nearly 8,000 square miles (roughly the size of the state of Massachusetts), just shy of the record size recorded in 2017. When excess nutrient pollution from human activities--including agriculture and urbanization--make their way down the Mississippi River watershed, they create an enormous algal bloom. This bloom litters beaches with debris and sinks to the bottom of the ocean where it eventually decomposes and removes oxygen from the water, creating an environment inhospitable to life. The Gulf of Mexico is not alone in this challenge. Ocean dead zones have increased by a factor of 10 since the 1950s and now threaten biodiversity, fisheries production, and livelihoods of those dependent on ocean resources in every inhabited continent on the planet. With agricultural intensification and urbanization only projected to increase over the coming years, we are in urgent needs of solutions that can combat the devastating ecosystem and livelihood impacts of nutrient pollution in the ocean.

 

An underappreciated function of marine macroalgae (i.e., seaweeds) is their role in nutrient remediation: seaweeds are highly productive, and effectively remove nutrients (especially dissolved nitrogen, phosphorous, and carbon) from the environment. While most interest in seaweed aquaculture expansion has been motivated by seaweed’s carbon sequestration potential, our recent work suggests that the carbon market is an insufficient financial instrument to incentivize industry growth. We believe there is potential for seaweed aquaculture to play a substantial role in eutrophication mitigation, the value of which can be directly captured through nutrient trading credits (NTCs). Capitalizing on these potential market benefits could be key to the financial viability of this ecosystem restoration strategy.

 

We therefore propose to uncover the net ecological and economic potential of seaweed aquaculture, explicitly weighing its potential benefits against its environmental impact and operational costs. Using the Gulf of Mexico dead zone as a case study, we will explore the potential to incentivize large scale seaweed aquaculture operations via existing trading schemes, including both carbon markets and NTCs. Ultimately, our analyses will determine under what conditions seaweed aquaculture could be a cost-effective solution for nutrient pollution.

 

For the purpose of this project, we will ask the following questions:

 

  • What is the true net environmental cost/savings of seaweed aquaculture?
  • How does the answer change for different methods of production, species, and end product?
  • Are there economic opportunities to make seaweed aquaculture a feasible pollution offsetting strategy?
  • How does seaweed compare to other strategies for fighting nutrient pollution?

 

We have assembled a team of ecologists, industrial ecologists, engineers, and farmers to assess the true inputs, outputs, and financial options for seaweed farming. To answer these questions, we will conduct a life cycle assessment (LCA), life cycle economic assessment (LCEA), and an LCA and LCEA contribution analysis to identify the environmental and economic costs of various farming strategies (considering farm design, placement, species, end product) in the Gulf of Mexico dead zone. We will adapt LCA and LCEA conceptual models we have already designed to understand the general global warming potential impact of seaweed farming to the specific environmental and market conditions in the Gulf of Mexico as a framework that could then be extended to other settings. This model clearly elucidates each node of the seaweed farming life cycle, considering inputs and outputs relevant to hatchery, farming/production, storage, processing, and potential nutrient offsetting pathways.

 

The immediate goal of this effort is to understand (a) what is the nutrient pollution mitigation potential of seaweed aquaculture now, and (b) what would have to change (e.g. technology, policy, markets) for seaweed aquaculture to be a promising future nutrient pollution mitigation strategy to motivate impact investment in this space?