Hydro-Stochastic Model to Inform the Design of Environmental Impact Bonds for Wildfire Resilience

We present a stochastic hydro-financial modeling framework that produces probabilistic forecasts of post-fire costs attributable to altered watershed hydrology under different wildfire regimes, estimating impacts borne by flood-control infrastructure managers and downstream communities. We then outline a practical framework for mobilizing capital from flood control infrastructure managers to finance forest management strategies that reduce wildfire risk via an Environmental Impact Bond (EIB). Our approach is valuable because economic assessments can emphasize direct wildfire damage while underrepresenting the long-term costs after an event including sedimentation in downstream infrastructure, elevated flood risk, and degraded water quality. This gap is particularly consequential for public entities that manage flood control infrastructure like debris basins and flood control channels and thus shoulder a large portion of post-fire sediment and water-quality management costs. Forest management strategies such as fuels reduction along high-risk corridors offer a pathway to reducing these wildfire costs by lowering fire occurrence and severity. However, entities hoping to implement these strategies can find it difficult to 1) raise the large volumes of capital needed to implement measurable changes and 2) justify the required expenditure without a robust assessment of cost effectiveness. To address these barriers, our model implements historical records of infrastructure maintenance, sediment accumulation and rainfall with wildfire simulation results to generate metrics indicating the benefits of an intervention. We then show how these results can be used to structure an EIB, a financial instrument where private investors provide upfront capital for implementation and are repaid through savings realized by infrastructure managers. We demonstrate the approach by analyzing flood-protection infrastructure operated by the Riverside County Flood Control and Water Conservation District (in Southern California).