Creating synergies between payments for ecosystem services, green bonds, and catastrophe insurance markets for enhanced environmental resilience

This study explores the potential of promoting sustainable land utilization practices through leveraging financial tools like green bonds, payment for ecosystem services (PES), and catastrophe insurance. In the proposed framework, a private manager issues green bonds to fund the replacement of degraded grasslands with forests, delivering the added advantages of replenishing stream water and protecting downstream hydropower plants from flooding. The downstream community engages in a PES agreement to enhance their water supply, while the hydropower plant secures flooding insurance from the manager, who utilizes green bond funding to cover potential damages following flooding. The study formulates a dynamic optimization model for the allocation of green bonds to support oak tree-led afforestation, ultimately bolstering the resilience of downstream communities and the power infrastructure. Results suggest that this green bond-based strategy holds promise for expeditious replacement of degraded grasslands with forests and can enhance ecosystem resilience by encouraging sustainable land use transformations. Furthermore, the research uncovers the potential for synergistic interactions between PES, green bonds, and catastrophe insurance markets. PES programs can also assist in repaying investments made through green bonds, while green bonds enable faster afforestation, leading to increased income from PES and improved resilience against flooding events.