Environmental Bonds: A Critical Assessment

Abstract

This paper aims to clarify the meaning, or meanings, and the applicability of the environmental bond (from now on e-bond), an interesting instrument of environmental risk control recently advocated by Perrings and Costanza.¹ The e-bond is a compulsory deposit which must be paid by anyone who wants to utilize certain natural resources the disposal of which is potentially polluting or, more in general, who wants to undertake an activity which may damage the environment. The amount of the deposit is conceived as a function of the possible environmental consequences of the relevant activity: according to the prevailing opinion it should cover the maximum potential damage to the environment so that society is insured against any possible damage produced by the activity. The deposit is refundable, in whole or in part, to the extent that the holder of the bond is able to prove to the environmental agency managing the e-bond scheme that she was able to avoid the anticipated environmental damage. The deposits paid are kept in an interest-earning escrow account which may be partially utilized, provided the social insurance role of the fund is not jeopardized, by the agency in order to pay the management costs of the e-bond schemes and to encourage research and innovations meant to reduce environmental risks.

Though this paper was jointly written by the authors, Loredana Torsello takes responsibility for Sections 1, and 2, and Alessandro Vercelli for Sections 3, 4, and 5. We would like to thank Charles Perrings for helpful comments.