A derivative approach to endangered species conservation
2010
Mandel, James T | Donlan, C Josh | Armstrong, Jonathan
Two major shortcomings of the US Endangered Species Act have led to inefficient use of conservation dollars: (1) it only provides conservation protection to distressed or rapidly declining species, and (2) it does not take full advantage of the market to reduce costs in conservation. New, derivative‐based insurance products (financial instruments designed to allow the commoditization and sale of risk) have been developed that allow investors to insure risk in exchange for fixed payments. Modifications to these financial derivatives, which are used to distribute risk and stabilize forecasts across many corporate and social scenarios, could allow purchasers to take preventative action to simultaneously protect their investment and decrease the likelihood of the insured event. We propose that governments issue modified derivative contracts to sell species' extinction risk to market investors and stakeholders. Using the endangered red‐cockaded woodpecker (Picoides borealis) in the US as an example, we show how a biodiversity derivatives program could proactively generate new funding, result in more cost‐effective conservation, align stakeholders' interests, and create incentives for private conservation efforts.
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