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Financing a new way to fight wildfires
Article published on Economists Impact’s The Sustainability Project on 29 November 2023
Marc Palahí – Chief Nature Officer, holistiQ, Lombard Odier Investment Managers – and a team of experts* explore landscape adaptation, forest resilience and new accounting frameworks as we seek to mitigate the consequences of climate change.
An accelerating problem
This summer we have seen the warmest global average temperature on record1. We have also witnessed extreme wildfire events. These include the largest wildfire ever recorded in the European Union, the Alexandroupolis and Evros wildfire in Greece, which resulted in more than 81,000 hectares burned and 20 people killed; and the Maui wildfire in Hawaii, which killed more than 100 people and incinerated a large portion2 of the island. Meanwhile, Canada is experiencing its most severe wildfire season on record, with more than 18.5m hectares of land burned3 (as of 19th October4).
In addition to loss of life, the implications for human health of wildfires like these are severe due to the particles released, and the impacts upon greenhouse-gas (GHG) emissions and natural capital are enormous.
The wildfires in Canada alone have resulted in emissions of more than 1,740 megatonnes of CO2 equivalent, probably equal to three times the annual GHG emissions of Canada’s entire economy.
Besides the devastating environmental and human impacts, the wildfires also have immense short- and long-term economic consequences, in the form of fire suppression costs, damage to properties and businesses, and increased insurance claims. It is estimated that globally, insurance claims due to wildfires have risen5 to USD 10 billion per year. Wildfire claims can also directly impact businesses. Pacific Gas & Electric (PG&E) has agreed to pay USD 11 billion to insurance companies representing claimants from deadly California wildfires in 2017 and 2018, including the town of Paradise, where 86 people died. This settlement comes after PG&E filed for bankruptcy in January due to an estimated USD 30 billion in potential wildfire liabilities6.
From tactical suppression to landscape adaptation
This new generation of wildfires exceeds present and future fire-suppression capacities and presents major environmental, economic and social threats.
A new model is required. We need to move from wildfire suppression-centred strategies to landscape resilience and climate-smart forestry strategies.
Read also: Hope from the ashes: unearthing ancient value in our forests
We need to create landscapes that are more resistant and resilient to wildfires – landscapes that can minimise the risk of extreme wildfires happening, and that can recover if an event does occur. In recent years, science and technology have substantially advanced the knowledge base for resilient landscapes, based on fire- and land-management practices integrating prevention and preparedness, detection and response, and restoration and adaptation. Climate-smart forestry7, for instance, is an emerging science-based approach which optimises forest adaptation and mitigation goals in a holistic manner.
The key question: how can we finance forest resilience and fire prevention?
Most of the financing related to wildfire prevention and landscape management currently comes from public subsidies, which are clearly not enough to deal with the scale of the problem we are facing. Private-public partnerships and private finance are crucial to deploy investments at scale to create resistant and resilient landscapes. In this context, carbon and possibly also future biodiversity markets provide an interesting opportunity for private finance. For example, the Australian government developed and approved a Kyoto-compliant savannah controlled-burning methodology8 – the first legal instrument of this kind at a global level – under its Emissions Reduction Fund. The programme funds strategic savannah fire management to reduce GHG emissions and protect fodder and infrastructure. Another example comes from the US, where the Forest Resilience Bond9 initiative seeks to overcome the funding gap for forest restoration by allowing private capital to play a role in supporting public land management (watershed restoration and fire risk mitigation). However, these innovative funding mechanisms are not widely applied.
Read also: Wildfire-Resilient Landscapes Network launched ahead of COP28 UAE
Revised carbon accounting framework needed
To encourage more initiatives, it would be important for wildfire emissions to be accounted for under the United Nations Framework Convention on Climate Change (UNFCCC). Currently, countries report GHG emissions and removals resulting “directly” from human activity or happening in so-called managed lands. This means that emissions from wildfires in unmanaged lands or resulting from “natural” causes are not reported10. If they are not reported, there are no direct incentives to address them. Accounting for wildfire emissions is important because they constitute a large source11 of global land-carbon emissions.
Once wildfire emissions are reported and accounted for properly, science-based frameworks that can quantify and certify GHG emissions reductions (avoided emissions) from the implementation of management measures for landscape resilience—such as fire management, fuel treatment and biodiversity enhancement—can be developed. This could form the basis for wildfire emissions-reduction funds to finance forest resilience and climate-smart forestry by selling carbon credits.
In short, a multifaceted approach, integrating science, finance and policy is needed to mitigate the far-reaching consequences of wildfires in an era of climate change.
*Contributors to this article include: Marc Palahí, Chief Nature Officer, holistiQ Investment Partners, Lombard Odier Investment Managers; Elena Górriz Mifsud, Forest Science and Technology Centre of Catalonia, CTFC; Antoni Trasobares, Forest Science and Technology Centre of Catalonia, CTFC; Gert-Jan Nabuurs, professor, European forest resources, Wageningen University and Research; Lorenzo Bernasconi, Head of Carbon Solutions, holistiQ Investment Partners, Lombard Odier Investment Managers; Morten Rossé, Head of Nature and Climate, holistiQ Investment Partners, Lombard Odier Investment Managers; Robert Mavsar, Interim Director, European Forest Institute.
1 https://www.reuters.com/business/environment/august-was-hottest-ever-recorded-third-straight-month-set-record-2023-09-06/
2 https://abcnews.go.com/US/environmental-impacts-maui-wildfires-years-experts/story?id=102458299
3 https://ciffc.net/
4 https://www.cbc.ca/news/climate/wildfire-season-2023-wrap-1.6999005
5 https://www.budget.senate.gov/imo/media/doc/Mr.%20Nicolas%20Loris%20-%20Testimony%20-%20Senate%20Budget%20Committee3.pdf
6 https://www.theguardian.com/us-news/2019/sep/13/california-wildfires-pg-e-agreement
7 https://www.sciencedirect.com/science/article/pii/S1389934120300630
8 https://cbmjournal.biomedcentral.com/articles/10.1186/s13021-016-0067-4#:~:text=Realising%20the%20benefits%20of%20EDS,land%20%5B13%2C%2017%5D.
9 https://www.blueforest.org/forest-resilience-bond
10 https://doi.org/10.1038/s43247-023-01005-y
11 https://carbonplan.org/research/fire-forests-inventories
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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