Environmental Derivatives, Risk Analysis, and Conservation Management

Two key challenges in conservation management are: (1) how to quantify and manage the risk that natural populations will fall below critical thresholds and (2) how to fund recovery plans should a population do so. Statistically estimated, process-based simulation models of two distinct fish populations are used to forecast the species population levels, and capture the risk of crossing a management defined trigger point. We show how to calculate the environmental derivative price, which is the amount a risk-neutral investor would require for promising a pay-out should the species abundance fall below the trigger level. The approach provides the potential for environmental derivatives to support species recovery, and a method for measuring the underlying “health” of a managed population and calculating risk-cost tradeoffs among alternative management strategies.