We develop a continuous-time model of heterogeneous farms with two-dimensional state- size and biodiversity- to compare a blended finance credit instrument with conventional direct payments for biodiversity conservation. Under blended finance, the government co-pays a fraction of private borrowing costs, lowering the cost of capital and conditioning the cost of capital on ecological outcomes. Farms endogenously choose capital and subsidised intensity, which translates into biodiversity effort. We calibrate the model on EU agricultural data (FADN, Farmland Bird Index, GLOBIO4) and we find that blended finance raises expected biodiversity by 28% relative to current EU policies, reverses the net biodiversity decline, and achieves these gains at 84% lower fiscal cost, with a biodiversity leverage ratio approximately 50 times that of direct payments. The instrument is automatically progressive- small farms, which face higher borrowing costs, benefit most from the proportional subsidy- and participation is voluntary via self-selection. Blended finance dominates direct payments across all 27 EU member states, under both high and low interest-rate regimes, and even when up to 60% of the subsidy is captured by financial intermediaries. In regions with severe biodiversity decline, combining blended finance with targeted direct payments nearly doubles the biodiversity gain of either instrument alone.
