Wetland mitigation banking: analysis & comparison of market mechanisms

John Kenneth Cary

Federal regulation currently requires that wetland fills be offset by providing compensatory mitigation under a Clean Water Act Section 404 permit. This policy, often described as "no net-loss," has facilitated the emergence of wetland mitigation banking. Wetland mitigation banking, a market oriented mechanism, works by allowing landowners to generate credits through restoring, enhancing, creating and/or preserving wetlands and selling them to those impacting wetlands for a cash return. Over the last several years, wetland mitigation banking markets have materialized as the preferable compensatory method of providing no net-loss. Timing issues due to the ecological, economic, and regulatory conditions surrounding the credit market have created situations of credit "misses" or lags between permittees and suppliers. These misses can be characterized as credit shortages or excess demand in the compensatory market. In cases of credit shortages, permittees may provide mitigation themselves. However, permittee-responsible has associated opportunity costs since permit review times are longer compared to mitigation banking. In North Carolina, excess demand and increased permit review times provoked the creation of the Ecosystem Enhancement Program, a partnership between North Carolina's Department of Transportation and North Carolina's Department of Environment and Natural Resources. Under this program, credits are generated in advance of wetland impacts thus eliminating excess demand. Acting as a wetland credit broker, the Ecosystem Enhancement Programs coordinates the North Carolina Department of Transportation with credit suppliers promoting excess supply of wetland credits by investing early in credit generation. This paper offers analysis of costs surrounding two wetland banking market mechanisms, conventional wetland mitigation banking and the Ecosystem Enhancement Program. The analysis provides information regarding the economic conditions surrounding both mechanisms, cost tradeoffs, and which mechanism is less costly at providing wetlands protection to society. The costs of excess supply and excess demand are modeled for the two market mechanisms and compared. Comparative statics derived from first order conditions, help to understand the circumstances and factors influencing low market cost mitigation.

Wetland mitigation banking: analysis & comparison of market mechanisms

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