Conceived fifteen years ago, wetlands mitigation banking is the new concept in wetlands protection as it stands under current national wetland policy, focused around the Clean Water Act. In short, the process of mitigation banking creates a regulated psuedo-market where wetland losses are traded for wetland gains. Ideally, this is how it works: Developer A significantly impacts 1 acre of wetlands; instead of having to create an acre adjacent to the development, Developer A can purchase wetland credit from Mitigation Bank B, which has created X acres of wetlands. In theory, Developer A (and others like him) will end up paying for a large, high quality wetland, instead of numerous, small, disjointed, and ofter low quality wetlands. Mitigation banking is being accepted gradually due to the radical character of the idea and numerous practical issues.

Federal Guidance for the Establishment, Use and Operation of Mitigation Banks

The Appeal of Mitigation Banking

Mitigation banking has developed within the regulatory sphere, meaning the concept is an evolution of policy from within the established legislation. Without definite legal status, the only way for the banking practice to stay viable is by satisfying the stakeholders in wetland policy: the environmentalists and developers who can and do sue the Corps and EPA. Mitigation banking garners mutual support by offering flexibility and economy of scale. Flexibility means choices for the developer. Developers are not forced into the wetland restoration business, because they can choose to purchase credits if conventional mitigation is more expensive. Bear in mind that conventional mitigation costs can often exceed $100,000 per acre. Economy of scale was alluded to in the introduction. By concentrating restoration in large projects, ecologically more significant wetlands can be realized at lower cost per acre. The developer has the ability to compare costs and probably save money, while at the same time providing more wetland value. In mitigation banking, economy of scale has two meanings. First, it means lower costs for the consumer of wetland permits. Second, economy of scale refers to the ecology of wetlands. Wetlands are more stable, support more diversity, and contribute more to larger ecosystem relationships when they are larger. For instance, a patchwork of wetlands is less likely to attract and support migratory bird populations than a large tract. As is often the case with solutions to environmental problems, the devil is in the details.

Issues in Mitigation Banking

Timing--

A point of much contention between environmentalists, developers, and the newly created mitigation bankers (who often are developers) is the timing of credit sales. The issue is a trade-off between economic and ecological risks. Environmentalists want the economic return to wait for ecological results. The failure of conventional mitigation projects is a reality, and environmentalists are rightfully wary of concentrating mitigation failure. Ideally, credit sales should be permitted only when the constructed wetland is judged to be fully functional and relatively self-sufficient. That stipulation would prevents the temporal loss of wetlands which occurrs with conventional mitigation. However, the economic viability of development projects almost always requires immediate or short run returns on investment. Wetland construction is a developing science and art which carries an uncertain risk of failure. The foundation and structure of the market is being decided by the policy of government agencies which are subject to lobbying and change, which makes both the supply (approved banks) and demand (regulatory permission) of credits uncertain. Returns must follow risks for an investment to be attractive. The thresholds of acceptable ecological and economic risk must meet or overlap for the concept to work under current conditions. Inexperience is mitigation banking's biggest obstacle as the exact quantification of both economic and ecological risks needs to be realized.

Function and Value--

Another unresolved area in the concept of mitigation banking is the defintion of wetland function and the relationship of function to the definition of a wetland credit. Trading acre for acre or even an acre for two acres may achieve incomplete compliance with the no-net-loss standard, which includes function as well as area. After all, from an economic standpoint, losing wetland functions, not area per se, causes the negative externalities of decreasing water quality, increasing flooding, and decreasing habitat and diversity. A market solution's viability depends on increasing wetland functions nationwide while lowering the cost to the permitee.

Functions must be measureable to be traded. Many are concerned that an emphasis on measureability (like the Hydrogeomorphic method) will cause functions which are hard to observe and quantify to be lost. Many wetland ecologists say that almost all wetland functions are hard to measure and a reliance on measurement could be deceiving. Mitigation banking will require a great amount of technical expertise not just to construct the replacement wetlands, but to provide the measurement information to monitor and facilitate the process. These costs will be borne by the bankers and regulators. If the opposing sides demand higher and higher degrees of measurement to support their claims, then the savings offered by a market scheme could dry up.

Once universal, but highly specific function standards are agreed upon, more questions remain. The regulatory agency must decide whether to permit trading a wetland with one set of functions for another. Obviously, developers and conservationists will differ on that decision, which could strictly protect wetland functions or facilitate more trading. Decisions regarding the geographic area of a bank decide who gets the benefit of the functions. Environmentalists want to make sure that wetlands do not get traded out of a watershed or basin, creating some ecologically impoverished zones. Predictably, bankers and consumers of credits push regulators for larger markets for banks, making them more available.

Risk, Responsiblity, and Perpetuity--

Mitigation banking is fundamentally a paradoxical practice, where man destroys his natural wetland resources only to recreate them elsewhere. As a result, risk is the primary barrier to the development of a large, nationally institutionalized, routine mitigation banking industry. The enviromentalists and conservationists are reluctant to accept that private, for profit ventures (or the government either) are capable of absolutely assuring no-net-loss. The mitigation process, of course, assigns responsiblity for the success of the project to the mitigation banker, but it is hard to rely on the financial assurances of an embryonic industry. Regardless of financial concerns, any mitigation banking failure results in a significant temporal loss of wetlands. Extreme minimization of risk is necessary.

More work is needed on site selection. The highest input into a mitigation bank project is not the sophisticated ecological construction, but land (D. Irvin, personal communication). Second to land, and very important to the issue of risk, is maintenence costs. More work landscape modelling work needs to be done to identify the numerous areas of previously drained wetlands to dramatically reduce risk. If the modelling is done by an alliance of local government, state water quality officials (who are busy out there devising TMDLs for every water body), development interests, and environmental consulting, eventual mitigation banking, companies, then the process should be able to take advantage of high quality science, which is necessary for the industry to take off. Capital investments for less risk will relieve the mitigation bankers of burdensome capital commitments like the insurance bonding schemes that are relatively common today.

Perpetuity is a tricky legal concept. The rationality that is backs our legal system has a difficult time defining "forever and ever." Land in the United States must be owned by someone. Mitigation bankers understandably want to divulge responsiblity as soon as their work, including maintenence and monitoring is done. Local governments need to become more familiar with conservation easements and develop networks of non-profit organizations that want to become involved in the preservation of created wetlands. Private ownership of the mitigated land is problematic because of the deep penetration of property rights in the legal system.