CHAPTER 1
Introduction and Overview
Lindell L. Marsh, Douglas R. Porter, and David A. Salvesen
The idea of mitigation banking was born in the 1970s, based on the need for a simpler way to mitigate the loss of wetlands caused by development projects, as required by laws such as the federal Clean Water Act (CWA) of 1972. Typically, developers had neither the expertise nor the incentive to mitigate the impacts of their projects on wetlands. Using a market approach, however, a third party ("mitigation banker") could create, restore, or enhance wetlands to create a bank of wetland credits that could be sold or conveyed to a developer, who would utilize the credits to compensate for the adverse impacts to wetlands caused by the developer's project. The banked lands would continue to be held and operated by the banker or its successor to conserve the wetlands in perpetuity (much like the perpetual-care concept associated with cemeteries), with appropriate assurances to this effect provided to the agencies. This is the standard model, often referred to as an "entrepreneurial bank."
While the idea had broad appeal, two decades later only a few entrepreneurial banks are in operation, and virtually none that is beyond the "start-up" phase. This is due in large part to several factors: our lack of understanding of the wetland ecosystems involved, the difficulty of reconciling the requirements of a variety of regulations and agencies, and an inadequate legal policy and planning framework. In addition, mitigation banking suffered from an underlying hostility between the development community and both the conservation community and a cadre of regulatory agency staffers. This hostility can be characterized as a deep institutional anger toward anything that would make development easier or that might provide a loophole in the strong environmental regulations that had been promulgated during the late 1960s and early 1970s.
Now, however, the mitigation banking concept is undergoing a renewal. While the basic idea is much the same, the concept has been modified to address prior impediments. To understand mitigation banking in today's environment, it is important to understand these impediments in a historic context.
The Troubled History of Mitigation Banking
Our system of governance is based on individual freedoms, one of which is the right to own property—land—and to choose its uses subject only to limited constraints. The system has great vitality, similar in some ways to the vitality provided by increased biodiversity, enabling a broad multitude of individual initiatives and actions—evidenced by the creativity for which our nation is known. There is, however, a dark side to the system. Individuals, corporations, and agencies undertake projects that by themselves cause relatively minor adverse impacts to the environment but together may result in substantial cumulative impacts, such as the destruction of crucial wetlands or wildlife habitat. These cumulative impacts, which economists call externalities, are not adequately accounted for or controlled under our current project-by-project system of regulation.
During the late 1960s to early 1970s, following the major economic expansion triggered by the conclusion of World War II, a series of environmental laws and regulations were adopted at the local, state, and federal levels, based on various general powers (police, commerce, treaty, etc.). These laws and initiatives profoundly changed the direction of state and national policy. They reflected a growing disenchantment with externalities of development and an antipathy that was expressed through the actions of agencies empowered to implement the regulations (an antipathy that was exacerbated by the resistance of economic development interests to change). This was the milieu in the 1970s that caused the concept of mitigation banking to be greeted with caution and even hostility.
Different levels of government attempted to protect environmental resources with separate standards and preferences, imposed through "command and control" techniques. In general, with regard to land use, environmental policy has been implemented by requiring new development to bear the burden of past and current adverse impacts. However, due to the historic project-by-project approach, little groundwork was laid for establishing the linkage between individual actions and their cumulative effects, and for understanding the ecosystems involved. Equally important, the legal and institutional linkages and frameworks to relate individual project impacts with relevant ecosystems as a whole had yet to be developed. Conservationists and regulatory agencies were troubled by the limited scientific knowledge available. Proposals for mitigation banking raised profound questions regarding the value and function of wetlands, wildlife, and habitat that were difficult to answer with any acceptable degree of certainty. How could wetlands be created, restored, and maintained? Would created or restored wetlands be as valuable as those lost, particularly if they were in a different and perhaps more distant location? How could the impacts and proposed compensation be measured and compared accurately? As a result of these uncertainties, the concept of compensating for wetland losses with acquisition and creation or restoration of wetlands was constrained by the promulgation of the Environmental Protection Agency's (EPA) Section 404(b)(1) guidelines in 1975 and their revisions in 1980 (see box on pp. 4–5). Within the Section 404 regulatory program, the guidelines skewed mitigation policy away from the compensation concept toward a preference for preservation in place. Policy statements within the guidelines reflected the skepticism among resource agencies and the environmental community about whether man-made wetlands could adequately replace the functions performed by natural ecosystems. The result was a wide spectrum of mitigation ideas promulgated by development interests, as well as an institutional reluctance to make the scientific judgments on wetland functions and values, and to invent the institutional elements that would support mitigation banking.
Meanwhile, development interests were clambering, in some cases desperately, to find a way through the regulatory maze that the regulations and guidelines had created. Developers had little understanding of, and often little patience for, environmental concerns. Still, some successful wetland restoration projects in the mid- to late 1970s began to reduce the general skepticism about the effectiveness of compensatory mitigation in reducing adverse environmental impacts. In the early 1980s, increasing numbers of Section 404 permit applications included proposals for compensatory mitigation. Throughout the late 1970s and 1980s, the U.S. Army Corps of Engineers (Corps) generally considered off-site mitigation as a legitimate mitigation solution, in part because its experience demonstrated that wetlands preserved on development sites could be damaged or destroyed by other impacts, such as siltation and other hydrologic alterations. Many Corps field staff preferred to allow wetland fills in exchange for an agreement that off-site mitigation sites would be managed or restored to maintain wetland functions and values.
The Environmental Protection Agency, on the other hand, interpreted the Section 404 (b)(1) guidelines to require that applicants follow a sequence of priorities in determining appropriate mitigation measures. Based on the high failure rate of attempted wetlands creation and restoration projects, EPA required evidence that applicants had avoided and minimized wetland impacts to the maximum extent possible before entertaining off-site mitigation proposals.
The conflicting approaches of these two agencies created tensions and delays. Mitigation banking proposals encountered predictable and often insurmountable difficulties posed by public agency responses and by business concerns regarding investment risk. In practical terms, mitigation banking ideas were met with lengthy delays in processing permit approvals, often capped with conflicting agency requirements. Frequently, these requirements were based on conservative approaches, such as narrowly defined "in-kind" and "geographically proximate" replacement criteria, or requirements that the bank be fully developed and proven for a significant period of time before the agencies would recognize any credits of the bank.
To potential entrepreneurial mitigation bankers, the risk attendant with these requirements was unacceptable. In addition, there were no guarantees that the agencies involved in the process would cooperate to make the banks successful. Staffs could change, and with them agreements and understandings. New staff members might interpret the "in-kind" requirement differently or more narrowly, excluding potential credit purchasers and encouraging them to use, in effect, a different bank or off-site mitigation source. Faced with these uncertainties, potential bankers concluded that the up-front costs and risk outweighed the potential reward and declined to participate.
The one exception was the "single user bank," where a highway agency or oil producer, for example, would agree to develop a mitigation bank in advance of a series of development projects or project phases that would occur in wetlands. In this case, the potential benefits outweighed the risks, in large part because of the ongoing relationships between the parties (such as interagency relationships), the ability to rely upon relatively general mitigation standards, and the geographically extensive impacts anticipated.
In 1990, when the Corps and EPA issued a Memorandum of Agreement (MOA), and then again in 1993 (see discussion of MOAs in chapter 7) when the two agencies issued joint guidance on mitigation banking, the regulatory situation became somewhat clearer. Although the MOA establishes preferences for avoidance and minimization of impacts and for on-site mitigation, off-site mitigation banks are considered acceptable instruments in some circumstances. The joint guidance increased the flexibility with which the Corps and EPA apply the Section 404 (b)(1) guidelines and specifically states that "the agencies' preference for onsite, in-kind mitigation does not preclude the use of mitigation banks...."
In November 1995, the Corps and EPA, along with the Fish and Wildlife Service, National Marine Fisheries Service, and the Natural Resources Conservation Service (NCRS, formerly the Soil Conservation Service) issued policy guidance that further clarified the role of mitigation banks in compensating for adverse impacts to wetlands and other aquatic resources. The 1995 joint federal guidance reiterated the agencies' preference for on-site mitigation, but stated that mitigation banks may be used where on-site mitigation is not practicable or where the "use of a mitigation bank is environmentally preferable." (See chapter 3 for a discussion of the joint federal guidance, see federal mitigation banking guidance in the appendix.)
A Shift in Paradigm
It appears that a major shift is occurring in the governance framework relating to mitigation banking from that established in the late 1960s. First, fragmented efforts that led to inefficiencies and conflicts are giving way to commitments to collaborative actions among public agencies as well as between the public and private sectors. The trend toward collaboration is reflected in the private sector by a movement toward more horizontal management structures, characterized by management by principles and values, or "partnering." These structures emphasize open and honest communication, the promotion of trust and commitment to work in good faith toward the reconciliation of conflicts (as opposed to compromise, which implies a lowering of standards), with the objective of achieving a solution that addresses all concerns to the extent practicable. The trend is fueled by an increasing shift toward a broad national consensus that wetlands and wildlife conservation are appropriate societal values and that project-by-project mitigation has failed to achieve its objectives.
Second, in addition to the emergence of groups of regulators, developers, and consultants who have grown more accustomed to working together—developing a vocabulary, protocols, and understandings, and a degree of trust in mutual commitments, assumptions, and objectives—planning processes have been developed to enhance collaborative efforts. The conceptual model for these processes is the National Environmental Policy Act (NEPA), which establishes procedures for exploring a proposed action, together with possible alternatives and their impacts, with the constituency of concerned organizations, interests, and agencies.
Prior to 1965, environmental and land use planning reports prepared by agency staff or consultants often were disregarded, with some exceptions (e.g., plans for some river basins and national parks and forests). In part, such plans did not reflect the many factors that would ultimately affect the public policy decisions that would follow. During the late 1960s and early 1970s, plans began to be the repository of public policy decisions. In 1973, Florida adopted much of the American Law Institute Model Land Development Code and California had provided for "specific plans" in addition to general (comprehensive) plans. Plans were also called for by New York in connection with its proposed Adirondack Park (including private and public lands) and by California for its coastal zone, Lake Tahoe, and San Francisco Bay. New Jersey later developed a plan for the conservation of the 1.2-million acres within the Pinelands. And the federal government enacted the Coastal Zone Management Act, which fostered coastal plans by the various coastal states.
During the late 1970s and 1980s, the use of plans as repositories of public policy and the process concepts contained within the NEPA converged. Major large-scale planning efforts occurred for special areas, such as Grays Harbor Washington (which ultimately failed because of defects in process and the legal framework) and later, the Chesapeake Bay. The prime example, however, is the amendment to the federal Endangered Species Act (ESA) in 1982, which institutionalized the use of habitat conservation plans (HCPs) for this purpose. The amendment contemplates that the "constituency of interests" will collaborate to develop a habitat conservation plan and reconcile the competing concerns. Natural Community Conservation Plans (NCCP), which are large-scale HCPs, are now being prepared for virtually all of the undeveloped urbanizing areas of Southern California. Similar efforts are underway in the Northwest, Texas, and Florida. In addition, a variation of the process is being used to address wildlife and other water resource concerns in the California Bay–Delta and in south Florida.
Moreover, the Clinton administration has placed substantial emphasis on multiple-objective watershed planning processes as the framework for mitigation banks and other wetland conservation approaches. By 1993, even the Corps was reconsidering its regulatory and construction programs in the context of watershed planning. A report by the Institute of Water Resources, a Corps policy think tank, recommended that "a watershed restoration focus can be used to better integrate the regulatory program with project planning and with the operation and maintenance of existing projects." By linking regulatory decisions to watershed management, said the institute, the emphasis of the program could shift from protecting specific wetlands to restoring wetlands throughout watersheds. Thus, the current trend in the wetlands regulatory program is away from absolute protection, except for high-quality resources, to a planning and management approach that emphasizes multiple objectives, including wetland restoration and mitigation banking.
While NEPA focuses on "major federal actions," it promotes the "scoping" of a spectrum of reasonable alternatives, an analysis of their impacts, and the selection of one or more preferred alternatives, with the understanding that the final determination regarding the alternative to be selected is left to the formal decision makers.
The use of such an issue-focused planning process has a number of benefits. It provides the opportunity to develop a reliable, broadly accepted base of scientific information; to develop the trust that will be necessary to resolve subsequent policy decisions; and to explore policy options before they are lost prematurely as the result of individual actions.
Unfortunately, until relatively recently, there were no assurances provided by the public to private sector economic interests that agreements reached in the plans would be honored. As the plans increasingly became more detailed and represented specific agreements and understandings, the need for assurances increased. Not surprisingly, high-growth states, such as California, Florida, and Hawaii, have provided for development agreements and for implementation agreements in HCPs that would assure, for the benefit of the private participants as well as the agencies, that the plans would be honored.
