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...