[*PG161]PAVING THE ROAD TO WETLANDS MITIGATION BANKING

Jennifer Neal*

Supporters of the relatively new concept of wetlands mitigation banking herald it as environmentally superior to on-site mitigation undertaken at individual project sites because mitigation banks can be used collectively for the restoration, enhancement, or creation of larger, more viable wetlands. Still, many environmental groups remain apprehensive. This Comment examines the emergence of wetlands mitigation banking as a means to satisfy the Clean Water Act  404(b) sequencing requirement of compensation. This Comment argues that explicit legislative support, such as that contained in the recent Transportation Equity Act for the 21st Century (TEA-21), is essential to provide the necessary market support of mitigation banking. In addition, a comprehensive federal statute would promote the establishment of an economically and environmentally successful mitigation banking system.

Introduction

The development of America’s shopping malls, highways, and housing developments has contributed to the destruction of over half of the original 230 million acres of wetlands that the first settlers of the United States found upon arrival.1 Wetlands protection has long [*PG162]been among the most controversial of national environmental policies, in part because it is implemented through an inconsistent2 and often ineffective3 federal regulatory program. Despite the goal of “no net loss,”4 wetlands in the United States continue to be destroyed and disrupted at an alarming rate.5

Under the Clean Water Act (CWA)  404(b) sequencing process, developers of projects that impact wetlands must:

1. demonstrate that the least environmentally-damaging alternative will be used;

2. minimize any unavoidable impacts; and

3. compensate for or offset the harm.6

Compensation is achieved through the process of restoration, creation, enhancement, or preservation of wetlands, collectively termed mitigation.7 On-site mitigation is generally the preferred alternative to compensate for unavoidable damage to wetlands.8 This rigid system generally results in the creation of fragmented, isolated, and poorly monitored wetlands with limited ecological value.9

[*PG163] Wetlands mitigation banking, a subset of compensatory mitigation,10 represents an innovative, market-based resolution to many of the current problems associated with on-site wetlands mitigation.11 Upon establishing a mitigation “bank” by enhancing, restoring, or creating wetlands habitats, the creator of a mitigation bank (the “banker”) can satisfy CWA requirements by selling wetlands “credits” to developers.12 Mitigation banking provides greater certainty in the development permitting process, creating more ecologically significant and successful wetlands mitigation projects, and developing a new industry devoted to the restoration and creation of wetlands.13

On August 24, 1993, the Clinton Administration released a comprehensive package of improvements to Federal wetlands programs that included support for the use of mitigation banks.14 The Environmental Protection Agency (EPA) and the Army Corps of Engineers (the “Corps”) simultaneously released interim guidance clarifying the role of mitigation banks in the CWA  404 permitting program.15 This guidance has subsequently been expanded to include guidelines for the establishment and use of mitigation banks.16 Participation in the mitigation banking program has been slow, however, partially due to a lack of regulatory support.17

On June 9, 1998, the President signed into law Pub. L. No. 105–178: the Transportation Equity Act for the 21st Century (TEA-21).18 TEA-21 authorizes programs for highway, highway safety, transit, and other surface transportation for the next six years.19 A brief yet significant passage in TEA-21 endorses using wetlands banks for miti[*PG164]gation of some transportation projects, placing TEA-21 among the first substantial legislative acts to specify a preference for mitigation banking where compensatory mitigation is required.20 This passage indicates growing support of the mitigation concept in the regulatory system, and provides the much needed commitment to this struggling new alternative to America’s wetlands policy problem.21

This Comment explores wetlands mitigation banking in light of the recent passage of TEA-21. Section I provides a history of wetlands regulation in the United States under the Clean Water Act. Section II details the failure of traditional compensatory mitigation under the Clean Water Act. Section III discusses wetlands mitigation as a potential solution to many of the problems considered in Section II. Section IV introduces and briefly discusses the Transportation Equity Act for the 21st Century. Finally, Section V examines the significance of TEA-21 for wetlands mitigation and identifies areas of focus for implementation of the Act. Section V also examines the need for a comprehensive federal statute to support, clarify, and set consistent standards for mitigation banking.

I.  The History of Wetlands Regulation in the United States

The desire to protect our nation’s wetlands is a relatively recent phenomenon.22 Filling wetlands was once encouraged, since it took apparent wastelands and made them productive.23

Over the past two decades, this view on wetlands protection has reversed.24 It is now recognized that wetlands serve a variety of important functions, providing ecological, economic, and aesthetic value.25 [*PG165]Unfortunately, wetlands remain a desirable site for commercial, residential, and agricultural development because many of their characteristics, including rich soil, proximity to water, flat topography, and the existence of commercially valuable species, render them ideal for development.26 Consequently, wetlands regulation is increasingly being perceived as essential to protecting the functional value of wetlands.27

Federal regulations protect wetlands not by completely prohibiting their development, but by requiring permits when they are developed.28 For example, the principle federal regulatory protection for wetlands is  404 of the Clean Water Act (CWA).29 Established in 1972, the CWA is intended to protect water and adjacent land from adverse environmental effects due to discharges of dredged or fill material.30 Section 404 requires landowners and developers to obtain permits to carry out activities that involve disposal of dredged or fill materials into waters of the United States,31 including wetlands.32

[*PG166] Recently, both the Bush and Clinton administrations made the protection of wetlands a priority.33 President Bush’s wetlands policy made the goal of “no net loss” a national objective.34 “No net loss” was originally announced in 1988 as the goal of The Conservation Foundation,35 and was a pivotal platform of the 1987 National Wetlands Policy Forum, convened at EPA’s request to assess wetlands policy issues and recommend improvements.36 Under this wetlands resource and conservation management principle, the national net amount of wetlands should not be allowed to decrease.37 Ultimately, any loss of wetlands area or functional capacity must be off-set by gains in wetlands area or functional capacity by means of wetlands restoration, creation, enhancement, or preservation.38 Recognizing the inevitability of wetlands loss, this goal mandates increased efforts to restore, create, enhance, or preserve wetlands (collectively called mitigation) to balance net losses with net gains.39 Thus, mitigation policy and science have played an important role in wetlands policy since the late 1980s.40

On August 24, 1993, the Clinton Administration announced its wetlands policy, entitled “Protecting America’s Wetlands: A Fair, Flexible, and Effective Approach.”41 The Clinton policy perpetuates the national goal of “no net loss” of wetlands.42 This policy proposed:

1. using the best available science to define and delineate wetlands;

2. improving the current regulatory program and encouraging non-regulatory options; and

3. expanding the partnerships in wetlands protection efforts.43

[*PG167]Integral to this policy is the CWA  404(b) sequencing process.

A.  CWA Section 404 “Sequencing”

Under its CWA authority,44 EPA developed guidelines to evaluate permit applications, codified in  404(b)(1).45 The  404 guidelines establish a three-step approach, commonly called “sequencing,” to determine how a project impacting wetlands will proceed.46 The first step reviews alternatives and requires that the party demonstrate that he or she will use the least environmentally-damaging alternative.47 The “practical alternatives” test stringently requires consideration of areas not presently owned by the applicant, but which could be reasonably obtained, utilized, or expanded for the same activity.48 There is a presumption in favor of any alternative not involving wetlands, unless it is clearly demonstrated that the alternative would have a greater adverse impact on the aquatic ecosystem than the proposed development.49

If harm to wetlands cannot be avoided, the second step requires that the party seeking the permit formulate a plan to minimize this harm.50 Finally, when harm to wetlands functions cannot be avoided and will occur despite minimization, the third step requires that the party compensate for, or offset the harm.51 This final step, known as compensatory mitigation, is accomplished in coordination with the [*PG168]Corps, yielding a plan to restore, enhance, create, or preserve other wetlands located on- or off-site.52

B.  CWA Administration

While Congress delegated most of the authority to administer the CWA to EPA,53 the Corps successfully argued that it should have the primary authority to administer permits because of its experience managing similar activities, such as the Federal Water Pollution Control Act and dredging.54 Accordingly, Congress authorized the Corps to grant or deny  404 permit applications, subject to EPA’s veto.55

The  404(b) guidelines, promulgated by EPA “in conjunction with” the Corps in 1980, provide the chief environmental criteria governing the issuance of  404 permits.56 The Corps, however, did not concede that these guidelines imposed binding requirements until 1984, as a consequence of a lawsuit settlement arising out of National Wildlife Fed’n v. Marsh.57 Even after this case, and throughout the 1980s, EPA and the Corps frequently disagreed over how to interpret these guidelines, resulting in an inconsistent regulatory program.58

Until 1990, there was no comprehensive federal policy regarding enforcement under the CWA.59 EPA, the Corps, the Fish and Wildlife Service (FWS), and the Soil Conservation Service of the Department of Agriculture each regulate the discharge of pollutants into wetlands under the CWA.60 Consequently, the administering of  404 was highly irregular as each agency adopted its own system of policies, guidelines, and practices, often in conflict with another agency’s system.61 For example, while EPA continued to employ sequencing, some Corps districts followed a “buy-down” approach that conflicted with strict sequencing.62

[*PG169] Under the buy-down approach, applicants avoid strict sequencing by offering a compensatory mitigation package with their initial permit application.63 By promising to restore or enhance more wetlands than would be destroyed during the proposed project, the Corps could comply with the “no net loss” policy without requiring the applicant to first avoid, then minimize, any wetlands destruction at the project location.64 Although theoretically plausible, this approach, in practice, sometimes led to wetlands loss.65 Further, this approach also led to the restoration, creation, or enhancement of many isolated wetlands at project sites by developers who lacked the scientific knowledge or market incentive to ensure that these wetlands succeeded.66

In 1990, EPA and the Corps signed a Memorandum of Agreement (MOA) to resolve this controversy.67 The MOA established sequencing as the preferred wetlands protection process and implicitly precluded the buy-down approach.68 Thus, applicants were put on notice that sequencing would be interpreted to require that they first avoid, then minimize, and finally, compensate any harm done to wetlands functions and values.69

Significant to the mitigation banking issue, the MOA provides that when wetland damage cannot be avoided and compensatory mitigation is required, on-site mitigation (adjacent to the affected wetland) is preferred to off-site mitigation and in-kind mitigation (of a type similar to the affected wetland) is preferred to out-of-kind mitigation.70 Further, the MOA approved mitigation banking as an acceptable option for compensatory mitigation, and expressed a preference for restoration and enhancement over creation or preservation of wetlands for compensatory mitigation.71

The 1990 MOA provides two exceptions to sequencing.72 The first is a de minimus exception, used when “EPA and the Corps agree that the proposed discharge can reasonably be expected to result in [*PG170]. . . insignificant environmental losses.”73 This exception is said to allow “the type of small, de minimis actions that have gobbled up coasts and inland waterways, quarter-acre by quarter-acre, bulkhead by bulkhead.”74

The second exception is a de maximis exception, allowing divergence from sequencing in areas where “there is a high proportion of land which is wetlands,” making it hard to avoid or minimize wetlands loss.75

Both exceptions expose a great deal of natural wetlands to development which is not restricted by the CWA permitting process, increasing the number of wetlands that must be mitigated through compensation.76

After approving mitigation banking in the 1990 MOA, EPA and the Corps promised additional guidance on the establishment and use of mitigation banks.77 They did not issue interim guidance, however, until 1993.78 Finally, in 1995, this interim guidance was replaced when federal guidelines were issued for the establishment and use of mitigation banks.79

C.  Relaxing the Sequencing Process

Because of the CWA  404(b) requirements and the MOA, the public had a low opinion of wetlands regulation in the early 1990s.80 Developers and landowners in particular complained that sequencing reinforcement unduly burdened their private property rights.81 EPA and the Corps responded by attempting to relax their interpretation of sequencing requirements on three occasions.82

[*PG171] First, in August 1993, the two agencies released a Memorandum to the Field relating to the mitigation requirements under the CWA for projects with only minor environmental impacts.83 The Memorandum allows field personnel to consider the level of the proposed project’s impacts on wetlands in determining the avoidance component of sequencing, stating that the “flexibility” of the CWA regulations enables the agencies to “adjust the stringency of the alternatives review for projects that would have only minor impacts.”84 Thus, the necessity of finding and evaluating less environmentally-damaging alternative sites for a project depends upon the function and value of the harm to wetlands caused by the project.85

Second, in March 1995, EPA and the Corps further loosened their interpretation of the sequencing process requirements, issuing another Memorandum to the Field which provided small landowners with more flexibility in searching for less damaging alternative sites.86 Applicants proposing small projects no longer need to satisfy the first step of sequencing by demonstrating that no less environmentally-damaging alternatives exist, although the requirements for minimization and compensation remain.87

Third, the Corps authorized a Nationwide Permit (NWP) for single- family residential development later that same year.88 The NWP allows the destruction of up to half an acre of non-tidal wetlands during the construction or expansion of a single-family home.89 Under the NWP system, an applicant need not demonstrate that the proposed site is the least damaging alternative.90 The requirements of avoidance and minimization of on-site impacts, although not eliminated, may be waived if the Corps approves the applicant’s “compensatory mitigation plan.”91

[*PG172]D.  EPA Mitigation Banking Guidelines

The 1995 Federal Guidance for the Establishment, Use, and Operation of Mitigation Banks (hereinafter “Federal Guidance”) addresses most of the practical considerations necessary to make a mitigation bank work by establishing policies and procedures which support the mitigation banking industry.92 The Federal Guidance specifically requires that developers act in accordance with sequencing by attempting to minimize, if not avoid, adverse impacts to wetlands before using a bank as compensatory mitigation.93 Additionally, the applicant must establish that on-site mitigation is not practicable or that the “use of a bank is environmentally preferable to on-site compensation.”94

Although the CWA vests wetlands permit decision-making authority in the Corps, the Federal Guidance leaves approval of a proposed bank to a Mitigation Bank Review Team (MBRT), thereby diluting the Corps’ powers.95 The MBRT comprises representatives from the Corps, EPA, FWS, National Marine Fisheries Service (NMFS), and Natural Resources Conservation Service, as well as state and local representatives and resource agencies.96 The Federal Guidance states that the MBRT should reach a consensus before a bank is approved, effectively giving each member veto power, while recognizing that consensus will not always be possible.97 After bank approval, the MBRT is not involved in its daily operations; the Corps creates all procedures regarding credit generation and withdrawals.98

In general, the Federal Guidance precludes the use or sale of credits before the mitigation bank begins functioning.99 Despite objections from critics of mitigation banking who feared the continued loss of wetlands,100 the Federal Guidance permits limited sale of cred[*PG173]its in a bank’s early stages.101 This approach recognizes the vast financial outlay necessary for a mitigation bank, and provides potential bankers with a reasonable and predictable return on their investment.102 Further, agencies still require a reasonable likelihood that the wetlands will be successfully restored or created before any credits may be issued.103

The Federal Guidance specifies that a “bank sponsor is responsible for assuring the success of the debited restoration, creation, enhancement, and preservation activities at the mitigation bank. . . .”104 Once incorporated in a federal permit, the EPA and the Corps may enforce this permit under the CWA’s enforcement provisions.105 The Federal Guidance does not, however, specify whether a bank sponsor is solely responsible, leaving open the possibility that a credit purchaser could be vulnerable to an enforcement action upon failure of a mitigation bank.106

II.  The Failure of Traditional Compensatory Mitigation

Traditional compensatory mitigation under CWA sequencing has been largely unsuccessful from an ecological perspective because it fails to consider the negative consequences of on-site compensatory mitigation107 such as fragmentation and isolation,108 and degradation and lack of oversight.109 As a result, many mitigation efforts developed under CWA sequencing led to degraded and fragmented wetlands with, at best, minimal ecological value.110

On-site mitigation, a type of compensatory mitigation, typically follows the destruction of wetlands through development.111 On this approach, a developer may destroy wetlands with a simple promise and plan to compensate the loss after the development’s completion.

[*PG174] If the compensatory mitigation project is not carried out, fails, or is subsequently degraded due to the previously discussed risks, a net loss of wetlands results.112 According to a study conducted by the Florida Department of Environmental Regulation, thirty-four percent of permittees never commenced compensatory mitigation projects, and only six percent fully complied with all mitigation permit conditions.113

Additionally, most on-site compensatory mitigation projects yield widely scattered, small, and isolated or “patch” wetlands, which are not buffered by adjacent uses because they are created at an actual project site to compensate only for a particular project’s wetland losses.114 For example, current regulations engendered numerous isolated wetlands which provide no filtering function or flood control, and rarely provide even limited habitat value, created, say, in the middle of a parking lot or behind a grocery store or shopping center.115 Such wetlands are essentially useless.116 Ultimately, patch wetlands probably will fail not only because of their location and size, but because their ecological potential is limited by their separation from broader wetlands ecosystems.117

A lack of institutional oversight also explains, in part, the failure of traditional compensatory mitigation.118 A 1994 investigation by EPA and FWS reported that the success of mitigation projects depends on human factors (including the “commitment to plan, implement, monitor, adjust, and maintain mitigation”) and economic factors (including the level of financial commitment to a mitigation project).119 A traditional mitigation project lacks these factors because the Corps rarely enforces permit agreements.120 Thus, developers frequently have an extremely low level of commitment to the economic success of a mitigation project.121

[*PG175] Generally, the Corps grants approval to develop on existing wetlands if the developer demonstrates a plan to mitigate wetlands loss.122 Often such developers do not complete or even initiate these plans.123 Further, even projects that are initiated are not adequately monitored because of a lack of resources within the Corps,124 and a lack of compliance mechanisms, such as a requirement that developers post a bond ensuring monitoring and maintenance for a specified time period.125

The developer’s economic commitment corresponds to the wetland’s success rate.126 Therefore, wetlands projects by developers seeking to do the minimum amount of mitigation required by the Corps rarely succeed.127 Private developers lack the economic incentive to commit more than required by their permit to compensate for lost wetlands.128 The 1994 investigation by EPA and FWS identifies numerous measures which might facilitate mitigation, such as hiring and retaining qualified environmental consultants, acquiring appropriate mitigation and buffer sites, and conducting any necessary corrective measures.129 A developer, however, seeking to do the minimum amount of mitigation required by the Corps probably will not take these measures even if financially able to do so.130

Upon the failure of a mitigation project, developers are rarely held responsible, and there is often no pre-designated party to rectify such failure.131 This also applies to successful projects, where degradation is possible because the developer is not required to monitor and maintain the project, and the Corps lacks the resources to do so.132 Even if the Corps did have sufficient personnel to monitor privately-[*PG176]created wetlands, however, the “present furor over private property rights makes it politically unpalatable.”133 Thus, to a purely market-minded developer, poor monitoring and enforcement of permit agreements provide an incentive not to initiate mitigation projects, or to allow initiated or completed projects to fail due to inadequate upkeep.134

The answer to recent wetlands protection failures may lie in mitigation banking, through which a developer may meet compensatory mitigation requirements without the associated problems.

III.  Mitigation Banking

Mitigation banking is a subset of the third step in CWA sequencing, compensatory mitigation.135 Mitigation bankers earn mitigation “credits” for restoring, creating, or enhancing wetlands habitat (the mitigation “bank”).136 Bankers may then use these credits to satisfy CWA requirements or sell them to developers.137 Currently, the majority of mitigation banks are owned and operated by government entities.138 Mitigation banking differs from “project-by-project” mitigation, which compensates a specific activity and typically follows the permitted loss of wetlands.139 Mitigation banking appeals to policy makers because it apparently provides a satisfactory alternative for both developers and environmentalists advocating “no net loss.”140

[*PG177]A.  Benefits of Mitigation Banking

Mitigation banks consolidate resources and create an economy of scale, yielding more efficient wetlands protection.141 Large-scale mitigation banks are more cost-efficient than smaller, site-specific mitigation efforts.142 Additionally, bankers have both the resources and incentive to hire scientific consultants and implement technology to ensure the long-term success of a mitigated wetland.143 Therefore, larger mitigation projects such as banks are likely to be cheaper and create higher quality wetlands than on-site compensatory mitigation by individual developers.144

One of the major advantages of mitigation banking is that compensatory mitigation is performed before, not after, wetlands destruction.145 Where fragmentation and habitat scarcity already strain an aquatic ecosystem, it is safer to mitigate, attain functional equivalency, and then allow development.146 Since mitigation bankers generally may only sell credits after the permitting agency deems the bank successful, wetlands will not be destroyed only to have the subsequent mitigation effort fail, resulting in a net loss.147 Advance mitigation not only eliminates the “lag-time” between the destruction and reintroduction of wetlands, but actually creates a temporary wetlands surplus before the withdrawal of credits at the commencement of development.148

In addition, advance mitigation eliminates the typical compensatory mitigation concerns of inadequate wetlands mitigation once development has been completed.149 This is particularly important given the failure even to initiate traditional mitigation due to inadequate monitoring by the Corps.150 Moreover, traditional compensatory mitigation is not considered until the end of construction, and there is no [*PG178]guarantee that the developer will have enough money to carry out sufficient mitigation.151 In contrast, in a mitigation banking system, the developer can be required to purchase the credits before construction begins, allowing the developer to budget accordingly.152

Further, banking would enable the Corps to require even those projects currently considered too small to require traditional compensatory mitigation, such as those authorized under the NWP, to buy a nominal amount of credits from a mitigation bank.153 The Corps could therefore require mitigation for all wetlands destruction and avoid the currently uncompensated, cumulative effects of small scale wetlands degradation.154

Several benefits are associated with the type of consolidated, large-scale mitigation endeavors that are actualized through a mitigation banking system.155 Larger, off-site wetlands systems are more ecologically valuable than the isolated, on-site “patch” wetlands created from individual mitigation efforts.156 The ecological benefits include: providing a habitat for a larger variety of wildlife; accommodating larger populations of the present species, which prevents inbreeding and promotes species stabilization; and allowing the wetlands to adapt to changes in the ecosystem.157 Further, on-site wetlands are often negatively affected by the impacts of construction and development itself, compromising the slight value that does exist in both the remaining natural wetlands and the mitigation wetlands at the development site.158

Mitigation banking also provides a solution to the problem of monitoring isolated wetlands created by individual developers.159 The vast number of small, isolated wetlands currently permitted by traditional compensatory mitigation makes monitoring by the Corps impracticable.160 Consolidating these patch wetlands into a larger site [*PG179]enables the Corps more effectively to monitor mitigation projects while expending fewer resources.161

The benefits of mitigation banking even extend to perhaps the largest category of critics of wetlands protection: landowners and developers.162 Because landowners and developers need not spend as much time and effort developing and implementing small-scale mitigation plans as they currently do, the mitigation banking system streamlines the wetlands regulatory system.163 Small landowners who lack the financial resources and expertise necessary for on-site mitigation can participate in a mitigation bank without the associated inconvenience and expense of traditional compensatory mitigation.164 The developer simply must purchase the appropriate amount of credits from an appropriate mitigation bank.165 Further, developers benefit from the foreseeability and reduced cost such a system provides.166

Finally, a mitigation bank relieves ill-equipped developers of the responsibility for long-term maintenance of the compensatory mitigation site, placing it instead in the hands of the experts managing the banks.167 The increased financial resources devoted to mitigation allow mitigation bankers to acquire the most promising sites and to use the appropriate technology to ensure the project’s success.168 And, by providing extra credits for the successful restoration or creation of rare or complicated wetlands, mitigation bankers have an incentive to explore scientific innovations in the restoration and creation of wetlands.169

Despite the broad appeal of mitigation banking, it is not universally accepted as a panacea for the problems with our regulatory system, and many fear that it is too risky to warrant strong support.170

[*PG180]B.  Problems with Mitigation Banking

Many environmentalists worry that mitigation banking will accelerate wetlands loss,171 result in a net loss of wetlands area,172 allow mitigation sites too far from the original wetlands for which they are intended to compensate,173 and fail sufficiently to capture qualitative differences in wetland functions.174

Wetlands present a unique problem to regulators because, unlike other regulated substances (e.g., Sulfur Oxides), they are highly differentiated and their functional value is difficult to quantify.175 Therefore, even a market mechanism such as wetlands mitigation banking requires concurrent command and control regulations to ensure that the market achieves the appropriate level of wetlands protection.176

In launching a mitigation bank, the banker must consider the ecological risk that a bank will not be as successful as required.177 Many bankers minimize this risk by restoring, creating, or enhancing wetlands designs that are easier and less expensive to construct and by hiring ecological specialists to enhance the quality of the wetland.178

Environmentalists, joined by FWS, fear that facilitating mitigation will accelerate wetlands destruction.179 In fact, mitigation banking has been called a “cheap trick,” enabling original wetlands to be degraded in exchange for less valuable compensatory mitigation.180

Opponents of mitigation banking also fear a resulting net loss of wetlands.181 When mitigation credits are issued for restored, enhanced, or previously-existing wetlands, a net loss in quantity or functional quality results when those credits are used to compensate for wetlands destruction elsewhere.182 Further, environmentalists fear that [*PG181]mitigation banking may create or exacerbate habitat fragmentation by allowing restoration sites too far from the biota they are intended to support.183 This risk is minimized, however, because regulations supporting or permitting wetlands mitigation banking include provisions specifying that developers may only purchase credits to compensate for wetlands impacts within a designated service area.184 In addition, a service area is determined for each bank upon its approval to assure that credits will not be used to compensate distant wetlands destruction.185

Finally, mitigation banking has not met with resounding success among potential bankers because of market and regulatory risks.186 The market for mitigation bank credits depends upon the demand for credits, which, in turn, depends upon governmental regulation mandating compensatory mitigation for unavoidable wetlands loss.187

Although the current administration supports mitigation banking,188 most existing statutes and regulations do not specifically address its use.189 Adoption of the concept is usually mentioned only in guidance documents, which are subject to adoption, amendment, and revocation without any notice-and-comment period.190 The existence of other compensatory mitigation options, conjoined with the absence of legislation compelling the use of mitigation banks, reduces the viability of mitigation banks.191

EPA and the Corps have established guidelines on mitigation banking, furthering the mitigation banking effort by providing much-needed regulatory support.192 This support may prompt the adoption [*PG182]of legislation like TEA-21, which explicitly mandates the use of mitigation banking wherever feasible.

IV.  Legislative Support for Mitigation Banking: TEA-21

On May 22, 1998, Congress passed the Transportation Equity Act for the 21st Century (TEA-21).193 With a $217 billion appropriation, TEA-21 is the largest public works measure ever authorized by Congress,194 virtually guaranteeing that transportation will be this year’s hottest market in the construction industry.195 The bill provides $175 billion for highways and $42 million for mass transit programs through fiscal year 2003.196 This represents a forty-four percent increase over the amounts provided by the 1991 Intermodal Surface Transportation Efficiency Act (ISTEA).197

Under TEA-21, the Surface Transportation Program (STP) provides funds to states and localities for use on any federal-aid highway, including the National Highway System, bridge projects on public roads, transit capital projects, and public bus terminals and facilities.198 In addition, TEA-21 expands the list of projects eligible for STP funds to encompass environmental provisions, including wetland and natural habitat mitigation.199 Therefore, mitigation banks created to compensate for wetlands loss associated with highway construction can be classified as highway projects, making them eligible for federal funding.200

In a display of support for wetlands mitigation banking, a brief passage of TEA-21 includes a provision stating that mitigation banking is the preferred method for replacing wetlands lost due to highway [*PG183]projects.201 This is important because the federal and state highway agencies “are among the largest destroyers of wetlands.”202 The Federal Highway Administration (FHWA) has submitted about 100 Environmental Impact Statements each year, more than any other federal agency except the U.S. Forest Service.203 Highway agencies destroy significant amounts of wetlands “because their routes run through low, flat areas where natural wetlands once flourished.”204 Congress’ explicit preference of mitigation banking for compensatory mitigation projects by this large federal agency will promote mitigation banking.

V.  The Future of Mitigation Banking: Paving the Road

Mitigation banking may hold the key to an effective implementation of CWA’s wetlands policy objectives, and therefore should be supported by explicit regulatory endorsement, as TEA-21 provides.205 This bill’s support may pave the road to a more effective wetlands mitigation banking system, both by creating a direct demand for mitigation bank credits within the federal highway industry, and by indirectly indicating the regulatory commitment necessary to stimulate market support for the concept.206 Future regulations should likewise indicate support for mitigation banking,207 setting clear standards for authorizing the use of banks.208 In addition, a federal statute is neces[*PG184]sary to support, clarify, and set consistent standards for mitigation banking.209 In both specific regulations and a comprehensive federal statute, sequencing must be preserved, and mitigation banking must occur only after the exhaustion of avoidance and minimization.210

A.  Mitigation Banking Warrants Support

Mitigation banking may provide the much needed flexibility to achieve the goal of “no net loss” both in theory and in practice. The only way to fulfill the goal of “no net loss” is to provide replacement ecosystems that function as well as the system that the developer is permitted to damage, and to do this before the damage occurs.211 Mitigation banking preserves CWA sequencing while providing cost-efficient, ecologically valuable, and well-monitored wetlands systems.212 Additionally, mitigation banking provides predictability to the current, often mysterious mitigation system, and allows developers to proceed with their projects knowing that they were involved in the development of acceptable mitigation prior to construction.213

The fear that facilitating mitigation will accelerate wetlands destruction is understandable,214 given the Corps’ pro-development stance.215 The maintenance of sequencing, however, assures that mitigation banking will only replace alternative forms of compensatory mitigation—which tend to occur on-site with a much lower success rate and ecological value—and will not lead to additional authorization of wetlands destruction.216 Further, EPA and the Corps can more successfully monitor mitigation banks because they are fewer in num[*PG185]ber and larger in size than on-site compensatory mitigation projects.217

Similarly, opponents of mitigation banking fear that issuing mitigation credits to allow the destruction of wetlands at the development site will entail a net loss of wetlands.218 These concerns, however, apply not only to mitigation banking, but to compensatory mitigation as a whole under the current system.219 Mitigation banking could alleviate this problem by requiring functional equivalence between credits and the wetlands they are to compensate, and by requiring a higher ratio of acre to acre wetlands for certain projects.220

The enactment of Federal Guidance has provided the initial support for mitigation banking necessary to spur the industry.221 Until recently, however, Congress has not explicitly expressed support for mitigation banking in other acts. The passage of the Transportation Equity Act for the 21st Century, however, contains a brief passage that could have a significant impact on the emerging field.222

B.  TEA-21 and Mitigation Banking Policy

Market-based wetland mitigation banking has the greatest potential for fairly and effectively achieving the national goal of “no net loss.”223 As with all market-based regulatory policies, federal regulators create and control the market for wetlands credits by the regulations they pass.224 Demand for mitigation banking credits is a function of the pressure to develop wetlands and the regulatory requirements of compensatory mitigation.225 Without regulations requiring mitigation for wetlands loss and degradation, developers would not need mitigation credits.226 Therefore, any regulatory policy that affects the amount or type of mitigation required in a given area necessarily affects the market for mitigation credits and the feasibility of establishing mitigation banks.227

[*PG186] TEA-21’s explicit endorsement of mitigation banking may give mitigation banking the support it needs to succeed. A significant restriction on the operation of a successful mitigation bank system has been the high degree of market risk associated with it.228 TEA-21 provides regulatory support for mitigation banking by supplying a large potential purchaser of credits. This, therefore, reduces the risk of an insufficient demand for mitigation credits at certain times and in certain places.229 TEA-21’s governance of so many projects impacting wetlands could entice potential bankers with a market for their credits.230 TEA-21 provides certainty to the credit market and demonstrates federal commitment to mitigation banking.231 This support is essential for the development of a fully functioning system because bankers have little control over market risk.232 To further support the credit market, TEA-21’s explicit endorsement of mitigation banking should serve as a paradigm for future legislation.

C.  TEA-21 as a Model for Future Legislation

TEA-21 should serve as a model for future legislation endorsing mitigation banking. Following TEA-21’s lead, future government regulations should clearly indicate that mitigation banks will continue to be endorsed.233 As seen in TEA-21, regulatory support of mitigation banking should specifically indicate that such banking is only to be used when compensatory mitigation is required.234 This reduces confusion in applying a statute supporting mitigation banking, which must also comply with the terms of the CWA, by explicitly recognizing the discretion of EPA and the Corps to determine when compensatory mitigation is required under CWA sequencing.235 The agencies will continue to rely on the best professional judgement of its field personnel to make evaluations and determinations regarding mitiga[*PG187]tion.236 Further, this language provides the necessary flexibility for EPA and the Corps to create further requirements, such as a requirement that mitigation precede such projects.

It is imperative that statutes like TEA-21, supporting the purchase of mitigation credits from a bank, specify that the project must occur within the service area of a bank.237 This ensures that banks protect wetland values in the same watershed as the projects they are intended to mitigate.238

D.  Clear Standards for the Creation of Mitigation Banks

The success of mitigation banking depends on the development of firm regulatory policies, which establish and further ecological, economic, and administrative goals.239 Regulators must provide clear standards for authorizing banks, and for crediting and debiting wetlands, to assure bankers that the current support of wetlands mitigation banking is not likely to disappear.240 The current meager federal guidance does little more than endorse the mitigation banking principle.241 As a result, approval of mitigation banks tends to be unpredictable, adding to the uncertainty that has prevented mitigation banking from realizing its full potential.242 Moreover, the current mitigation banking system suffers from a lack of certainty because guidance documents can be adopted, amended, or revoked without any public notice-and-comment period.243 Besides specific regulatory standards, Congress should pass a comprehensive federal statute in support of mitigation banking, setting explicit standards for the creation and use of mitigation banks.

[*PG188]E.  A Federal Statute Is Necessary

Although the federal government’s policy statements encourage the use of mitigation banks in certain circumstances, explicit statutory support is necessary. A comprehensive federal statute is needed to support, clarify, and set consistent standards for mitigation banking.244 Without a clear and comprehensive federal statute, the investment risk associated with establishing a mitigation bank is prohibitively high.245 Conversely, such a statute would reduce the investment risk by stabilizing the regulatory market.246

Under the current system, states may supplement federal regulations with more rigorous state regulations, tailored to address local concerns.247 This may result in a regulatory race to the bottom, however, because states are given the flexibility to relax their mitigation standards to compete for business development investment.248 Even in the absence of a race to the bottom, state standards can constrict the market for mitigation banking if state programs conflict with federal guidance due to different objectives.249 Federal standards are preferable because they ensure at least a minimum degree of technical and administrative sufficiency, increasing the likelihood of mitigation banking’s success.250

In drafting a federal statute supporting mitigation banking, regulators should carefully weigh all interests to determine the appropriate balance of market efficiency and ecological preservation. A lack of specificity, such as that which exists under the present federal guidance, increases market uncertainty and prevents the formulation of an effective mitigation banking system.251 On the other hand, more restrictive requirements in a federal statute will necessarily result in a premium on suitable sites and will reduce the amount of credits available to the market.252

A federal statute setting standards for mitigation banking should not threaten the present preference for in-kind banking.253 By sug[*PG189]gesting that banks be located near areas of expected future development, regulators can help to ensure that wetlands values are not stripped from one watershed and replaced in another.254

F.  Preservation of CWA Sequencing

The attempt to provide the needed flexibility in the regulatory scheme through a federal statute should not extend so far as to jeopardize the CWA sequencing currently endorsed by both EPA and the Corps. Sequencing must be retained to preserve existing wetlands, so that valuable wetlands are not destroyed under relaxed permitting standards and mitigation crediting.255 Although the elimination of sequencing to support mitigation banking would increase the demand for credits as the destruction of project-site wetlands is permitted, it would not significantly increase predictability over a system where sequencing was uniformly required.256 Therefore, wetlands classification should supplement, not replace, sequencing in regulating wetlands mitigation and mitigation banking.257

Critics of the present system denounce sequencing, claiming that it reduces the demand for permits and credits and discourages entry into the credit-supply market.258 Since the government is the only contracting party with an intrinsic interest in maintaining wetland functions, however, sequencing must be preserved.259 Otherwise, developers could destroy valuable wetlands that would have been avoided under sequencing, simply by buying mitigation credits to replace them.260

Mitigation banking should only be employed as part of an approved compensatory mitigation plan in the third step of sequencing, when the use of a wetland is determined to be unavoidable.261 In that case, instead of offsetting the damage by creating a wetland of the same size in an unproductive location, the use of credits from a larger, more diverse and resource-oriented bank is preferable.262

[*PG190] Many who favor mitigation banking urge that eliminating sequencing is necessary to create a predictable market for credits.263 The maintenance and uniform application of sequencing, however, will also result in a predictable level of demand for mitigation credits by applicants whose projects require compensatory mitigation.264 Thus, maintaining sequencing will not plague mitigation banking with unpredictability so long as it is consistently applied.265

Mitigation banking fits within the current administrative interpretations of sequencing. For example, preservation and uniform application of sequencing in a mitigation banking system is beneficial in light of the current Nationwide Permit System (NWP), which admits of many exceptions.266 These exceptions engender numerous small, unmonitored wetlands created without the scientific knowledge and market incentive to ensure success.267 While such wetlands offer little ecological value, they cumulatively constitute a large wetlands habitat.268 In all respects, it is better to require each applicant under the NWP system to purchase credits from a larger bank, which will endure for a longer period, and will be more valuable economically and ecologically and easier to monitor.269

G.  Public vs. Private Banks

Both federal regulations supporting the use of mitigation banks and a federal statute regarding the establishment of mitigation banking should explicitly support private, as well as public, banks.

While public sponsorship often provides the greatest control over how mitigation is conducted,270 private entrepreneurial banks offer benefits that public banks cannot. For example, private banks avoid conflict of interest concerns associated with public banks271 and are better able to take advantage of the economies of scale that make mitigation banking such a favorable policy.272 Private bankers have the [*PG191]financial incentive to hire the best available scientific experts to ensure the long-term viability of the wetland, since their profit is inextricably linked to the success of the mitigation.273

On the other hand, public agencies like Departments of Transportation (DOTs) that create banks may not have the long-term resources, staff, or expertise to carry out the requirements of establishing and maintaining a bank.274 Mitigation banking requires that agency bankers be closely involved in the restoration or creation of compensation sites including land purchase, mitigation design, construction, monitoring of replacement wetlands, and long-term maintenance.275 While agencies such as DOTs often have project funds available to pay for wetlands mitigation, they are limited in the long-term availability of staff and/or funds for on-going maintenance and land ownership, making the purchase of credits from a private mitigation bank a preferable alternative.276

Environmentalists fear that profit-minded bankers will cut costs during mitigation, thereby sacrificing the quality of the bank, in order to realize higher profits.277 They fear that this cost-cutting approach will not coincide with the goal of achieving high-quality, successful mitigation.278 This problem, however, inheres in any market-based system, and exists whether the bankers are profit-minded entrepreneurs or federal agencies working within a budget. Therefore, federal regulations, currently silent about the use of entrepreneurial banks for regulatory purposes, should explicitly encourage private, as well as public, mitigation banks.279 This will provide the necessary stability to encourage private investment.280

Conclusion

Mitigation banking presents an innovative solution to many of the existing problems with current wetlands regulation. Explicit legislative support, such as that contained in the recent Transportation [*PG192]Equity Act for the 21st Century (TEA-21), is essential to provide the necessary market support of mitigation banking. TEA-21 should serve as a model for future legislation, explicitly endorsing mitigation banking as the preferred alternative for compensatory mitigation. In addition, clear standards governing the establishment of mitigation banks and a comprehensive federal statute to support and clarify these standards would promote the establishment of an economically and environmentally successful mitigation banking system.

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