Mitigation Banking Under Section 404 of CWA

By: Gabe Gonzalez

Introduction

The loss of wetlands within the continental United States is not a new phenomenon; still, little has been done to slow the progressive loss of wetland habitats successfully. Since the 1780s, the continental United States has lost nearly 50% of its wetlands, and since 2009, the rate of wetland loss has increased by another 50%. Much of this historical loss was due, in part, to a misunderstanding of the significant roles wetlands play in filtering pollution, providing habitat for numerous plant and animal species, and providing natural flood control.

With the enactment of Section 404 of the Clean Water Act (CWA), the federal government finally acknowledged the dire problem of wetland loss. Section 404 regulates "discharges" of "dredged or fill material" into the Waters of the United States (WOTUS), defined as navigable waters and those waters, including wetlands that have a continuous surface connection to traditionally navigable waters and streams that are "relatively permanent, standing or continuously flowing bodies of water. Section 404 establishes a “no net loss” policy aimed at preventing further wetland loss by requiring wetland mitigation at a 1:1 ratio. Waters of the United States is defined as “ Critics have questioned Section 404's effectiveness, arguing that the mitigation efforts have created fragmented wetlands with low ecological value. Given these critiques, mitigation banking has evolved as an alternative to applicant developer-provided mitigation.

Wetland mitigation banking entails an entity undertaking actions such as creating, restoring, enhancing, or preserving wetlands to offer compensatory mitigation ahead of anticipated discharges. Mitigation banking aims to prevent further wetland degradation by applying economic principles to environmental issues.

Process of Determining Mitigation Credit Value

The "bank" represents mitigation in a single, more extensive off-site wetland. This approach effectively allows developers to fulfill their compensatory wetland obligations without undertaking mitigation efforts themselves. Instead, developers can purchase mitigation credits from a separate entity that has undertaken and stored them for this purpose. Regulatory agencies officially recognize these "compensation credits" held within the bank as appropriate compensation for wetland impacts after the sponsor completes the following seven steps: 1) Establish baseline information, 2) Submit a Prospectus, 3) Address Public Comments, 4) Prepare a Mitigation Banking Instrument, 5) Secure Financial Assurances, 6) Conduct Mitigation Activities, and 7) Monitor and Manage the Bank.

The prices of mitigation credits are set through a negotiation process between the buyer (developer or agricultural producer) and the seller with little involvement from the overseeing agencies. The sellers of the mitigation credits are referred to as “bank sponsors,” individuals or entities that develop wetlands for use in mitigation banking and are responsible for the development and continued maintenance of the wetlands.

Once the bank sponsors have engaged in wetland mitigation efforts, the difficulty becomes determining the wetland's value. This difficulty arises primarily due to wetlands' numerous economic and non-economic values and the lack of federally enforceable standards, instead only guidance documents that offer mere suggestions. Due to these difficulties, many valuation methods have arisen, some as simple as using acreage as an index to more complex site-specific or function-specific approaches.

Negotiations Within the Mitigation Banking Process

From there, the first negotiations between the bank sponsor and the regulating agency will occur. A memorandum of understanding (MOU) will be established, which outlines stipulations such as the amount of a performance bond or where the credits may be sold.

Negotiations are likely to occur between the developer or producer purchasing the credits and the bank sponsor when purchasing the mitigation credits. Due to the varied complexity of the Clean Water Act and the mitigation banking process, the parties often hire a mitigation credit sales broker to reach an acceptable agreement. These brokers ensure developers gain access to the mitigation credits necessary to pursue their planned projects at a reasonable rate or that the bank sponsor maximizes its return on investment.

Numerous factors, including market value, investment cost, market demand, and the number of credits purchased, play a role in setting the price of a wetland mitigation credit when negotiating its terms. Mitigation banking is a large industry, with nearly one billion dollars in mitigation credit sales annually and roughly 1.1 million wetland mitigation credits for purchase as of 2018.

Critics and Critiques of Mitigation Banking

Mitigation banking has its critics. Opponents believe it is simply a tactic that allows the degradation of valuable wetlands in favor of less valuable compensatory mitigation. Another common fear of critics is that mitigation banking will discourage entities to avoid of dredging and filling. The predominant critics of mitigation banking revolve around compensatory mitigation, not mitigation banking itself.

Mitigation banking also presents some inherent uncertainty for investors who wish to become bank sponsors. First, receiving approval from the governing regulatory agency can take years. Additionally, as mentioned previously, the ability to predict the amount a credit may generate is exacerbated by the numerous types of credit valuation methods. Last, there is very little historic credit price information, which, if present, would provide interested investors with the information necessary to make an informed decision and encourage further mitigation banking and preservation of wetlands.

Conclusion

Although mitigation banking is not new, its increasing use and potential for significant economic impacts are an interesting wrinkle in American environmental law. Only time will tell if the market-based approach to preserving wetlands under the Clean Water Act is an effective measure to achieve the no net loss policy or if the critics are correct and this leads to more wetland degradation. In the meantime, mitigation banking requires cooperation between bank sponsors, governing agencies, and potential developers to fulfill the requirements outlined in Section 404 of the Clean Water Act.