Box The Evolution of a Wetland Banker

Steve Morgan is a duck hunter who now makes a living as a wetland banker. He came to this business via a strange and somewhat circuitous route. In the late 1980s, Morgan and a few colleagues bought a piece of land in central California to create a "hunting club," a place where streams and wetlands would attract the ducks they so loved to hunt. Unfortunately for Morgan—or perhaps fortunately—the wetlands that served as a rest stop on the ducks' flyway were also slated to serve as the site of a major highway bypass. Under the U.S. Constitution, the government can force private landowners to sell their land (assuming adequate compensation) when it is deemed in the "public interest." In legal jargon, the law is called "eminent domain."

Naturally, Morgan was furious. But in discussions with the local authorities, he found out that while it was perfectly legal for the U.S. government to strip him of his duck-hunting grounds in order to make a highway, it was not legal— thanks to the Clean Water Act—for anyone to damage the wetland without "minimizing and mitigating" (or offsetting) that damage.

Morgan decided to take advantage of this situation. He bought 315 acres of his neighbor's farm across the street and then "enhanced and restored" the existing wetland complex by removing invasive species and returning water to the system of streams and channels that had in the past been dammed, dredged, or filled (thus attracting his beloved ducks).With the approval of the U.S.Army Corps of Engineers and EPA, he then turned around and sold the wetland credits from this land (for tens of thousands of dollars an acre) to the Department of Transportation that was building the highway on his former hunting club, allowing them to offset the damage to the wetland they wanted to pave over by protecting the restored wetlands on his new property. The end result was that Steve Morgan had created the first "wetland mitigation bank" west of the Mississippi.

Based on this success, Morgan went on to found a wetland mitigation company called Wildlands Inc. Two decades later, this has become a multimillion-dollar business that employs some 100 people and manages thousands of acres of restored wetlands. (It is also involved with species mitigation banking.) In March 2007,Wildlands received a major capital infusion from Parthenon Capital, a private equity investment firm that manages some $1.5 billion.

In destroying his wetlands, the government had upended Steve Morgan's life, but that gave him a whole new way of making a living and pushed him to become an accidental pioneer for a whole new industry.

Source: See endnote 9.

is possible because the government is restricting supply and allowing the market to set a price—a value—on this particular aspect of biodiversity.9

In a way, it amounts to governments tinkering with the economic infrastructure in order to protect those aspects of biodiversity that should be valued, the externalities. And it is no small matter: Although there are no reliable figures on the size and value of wetland banking, the best guess is that there are more than 400 wetland banks throughout the United States, that the market for wetland mitigation is worth more than $3 billion a year, and that entrepreneurial wetland mitigation bankers account for about one third of that business. The rest is composed of people doing their own wetland mitigation in order to obtain permits or paying the government or nonprofit groups a fee instead of compensation.10

Although wetland mitigation banking has proved to be a rather innovative concept— fueling the growth of a new "nature management industry"—it is important to point out that it is by no means perfect. Like all

SPECIAL SECTION: PAYING FOR NATURE'S SERVICES Banking on Biodiversity innovations, it has come in for some serious criticism. Some of these critiques are really about a reticence to assign a dollar value to biodiversity, reflecting an inherent dislike for the use of markets and capitalist tools to protect nature.11

The critics often argue that the only way to protect nature is for government to restrict its use and strongly enforce this restriction. Although there is clearly a place for this type of protection, there are other powerful tools that should be used as well. Besides, without wetland banking U.S. wetlands would be worth little or nothing, and they would continue to disappear under strip malls, airports, and highways. With banking, their loss has at least a very real monetary cost and can generate funds that may actually lead to the creation of new, very similar wetlands. More important, this cost sends a signal: developers who want to develop a site that has wetlands will spend considerably more per acre, so they had better be absolutely sure they must have that particular site.

Two other criticisms do merit concern, however. The first has to do with the fact that it is notoriously difficult to "create, enhance, or restore" wetlands, so the wetland acre used as compensation may be inherently "less valuable" in terms of biodiversity than the acre being damaged. Partly for this reason, many of the U.S. wetland banking systems require that each acre damaged be compensated with two, three, or more acres of wetland "created, enhanced, or restored." It is a form of overcompensation or insurance and, while it alone does not resolve the matter, it does help.

So far the studies on the quality of the wetlands created as compensation are mixed. In one study conducted in Ohio, scientists looked at the 12 oldest of the state's 25 wetland mitigation banks. Although these had been studied and monitored by the Army Corps and EPA, the study found that many were not up to standard when checked against stringent scientific criteria. Indeed, against these measurements only three banks scored in the "successful category," while five passed in some areas and failed in others. The remaining four failed nearly every assessment, functioning more like shallow dead pools than wetlands. More disturbing, none of the government agencies charged with oversight were taking the bank managers to task for this fact. Overall, however, the study found that the banks were most successful when they maximized the areas defined as wetland, minimized areas of open water, and had similar plant and animal life to natural wetlands.12

Despite its implicit criticism of banking, the study's author, wetland ecologist John Mack, remains one of the more steadfast supporters of mitigation banking. He says that the conclusion from his study should not be that banking as a concept is flawed but rather that, when done properly, it can succeed. He argues that by using better designs, performance standards, enforcement, financing, and an appropriate watershed approach, wetland mitigation banking can produce high-quality wetlands.13

The second important criticism centers on how wetland mitigation banks are monitored and implemented. How is it possible to ensure that an acre of wetland protected today will still be there tomorrow, the day after, and the day after that? There is also a related question: Will funding be ensured to maintain the newly created wetland? To address these issues, the Corps and EPA require that wetland bankers provide both legal and financial assurances that the "created, enhanced, or restored" wetland will last (presumably) in perpetuity. The legal assurances usually take the form of conser


vation easements (legal restrictions on the use of land) held by third parties (usually a nonprofit or the government). The financial assurances can take a variety of forms. They are either trust funds set up to produce the interest necessary to run the bank or bonds or letters of credit that hold the bank financially liable for the protection of the wetlands.14

In addition to these assurances, wetland mitigation banking requires a considerable amount of enforcement and verification. It needs the government agencies overseeing the system to continuously monitor and ensure that the promised wetland protection is delivered. Such "perpetual oversight," however, is costly and is usually very difficult for understaffed and underfunded government agencies. Nevertheless, as the mitigation industry grows it may generate the funds needed to monitor itself.

Despite these warranted criticisms, wetland mitigation is still probably a better system than the alternative—which, realistically, amounted to little or no real protection. Even if there were no wetland banking, roads would still be built, airports would still be constructed, and shopping malls would still go up. Wetlands, in other words, would still be damaged. History shows that society has not been very good at blanket prohibitions on the use of land.

And even if all further damage to biodiversity could realistically be prohibited, the problems of government enforcement and monitoring would still exist. It just would be spread out across tens of thousands of projects, and tens of thousands of acres of damaged wetlands, rather than across hundreds of wetland banks. In fact, numerous government officials report that the existence of wetland mitigation banking makes it easier for them to carry out their monitoring, enforcement, and protection work.15

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