Mitigation Banking as an Endangered Species Conservation Tool

Michael J. Bean and Lynn E. Dwyer

This Article is derived from a November 1999 report of the same name prepared by Michael J. Bean, Robert Bonnie, and Dr. David S. Wilcove of Environmental Defense, with the assistance of Lynn Dwyer and Krista Thomas, then of Sustainable Conservation.

Michael J. Bean is Chairman of the Wildlife Program of Environmental Defense (formerly Environmental Defense Fund). He is the author, with Melanie J. Rowland, of The Evolution of National Wildlife Law (3d ed. 1997 Praeger), the first edition of which was written in 1977, when he was an attorney at the Environmental Law Institute.

Lynn E. Dwyer is California Private Lands Coordinator in Environmental Defense's Oakland, California, office. When the report from which this Article is derived was written, she was Senior Project Manager for Sustainable Conservation in San Francisco, California.

[30 ELR 10537]

A recent headline on the front page of the Wall Street Journal hailed the opening of the nation's first "butterfly bank."¹ The "deposits" in this unusual bank are conservation credits earned by preserving an important area of habitat for the Quino checkerspot butterfly, an endangered species restricted to California. The bank's intended customers are other landowners who hope to develop other sites where the butterfly occurs. In order to do so, they can buy credits from the private entrepreneur who established the butterfly bank.

Meanwhile, just a week earlier on the nation's other coast, the state of North Carolina announced that it was purchasing a large tract of land containing a number of endangered red-cockaded woodpeckers. The state's intention is to earn conservation credits that it can use to meet future mitigation requirements when the state's transportation department builds new roads in woodpecker habitat elsewhere.² The California and North Carolina examples illustrate two forms of a new phenomenon, generally known as either conservation banking or mitigation banking for endangered species.

Mitigation banking originated in the nation's regulatory program aimed at conserving wetlands. Wetland mitigation banking began nearly two decades ago in a largely ad hoc fashion. Few banks were developed until several federal agencies promulgated uniform guidance in 1995³ concerning how they would evaluate and approve wetland mitigation banks. Today, mitigation banking for endangered species is much like wetland mitigation banking nearly two decades ago. That is, a few endangered species mitigation banks are beginning to be developed, but largely in an ad hoc fashion and with no federal policy or written guidance. The banks are coming first; the policies and rules will come later, if at all.

Developing intelligent policy for endangered species mitigation banking should not take as long as it did for wetland mitigation banking. The experience of nearly two decades of wetland mitigation banking should be helpful in designing an appropriate policy for endangered species mitigation banking. However, as this Article explains, the policy cannot merely replace the word wetland with the words endangered species each time it appears in existing wetland mitigation banking policy. There are significant differences not only between endangered species and wetlands but also between the regulatory programs that seek to conserve them, and these differences may warrant quite different mitigation banking policies. The aims of this Article are to explore those differences, examine the role that mitigation banking could play in achieving the goals of the Endangered Species Act (ESA),⁴ and suggest a policy that would best accomplish that result.

Wetland Mitigation Banking

Origins and Basic Principles of Wetland Mitigation

In its most general sense, the word mitigation means the "abatement or diminution of something painful, harsh, severe, afflictive, or calamitous," a way, in other words, of making a bad thing less bad. In environmental contexts, mitigation generally refers to efforts to reduce or offset the negative environmental consequences of activities that are permitted despite their negative impact.

The origins of environmental mitigation date back at least as far as the Fish and Wildlife Coordination Act of 1934 (Coordination Act).⁵ As subsequently amended, that law sought to ensure that fish and wildlife conservation was given "equal consideration" with other objectives of major water resource development projects.⁶ The construction of dams, channelization of streams, and similar public works projects can have a variety of wildlife impacts, such as blocking fish migration, destroying spawning areas, and inundating wetlands and free-flowing streams. To minimize these impacts, the Coordination Act tried to make sure that every major water resource development project included conservation features. Some were intended to benefit wildlife, such as fish ladders to enable fish to surmount otherwise impassable dams or hatcheries to supplement natural spawning opportunities. Other mitigation measures under the Coordination Act were intended not so much to benefit wildlife as to facilitate human recreational use of it. For example, the construction of boat-launching facilities, the acquisition [30 ELR 10538] of existing high-quality habitats, and similar measures were undertaken to offset the loss of public hunting and fishing opportunities. The units of measure for both the adverse impacts and the compensating mitigation were often not acres of habitat or numbers of animals but numbers of human "user days."

At present, somewhat more rigorous mitigation principles are used to implement the wetland conservation provisions of the Clean Water Act (CWA).⁷ Section 404 of that law prohibits the discharge of fill or dredged material into the waters of the United States, including wetlands, without a permit from the U.S. Army Corps of Engineers. The Corps routinely requires compliance with specific mitigation measures as a condition of such permits, and it follows a three-step sequence in developing such measures: avoidance, minimization, and compensation. The first step explores the availability of practical alternatives that avoid wetland impacts altogether. If there is a practical alternative to siting a project in a wetland, the Corps will not issue a permit. If there is no practical alternative that completely avoids the wetland, the second step is to minimize the impact on it by reducing the project's "footprint," restoring temporarily disturbed habitats, or other means. Any remaining, unavoidable impacts must then be remedied through compensating measures that try to offset any loss of the wetland's functions and values.

In addition to this sequencing requirement for wetland mitigation, other principles have been clearly established. For example, the Corps generally prefers "on-site" mitigation measures (undertaken on or very near the project site) to "off-site" measures (undertaken away from the project site). The reason is that certain wetland functions (e.g., floodwater retention and water purification) are truly local. That is, less retention of floodwater in the Illinois River watershed cannot be fully compensated for by more retention of floodwater in the Iowa River watershed. Similarly, the Corps strongly prefers "in-kind" to "out-of-kind" mitigation. For example, the Corps generally tries to mitigate the loss of a particular kind of wetland by requiring the restoration or enhancement of the same kind of wetland. One rationale for this preference is that the suite of species associated with each particular type of wetland differs from the suite of species associated with other types of wetlands. Requiring in-kind mitigation therefore attempts to maintain ecological values.

A final preference is for restoring and enhancing wetlands over creating them, which reflects scientific doubts about being able to create fully functioning wetlands where they never occurred naturally. The preference of restoring and enhancing over simply purchasing or preserving existing wetlands recognizes that mitigating the loss of some wetlands by purchasing or preserving others guarantees a net loss of existing wetlands and their associated functions and values. Later we will consider whether these principles are equally relevant to endangered species mitigation.

The Potential Benefits of Mitigation Banking: A Theoretical Review

Project-by-project mitigation, in which on-site, in-kind mitigation measures are drawn up for each new project affecting wetlands, has a number of potential drawbacks, for both regulated and conservation interests. First, designing an appropriate mitigation element for each new small development project is costly, as one cannot take advantage of economies of scale. Second, the restoration and enhancement of wetlands are uncertain arts; if development projects proceed concurrently with mitigation efforts, the development may be complete long before one can determine the success or failure of the mitigation effort. Third, even if successfully established, small and often isolated mitigation wetlands may be seriously degraded over time by the invasion of exotic species, illegal dumping, off-road vehicles, and other threats. Without some mechanism to "defend" and manage these mitigation sites over the long term, they may cease to provide the full range of functions and values for which they were intended.

Wetland mitigation banking was developed to overcome these deficiencies in traditional mitigation and to create opportunities for entrepreneurial landowners to profit from wetland conservation.⁸ Essentially, wetland mitigation banking is the creation, restoration, enhancement, or preservation of wetlands in advance of any specific project requiring mitigation, with the "credits" earned from such efforts made available to meet the mitigation requirements for future projects of the same or a different landowner. State highway departments initiated most of the early wetland mitigation banks. They knew that they would have a continuing need to mitigate wetland losses as they built more new highways. Rather than develop postage stamp-sized on-site mitigation projects for each new highway project, they looked for a means of mitigation that was both more efficient for them and more beneficial for the environment. One large-scale wetland restoration effort was often cheaper, on a per-acre basis, than many smaller projects.

Proponents of wetland mitigation banking asserted that the environment would also benefit for at least three reasons. First, mitigation banking offered the opportunity to locate mitigation sites where they would offer a significant environmental benefit rather than at the site of the proposed development, which might or might not have such benefits. Second, by consolidating the mitigation for many small projects into one large mitigation site, banking could secure certain environmental benefits (e.g., complexity of habitats, viability of populations, buffering from edge effects) unattainable at smaller sites. Finally, if mitigation banks extended credits only after demonstrating success in creating, restoring, or enhancing wetlands, then banking could offer a means of improving the generally poor record of traditional mitigation.

The Results of Traditional Mitigation: A Practical Review

The track record of traditional, project-by-project wetland mitigation is dismal. One example is a 1991 study done for the South Florida Water Management District that examined more than 100 projects that required some form of wetland mitigation,⁹ but for which the mitigation was actually [30 ELR 10539] carried out for only 40. The mitigation for 31 of them required the creation of a total of 1,058 wetland acres, but only about one-half (531 acres) were actually created. The study also found that 32 of the 40 mitigation sites had been colonized by undesirable plants. Furthermore, only three of the sites had long-term management plans. Finally, although post-construction monitoring was required at nearly every site, it was never done at 15 of them.

Whether these results should properly be considered a failure of traditional mitigation or, rather, a failure of the government to monitor and enforce traditional mitigation requirements, the outcome is still the same. Traditional, project-by-project wetland mitigation has often not lived up to its promise.¹⁰ Benjamin Tuggle, a former U.S. Fish and Wildlife Service (FWS) field supervisor in Chicago, explained why wetland mitigation in urbanizing areas so frequently fails:

The typical project requiring mitigation is a residential or commercial development impacting several acres of wetland. The mitigation typically is sited in a basin which also provides stormwater detention or compensatory floodplain storage, both of which involve large influxes of contaminated urban stormwater. Water quality is often limiting in these situations, and the large water level fluctuations preclude the establishment of normal wetland hydrology. These basins typically become shallow open water ponds, providing few wetland functions. Because they are small and usually surrounded by development, they provide little in the way of wildlife habitat. For similar reasons, it is difficult to find appropriate entities to take over management responsibilities, so there usually is no provision for long-term management and stewardship. All of these factors result in a high failure rate.¹¹

Problems with wetland mitigation are not unique to federal programs but plague state programs as well. A recent example is a study¹² of mitigation results in Massachusetts under that state's generally well regarded Wetlands Protection Act.¹³ The goal of the Massachusetts study was to generate more recent and more statistically reliable information than that contained in a 1989 Corps study that found a 36% failure rate for wetland "replication" (i.e., creation) projects in the state. The later study examined 391 mitigation projects in 44 randomly selected towns, including site visits to 114 projects. It found that 54.4% of the projects did not comply with regulatory requirements and that 38.6% had produced no wetland at all. In nearly 22% of the projects examined, no wetland had even been built; for a nearly identical proportion of projects, a wetland was built but was smaller than required.¹⁴

Another significant finding of the Massachusetts study was that "the plant communities in replicated wetlands differed significantly from those in wetlands they were designed to replace."¹⁵ Although a majority of the projects for which mitigation was required affected forested wetlands, and creation of a forested wetland was the goal of a quarter of the projects, no forested wetland was successfully created at any mitigation site. Moreover, the study found that plant communities in the created wetlands did not become more like those at impact sites over time, even though the created wetlands were as much as 12 years old. In the words of the study: "This means that, at best, there is a significant temporal loss of wetland function for at least 12-15 years following creation of a replication site, and this loss may possibly last much longer."¹⁶

In addition to the biological problems associated with the mitigation sites, the study uncovered deficiencies in program administration. "Some projects that were clearly not in compliance, including two that were never built, had been issued Certificates," indicating that they were in compliance.¹⁷ The study also found that "most towns are not systematically tracking the progress of replication projects and determining if they are in compliance with the regulations."¹⁸ Although Massachusetts regulations require that replicated wetlands function similarly to the wetlands they replace, this requirement "appears to be poorly understood both by Conservation Commissions and by permit recipients, and approval is routinely given for wetland replication projects that are designed to be dissimilar from the impacted wetlands in both structure and function."¹⁹

The Massachusetts study shows that traditional wetland mitigation efforts often fail whether they are overseen by state or federal authorities. There are, as yet, no similar studies assessing the effectiveness of endangered species mitigation [30 ELR 10540] efforts. It is clear, however, that some of the facts contributing to the ineffectiveness of wetland mitigation efforts also are present for endangered species mitigation. These include diffuse and poorly coordinated mitigation efforts, technical challenges, and limited resources for monitoring and enforcement.

It was because of difficulties like these and the repeated failure of traditional wetland mitigation efforts that the idea that wetland mitigation banking might be more successful took hold. Whether wetland mitigation banking will in fact achieve better results than traditional, project-by-project wetland mitigation is not yet clear. Nevertheless, some people are beginning to embrace endangered species mitigation banking as a better alternative than traditional approaches to endangered species mitigation. Before deciding whether they are right, we will consider some of the important similarities and differences between wetlands and endangered species.

Similarities and Differences Between Endangered Species and Wetlands

Many private landowners who want to earn income from their land or to hold onto it as a long-term investment regard wetlands or rare species as a liability rather than an asset. It is not the wetlands or the species themselves that pose a threat; rather, it is the potential land use restrictions. Under the ESA, no one can "take" an endangered animal without a permit,²⁰ and this prohibition against "taking" extends to activities that alter the animal's habitat. Land clearing, timber harvesting, and other habitat-altering activities may therefore expose a landowner to criminal penalties or civil injunction. Landowners whose land houses either endangered animals or plants may also be unable to secure any of the federal permits required for the activities they wish to carry out. From the landowner's perspective, then, any endangered animal may well be an "anima non grata."

For our purposes, the main similarity between wetlands and endangered species is that both are protected and thus, without a permit, cannot be harmed by a variety of activities. At the same time, there are some important differences between the two. Wetlands are relatively permanent features on the landscape, but many endangered species are only short-term occupants of any given parcel. For example, a wetland with threatened California red-legged frogs living in it remains a wetland even after non-native bullfrogs have found their way to the site. Once the bullfrogs arrive, however, they are likely to displace the red-legged frogs. When the red-legged frogs are gone, the site will continue to be protected as a wetland under the CWA, but it will no longer receive protection under the ESA.

It is not just introduced species that contribute to the impermanence of many endangered species. The young stands of jack pines that serve as breeding habitat for Kirtland's warblers stop supporting these endangered birds once the stands are more than roughly 20 years old. A parklike stand of older longleaf pine trees will serve as suitable habitat for the endangered red-cockaded woodpecker only as long as the hardwood understory is kept at bay through prescribed burning or other means. If the hardwood understory and the woodpecker's ideal open pine forest habitat are not properly managed, they will be transformed into an unsuitably dense mixed pine-hardwood forest. Small, isolated wetlands will likely persist on the land regardless of what happens to other, similar wetlands nearby. In contrast, however, a small patch of habitat supporting the endangered Bay checkerspot butterfly may be too small to continue doing so once nearby habitat patches have disappeared.

These examples illustrate a common and important difference between wetlands and endangered species habitats. In order for wetlands to remain wetlands, they often need only to be protected; they generally do not need to be actively managed (though active management may be needed to prevent their degradation by alien species and other factors). In contrast, many endangered species habitats must be actively and continuously managed in order to support endangered species. Simply "protecting" them by putting a fence around them and prohibiting human activities inside is not sufficient. Without active management, many endangered species habitats cease to be endangered species habitats and thus lose the protection they formerly had under the ESA. Without active management, wetlands also may suffer serious degradation, but they are unlikely to cease being wetlands altogether. Despite their degraded condition, they will continue to be protected against the full range of activities regulated by the CWA. This important difference has significant ramifications for mitigation strategies.

In addition to the inherent differences between wetlands and other endangered species habitats, there also are differences in the purposes of the federal programs that seek to conserve them that, too, can give rise to different mitigation strategies. For example, the goal that has guided wetland policy during the past decade has been "no net loss" of wetland acreage and function. Whereas measuring wetland function is difficult, measuring wetland acreage is easy. That is, if there are x million acres of wetlands in the United States today and there will be x million acres 10 years from now, the goal of no net loss (at least with respect to acreage) will have been achieved. The goal of the ESA, however, cannot be achieved simply by freezing the status quo. Rather, one must reduce the likelihood of extinction—or, conversely, increase the probability of survival—to a safe level. When a species is no longer in danger of extinction in the foreseeable future and is not likely to become so, it is considered to have recovered. This, in turn, allows it to be removed from the endangered species list.

Recovery requires that the threats to a species' survival be reduced. It does not necessarily mean an increase in the numbers or distribution of a species (though it usually does). Indeed, it may be possible for a species to decline in total numbers even as its likelihood of survival increases. This could happen, for example, if none of the habitat of a declining species were initially under the sort of ownership that ensured the active management needed to perpetuate it. If, through public acquisition or otherwise, one could be assured that some of its habitat would be appropriately managed, that fact might improve its prospects of survival enough for recovery, even though the rest of the habitat (and the species occupying it) were lost.

For many endangered and threatened species, recovery objectives are often expressed as a number of populations of a given size occupying a secure habitat. To meet these objectives, it is not necessary for every occurrence of a species to be maintained where it now is. Instead, if occurrences of the [30 ELR 10541] appropriate size and distribution can be secured, the recovery goals can be achieved regardless of what happens to the smaller, more isolated populations. This fact makes the conservation of endangered species fundamentally different from the conservation of wetlands. It also provides opportunities for mitigation (and mitigation banking) under the ESA that are distinct from those for wetlands under the CWA. Before considering which policies would be most suitable, the policies governing wetland mitigation banking are briefly examined below.

Federal Guidance for the Establishment, Use, and Operation of Wetland Mitigation Banks

Although wetland mitigation banking began in the early 1980s, it had no uniform federal guidance until 1993, when the Corps and the U.S. Environmental Protection Agency (EPA) issued "interim national guidance."²¹ Two years later, on November 28, 1995, the Corps, EPA, the FWS, the National Marine Fisheries Service, and the Natural Resources Conservation Service jointly issued the more detailed, final Federal Guidance for the Establishment, Use and Operation of Mitigation Banks.²² This 1995 Guidance remains in place today as a comprehensive account of the policies, procedures, and criteria applicable to the use of mitigation banks to provide compensatory mitigation for authorized adverse impacts to wetlands under § 404 of the CWA and § 10 of the Rivers and Harbors Act.²³

The Basics of Establishing a Wetland Mitigation Bank

The 1995 Guidance describes both the procedural and the substantive requirements for wetland mitigation banks. In regard to procedure, the 1995 Guidance suggests that a mitigation banking initiative begin with informal discussions between a prospective bank sponsor and the appropriate agencies. If the prospective sponsor wishes to proceed, it submits to the Corps a "prospectus," a very general statement of the sponsor's plans for the bank. The Corps then provides notice and a brief opportunity for the public to comment on the prospectus.

Submission of a prospectus triggers a formal agency review of the banking proposal. This review is conducted by a "mitigation bank review team" chaired by a representative of the Corps and composed of representatives of all the federal agencies with an interest in the proposed bank, as well as state, local, and tribal agencies with regulatory authority pertaining to the proposed bank. Working with the review team, the prospective bank sponsor next prepares a "banking instrument" that describes in detail the characteristics of the bank and how it will be established and operated. Among other things, banking instruments typically describe the geographic area to be serviced by the bank, methods for determining credits and debits, performance standards, monitoring plans, contingency and remedial responsibilities, financial assurances, and provisions for long-term management. The 1995 Guidance states that review teams should "strive to obtain consensus," but if a consensus cannot be reached, it gives "the responsibility for making final decisions regarding the terms and conditions of the banking instrument" to the chair of the team (i.e., the Corps).²⁴ When completed, the banking instrument is signed by the bank sponsor and concurring members of the review team. Once a bank has been established, the Corps also is responsible for authorizing the use of credits from the bank to mitigate specific projects. When exercising this responsibility, the Corps is to consider the comments of the other resource agencies, just as it is generally required to do for wetland permit applications.

Activities That Generate "Credits"

What must a wetland mitigation bank do to generate credits? The 1995 Guidance recognizes four categories of activities: creation, restoration, enhancement, and preservation. Creation refers to the establishment of a wetland where none existed. Technically, this is usually the most challenging, least certain, and most controversial of the mitigation activities.

Preservation refers to the protection of existing wetlands in perpetuity through legal and physical mechanisms. Technically, this is the least challenging and generally most certain of the mitigation options. Nevertheless, for reasons discussed later, the 1995 Guidance does not favor preservation as a source of mitigation banking credits but allows it only "in exceptional circumstances."²⁵

Restoration and enhancement refer to a potentially overlapping set of activities. Restoration can mean the reestablishment of a wetland at a site where one once existed but no longer does. Often, restoration is relatively easy and usually successful if it is simply removing drainage tiles or levees, or otherwise restoring hydrological conditions to a site with hydric soils capable of supporting wetland plants. Because the art of wetland restoration is better developed than that of wetland creation or enhancement, the 1995 Guidance specifies that "restoration should be the first option considered when siting a bank."

Restoration, however, is not limited to the reestablishment of wetlands at former wetland sites. It also includes the reestablishment of wetland characteristics and functions at a site where they still exist but are degraded. It is here that it begins to blend with enhancement, which refers to activities that increase wetland functions at an existing (though not always degraded) wetland. When restoration is given this meaning, both it and enhancement activities present a big challenge in quantifying the values gained and ensuring their comparability to those lost by the filling of wetlands elsewhere.

Creating a Currency: The Measurement of "Credits" and "Debits"

Although the 1995 Guidance explains reasonably clearly the types of activities that can generate credits, it is far less clear about how those credits are to be quantified to compensate for the impacts on wetlands elsewhere. The 1995 Guidance requires the bank sponsor and the "mitigation [30 ELR 10542] bank review team" to agree on a "banking instrument." Among other things, the 1995 Guidance specifies that the banking instrument should address "methods for determining credits and debits." It does not say what those methods should be, other than to say that "an appropriate functional assessment methodology . . . acceptable to all signatories should be used."²⁶ Whatever methodology is chosen, the 1995 Guidance makes clear that it should be used in assessing both credits and debits.

The assessment methodology ultimately used must have a common "currency" to ensure that the environmental gains from the mitigation activities and the environmental lossesfrom the wetland-filling activities are measured consistently. The 1995 Guidance's preference is a methodology that measures both wetland acreage and "function." However, the 1995 Guidance recognizes that in some instances "an appropriate functional assessment methodology is impractical to employ" and that in such instances "acreage may be used as a surrogate for measuring function."²⁷

The use of acreage as a surrogate for more sophisticated measures of function is not a problem when the mitigation involves creating or restoring the same general type of wetlands as those being lost. Acreage becomes a more problematic surrogate when the mitigation consists of preserving an existing wetland or enhancing the functions of a degraded wetland. The difficult question then is how to determine what amount of wetland enhancement or preservation at the mitigation site is equivalent to the loss of an acre of wetland at the impact site. However credits and debits are measured, the actual exchange of credits for debits requires yet another determination, the specification of a compensation ratio.

Determining Compensation Ratios

Among the many things to be specified in each banking instrument are "compensation ratios." The banking instrument should specify the number of bank credits required to be exchanged in order to compensate for each unit (however measured) of wetland loss. Surprisingly, though, the 1995 Guidance fails to consider this in any detail.

The virtual silence of the 1995 Guidance on the topic of compensation ratios might be thought to reflect an implicit assumption that ordinarily the ratio will be one-to-one. A one-to-one ratio would ensure that each unit of wetland loss was replaced by a comparable unit of wetland gain, reflecting the goal of "no net loss" of wetlands in effect since 1990. In practice, however, compensation ratios are frequently set higher than one-to-one. Although the 1995 Guidance offers few clues to setting compensation ratios at anything other than one-to-one, it does at least suggest that the likelihood of success in creating, restoring, enhancing, or preserving wetlands at the mitigation site should not influence the compensation ratio.

The Chicken or the Egg: The Dilemma of Advance Crediting

The 1995 Guidance does not require that mitigation credits be earned and used only after the bank's credit-generating measures have proved successful. Instead, it authorizes the "limited debiting of a percentage of the total credits projected for the bank at maturity" before the successful achievement of the full wetland functions that are to be the basis for any credits.²⁸ This practice, known as advance crediting, was a concession to the economic argument that prospective bankers often need to be able to generate some return relatively quickly to finance the costs of mitigation, particularly when a large restoration or creation effort is planned. While that argument may often be valid, it undermines one of the strongest arguments offered for mitigation banking—that mitigation is first achieved and then "banked" for later use.

If advance credits are issued, there will be at least a temporary loss of wetland functions before the mitigation actions meant to compensate for that loss take effect. The 1995 Guidance tries to balance this situation in two ways. First, it seeks to limit the duration of such temporary losses by specifying that "initial physical and biological improvements" associated with the advance credits "should be completed no later than the first growing season following initial debiting of a bank."²⁹ Second, the 1995 Guidance suggests that it may be appropriate to impose higher mitigation ratios to compensate for such temporal losses.

Service Areas: On-Site Versus Off-Site Mitigation

In 1990, five years before the 1995 Guidance on mitigation banking, the Corps and EPA signed a memorandum of agreement concerning mitigation under § 404 of the CWA and § 10 of the Rivers and Harbors Act. That memorandum expressed a preference for on-site mitigation over off-site mitigation. Nevertheless, the 1995 Guidance concludes that the 1990 memorandum "should not preclude the use of a mitigation bank when there is no practicable opportunity for on-site compensation, or when use of a bank is environmentally preferable to on-site compensation."³⁰ Thus, the preference expressed in 1990 for on-site mitigation may not in fact be as strong as it first appears.

The rationale for preferring on-site to off-site mitigation is that many of the benefits that wetlands provide, and that the law protects, are inherently local. Floodwater retention, nutrient uptake, and other functions of wetlands may be replicable through wetland restoration elsewhere, but the replication of those functions at a distant mitigation site still leaves the original wetland site without the local benefits that the lost wetland formerly provided. Unless mitigation is carried out very close to the impacted site, some local problems (e.g., flooding and the loss of locally valued wildlife) may actually be exacerbated, notwithstanding the mitigation.

Although the 1995 Guidance declares that the use of a mitigation bank may sometimes be preferable to on-site mitigation, it still tries to limit how far from the impact site a mitigation bank may be located. It does this by requiring that the banking instrument specify a "geographic service area" within which credits from the bank can be used to compensate [30 ELR 10543] for wetland impacts. Service areas may be nearby watersheds, adjacent counties, or other areas close by. The determination of the service area has major implications for the bank's economic viability. In general, bank sponsors seek as large a service area as possible so as to widen the market of potential buyers. The preference of the federal resource agencies for on-site mitigation, however, pushes them toward smaller service areas, to keep the benefits of mitigation as close as possible to the site of the wetland losses. The delineation of a bank's service area, however, does not necessarily preclude the use of credits from the bank to mitigate for losses outside the service area. The 1995 Guidance does allow such use of credits "on a case-by-case basis, where it is determined to be practicable and environmentally desirable."³¹

The Preservation of Existing Wetlands as a Source of Credits

The 1995 Guidance allows the preservation of existing wetlands to generate mitigation credits only "in exceptional circumstances." The rationale for this policy is that CWA § 404 already protects existing wetlands from a broad range of destructive activities. To allow credits for preserving what is already substantially protected from most threats would thus produce a largely illusory benefit.

While the scope of harmful activities regulated under § 404 is broad, it is not limitless, and some serious threats to the viability of wetlands are beyond its reach. For these reasons, the 1995 Guidance allows the preservation of existing wetlands to generate mitigation credits under a variety of exceptional circumstances, including situations in which existing wetlands "are under demonstrable threat of loss or substantial degradation due to human activities that might not otherwise be expected to be restricted."³² If, through preservation, a bank prevents the degradation of an existing wetland, then the difficult issue becomes how to quantify the credits. The 1995 Guidance specifies that credits in such circumstances "should be based on the functions that would otherwise be lost or degraded if the aquatic resources were not preserved, and the timing of such loss or degradation."³³ In other words, the more imminent the threat to the existing wetland is, the more credits earned. In practice, this rule is often exceedingly difficult to apply. Because preservation typically protects a wetland from the loss of some, but not all, functions, the 1995 Guidance asserts that "a greater number of acres from a preservation bank" is usually required to compensate for a given loss than would be the case if the bank were based on restoration, creation, or enhancement.

The Use of Public Land in Mitigation Banks

The 1995 Guidance prefers that preservation not generate mitigation credits because existing wetlands already have the benefit of significant legal protection. Somewhat similar considerations arise when publicly owned lands are proposed as sites for mitigation banks. Public agencies that manage public lands, particularly those established for conservation purposes, commonly carry out a variety of environmental improvements, including wetland creation, restoration, or enhancement. If private parties finance such improvements, should they be able to earn mitigation credits for doing so? The 1995 Guidance says yes but specifies that the number of credits in such circumstances "should be based solely on those values in the bank that are supplemental to the public program(s) already planned or in place."³⁴ Put differently, "baseline values represented by existing or already planned public programs, including preservation value, should not be counted toward bank credits."³⁵ This presents another, very difficult, variant of the familiar problem of quantifying mitigation credits. It also introduces a potentially troublesome new issue. A private entrepreneur entering into a cooperative arrangement with a public landowner to carry out a wetland restoration project on public land has no land costs associated with the project. In contrast, a private entrepreneur doing a similar project on his own land must factor the cost of the land into the credit price. These public-private cooperative arrangements therefore have a competitive advantage. The 1995 Guidance never addresses this, though commentators have criticized it. It reduces the incentive for entrepreneurs to establish mitigation banks on their own land, and it gives public agencies an incentive to look to the private sector to fund environmental improvements on public land. Ultimately, it may shortchange the environment by providing a convenient rationale for reducing the public funding of such improvements.

The Use of Federally Funded Wetland Projects

A similar question is whether mitigation banks can be sited on land where wetlands have been restored or created with federal funding. The Wetlands Reserve Program and the Partners for Fish and Wildlife Program are two examples.³⁶ The 1995 Guidance states that federally funded wetland conservation projects undertaken under such programs "cannot be used for the purpose of generating credits within a mitigation bank."³⁷ Similarly, the FWS' 1999 policy on the use of refuge lands states that "where habitats are protected or restored under" such programs, the FWS "will not recommend, support, or advocate the use of such lands as compensatory mitigation, including mitigation banks" during the term of the agreement and may do so after the term of the agreement only "in limited and exceptional circumstances."³⁸ The rationale for these policies, though not explained, appears to be that because such projects have been at least partially federally funded, private banking interests should not be able to sell mitigation credits for actions that would not have taken place were it not for the federal funding. That rationale is difficult to square with the fact that the [30 ELR 10544] 1995 Guidance allows mitigation banks to be sited on public (including federal) land. In those instances, there is also a public contribution to the endeavor (in the form of the public land made available for the bank), yet the 1995 Guidance allows credits to be sold from banks sited on public land.

In-Kind Versus Out-of-Kind Mitigation

Should the loss of onetype of wetland (e.g., a forested wetland), be compensated for by the creation or restoration of another type of wetland (e.g., a shrub/scrub wetland)? Such arrangements are known as out-of-kind mitigation. Although the 1995 Guidance is not in favor of them, it does not prohibit them altogether. Instead, it allows them if they are "practicable and environmentally preferable to in-kind compensation."³⁹ An example of this is a type of wetland at a mitigation site that is "of greater ecological value to a particular region."

Out-of-kind mitigation arrangements present a special challenge in quantifying credits and debits, since by definition, one is dealing with apples and oranges. Implicitly, the 1995 Guidance recognizes that it may be environmentally desirable to compensate for the loss of relatively common and ordinary types of wetlands by restoring or protecting relatively more rare or valuable types of wetlands. Alternatively, the relative rarity or value of two different types of wetlands might be addressed through specially tailored mitigation ratios. The 1995 Guidance, however, gives no real direction on this difficult issue.

Can Credits Count Twice?

A central tenet of mitigation banking is that beneficial activities carried out at a mitigation site generate credits that compensate for harmful activities at an impact site. Once used, a credit is extinguished and may not be reused. However, the 1995 Guidance states that "the same credits may be used to compensate for an activity which requires authorization under more than one program,"⁴⁰ such as state or local wetland regulatory programs, the national pollutant discharge elimination system program, and the Superfund removal and remediation programs. Although the 1995 Guidance never mentions the ESA, it presumably would qualify as a program under which separate authorization, in addition to that required by the CWA, is needed for at least some activities.

Must Mitigation Commitments Be Permanent?

Filling a wetland is, in most cases, a permanent loss. To balance that loss, compensatory measures should be permanent as well. That, at least, is the conclusion of the 1995 Guidance, which generally stipulates that wetlands in a mitigation bank be protected in perpetuity through a conservation easement, title transfer, or similar arrangement.⁴¹ However, less-than-permanent protection of the resources in a mitigation bank can be approved "in exceptional circumstances." When less-than-permanent mitigation is approved, the 1995 Guidance makes clear that it should never "extend for a lesser time than the duration of project impacts for which the bank is being used to provide compensation."⁴² The 1995 Guidance clearly is aiming for a temporal balance between impacts and mitigation: permanent impacts must be counterbalanced by permanent conservation commitments; less-than-permanent impacts should be counterbalanced by conservation commitments that last at least as long as the impacts.

Financial Assurances

The 1995 Guidance attempts to ensure the success of mitigation at approved banks by requiring that bank sponsors secure sufficient financial assurances to monitor and maintain the bank and to cover future contingencies. Such assurances can take the form of performance bonds, casualty insurance, or other mechanisms. Similar requirements are seldom imposed on those undertaking traditional project-by-project mitigation.

California's Conservation Banking Policy

The federal guidance on wetland mitigation banking is similar to the guidance of many states. Although many states have promulgated laws, policies, or regulations pertaining to wetland mitigation banking, only California has adopted a policy governing endangered species mitigation banking—a policy promulgated in April 1995 as an initiative of then-Governor Pete Wilson.

Details of the Policy

California's Official Policy on Conservation Banks is a brief document with a broad scope.⁴³ It provides guidance on the use of banks to compensate for impacts on both wetlands and endangered species, as well as on "Environmentally Sensitive Habitat Areas, mudflats, sub-tidal areas, and less sensitive resources." The broad scope of the policy reflects the several different environmental laws in California that may require mitigation, including the California Environmental Quality Act (CEQA),⁴⁴ the California Coastal Act,⁴⁵ and the California Endangered Species Act.⁴⁶

Interestingly, although all these various laws impose "mitigation" requirements, the policy never uses the term mitigation banks. Instead, it refers throughout to the banks it seeks to encourage as conservation banks. At least in part, this terminology reflects a conscious choice to try to avoid the controversy that long dogged wetland "mitigation banks." By calling their banks something different, California policymakers apparently hoped that those who had already made up their minds about "mitigation banks" would be willing to take a fresh look at "conservation banks."

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Apart from their names, however, there are few real differences. One rather conspicuous difference between the California policy and the federal wetland mitigation banking guidance is the treatment afforded "preservation" as a source of bank credits. Recall that under the federal guidance, the preservation of existing resources is permitted as a source of credits only under "exceptional circumstances." Instead, restoration and creation of wetlands are the preferred activities. Under the California policy, however, no presumption against preservation is made. Indeed, it is listed first among the four types of resource management that can generate credits. The others are resource enhancement (the enhancement of a degraded resource), resource restoration (the restoration of a resource to its historical condition), and resource creation (the creation of a specified resource condition where none existed before). In practice, most of the conservation banks thus far approved in California simply preserve existing parcels and promise little or no resource creation, restoration, or enhancement.

Like the federal guidance, the California policy allows advance crediting, or the recognition and use of credits before the "full realization of the targeted resource value at the bank." The availability of credits is to be determined "in accordance with agreed upon performance criteria for the development of the resource value in question." The California policy has one distinctive feature with respect to credits, however. It provides that "upon sale of the first credit in the bank area or subarea, the land in the bank or subarea must be permanently protected through fee title or conservation easement." Since the policy requires that any bank and each of its subareas be "large enough to be ecologically self-sustaining or part of a larger conservation strategy that has a reasonable expectation of being accomplished," this stipulation serves an important conservation purpose: it ensures that the mitigation associated with any sale of credits will be neither too small nor too transitory to be ecologically significant.

From the point of view of California's bankers, however, this requirement is problematic. According to interviews with several of them, they believe the resource agencies have no motivation to help complete the sale of credits in a bank once an easement is in place. Rather, the bankers believe that once the first credit sells and an easement is in place, the agencies regard the site as locked into conservation and therefore prefer to seek new sites to lock into conservation rather than to direct project proponents to banks with remaining, unsold credits. If the bankers' perception is correct, this requirement will ultimately be self-defeating for the agencies, since it will discourage entrepreneurs from entering conservation banking, exactly the opposite result from what the California policy seeks. In the meantime, bankers are trying to overcome this difficulty by writing into their banking agreements stipulations that obligate the resource agencies to inform potential credit buyers of the availability of credits at their banks and that require the agencies to give them a sort of "most-favored nation" guarantee. Such a guarantee would prevent the agencies from recognizing credits as having a mitigation value that is less on an acre-for-acre basis than that of any other mitigation banking or habitat mitigation credit program available for the same species in the same area.

Although the California policy says nothing about the use of public lands for conservation banking purposes, this issue soon came up when San Diego County asked the California Department of Fish and Game and the FWS about the suitability of county-owned lands for such purposes. The two agencies prepared a joint response concluding that several types of county land would not be appropriate for banking purposes, such as (1) land used as mitigation for a previous project; (2) land already designated or dedicated for passive park or open-space use, when that use was generally compatible with sustaining biological values; and (3) land acquired or given for park or natural open-space purposes. This response does not seem objectionable if preservation is the only activity that the bank is contemplating: the position of the two agencies prevents the use of lands already committed to preservation. A somewhat different response might have been appropriate for banks contemplating resource creation or enhancement. As mentioned earlier, the federal wetland mitigation banking guidance recognizes this distinction and allows mitigation credits to be earned on publicly owned lands, but "based solely on those values in the bank that are supplemental to the public program(s) already planned or in place."

The joint response of the California Department of Fish and Game and the FWS to San Diego County's request illustrates the coordination between these two agencies. Although the California policy on conservation banking does not have the FWS' imprimatur, the two agencies did jointly issue in 1996 a "Supplemental Policy Regarding Conservation Banks Within the Natural Community Conservation Planning (NCCP) Area of Southern California."⁴⁷ This supplemental policy, which begins by noting that the two agencies "support the creation of conservation banks," largely fills in some of the interstices of the state policy. It also tries to offer some guidance on what has become a contentious issue regarding the interchangeability of species and their habitats. According to the supplemental policy, in general only in-kind mitigation (involving the same habitat and species) is permitted. However, an exception to this in-kind mitigation requirement will be made when "the bank is located within a jurisdiction that has an approved subarea plan, or if the wildlife agencies determine that the bank achieves regional conservation goals." That exception was at issue in the only litigation thus far concerning endangered species mitigation banking.

Litigation

The premise of the NCCP program was that it would focus on distinctive natural communities (like coastal sage scrub), rather than on their constituent rare species. The ESA, however, focuses on individual species, generally prohibits their taking, and requires mitigation when their taking is allowed. Natural communities can sometimes usefully serve as a rough surrogate for the individual species generally associated with such communities, but the fit is not always precise. For example, if a landowner develops a 100-acre parcel of coastal sage scrub habitat that is occupied by California gnatcatchers, it is by no means clear that the loss of this particular habitat could be satisfactorily mitigated under the ESA by protecting another 100-acre parcel that is not occupied by gnatcatchers (although even an unoccupied parcel may be of conservation value if, for example, it is situated in [30 ELR 10546] a key corridor connecting major occupied sites). Yet the NCCP process tries to avoid this very need to account for each and every species on each and every parcel.

This issue surfaced recently in the onlycourt challenge thus far to an endangered species mitigation bank. In San Bernardino Valley Audubon Society v. Metropolitan Water District,⁴⁸ the narrow issue decided was whether the creation of an endangered species mitigation bank required the preparation of an environmental impact report (EIR) under the CEQA.⁴⁹ Although the trial court found no need for an EIR, the court of appeals reversed the trial court's decision.

The mitigation bank in the San Bernardino case was established by the Metropolitan Water District (MWD) primarily for its own future projects in southern California. However, the agreement creating the bank anticipated that there would likely be credits in the bank beyond those needed for the MWD's projects and provided that these could be sold to third parties. It was this potential for sale to third parties that most concerned the court, plus the fact that the bank purported to provide mitigation for projects affecting some 65 different "target species." In order to establish an equivalence of values when mitigating the impacts of future projects by the purchase of bank credits, the agreement adopted "a complex habitat value formula to match habitat values in affected outside project areas to the available mitigation bank credits."⁵⁰ The parties had different interpretations of how this complex formula was to work, and the court declined to analyze it in detail. Nevertheless, in a key passage, the court concluded that there was "a fair argument that mitigation banking on a habitat basis will allow for a result different from an acre-for-acre or specie-by-specie [sic] exchange."⁵¹ To illustrate its concern, the court offered the following example:

If an outside project has six endangered or threatened species on one acre, it appears . . . that the habitat value equivalent of one acre of the mitigation bank could be used to provide mitigation for all six species. This compression of habitat could have a significant effect on the six species.⁵²

The court went on to agree with the plaintiff's concern that significant effects were possible because "occupied habitat may be replaced by unoccupied habitat in the mitigation bank."⁵³

The court's decision would appear to create a significant problem for using habitat-based rather than species-based mitigation banks, at least when the habitat encompassed more than one species of concern. Since a major goal of the NCCP was to design a system of reserves that in their aggregate would meet the conservation needs of a whole suite of ecologically associated species without the need to account for each and every species on each and every parcel, the court's decision potentially undermines the ability to use mitigation banks as part of the NCCP's strategy. However, it may be noteworthy that the case addresses only the CEQA and not the California or federal ESAs. The court did not rule on the compatibility of themitigation bank with the requirements of either of those laws. It held only that the bank's approval required the preparation of an EIR because there was a "fair argument" that the approval would have a significant effect on the environment.

Notwithstanding the recent court decision, banks continue to be established under the California banking policy. Some appear to have had notable success, whereas others have struggled.⁵⁴

Recommended Policies to Govern Endangered Species Mitigation Banking

The ESA prohibits the "taking" of endangered animals, a prohibition that has been interpreted quite broadly to include the destruction of habitat under some circumstances. This prohibition, however, is not absolute. The government may permit landowners and others to take endangered species incidental to otherwise lawful activities. To secure such a permit, a landowner or other entity must prepare a habitat conservation plan (HCP) that mitigates the impact of the authorized taking.

Three basic approaches to mitigation are reflected in HCPs. The simplest is a plan for a single landowner to take prescribed measures on his own land to mitigate the impacts of the authorized activity. This approach is functionally equivalent to the traditional project-by-project, on-site mitigation typical of the CWA's implementation.

A much more complex mitigation scheme is representative of the many HCPs initiated by local governments on behalf of some or all landowners in their jurisdictions. A common arrangement under these HCPs is for the local government to agree to purchase identified land parcels and to manage them for conservation purposes. In return for that mitigation, landowners whose land has not been identified for acquisition can develop it as they choose. Often, the funds for the acquisition and management of the conserved parcels are generated from special assessments levied on other land as it is developed. These arrangements are thus closely akin to the "in lieu" mitigation arrangements widely used under the CWA. Under these, in lieu of actually performing wetland mitigation, a developer pays a predetermined sum to a public or private conservation agency, which then uses the money to support wetland conservation activities.

The third form of mitigation is mitigation banking. This is the acquisition (usually by purchase from a third party, at a negotiated price) of conservation "credits" that have been recognized by the appropriate regulatory agency (typically the FWS) as a result of some action—such as the preservation, creation, restoration, or enhancement of habitat. This sort of private entrepreneurial mitigation banking is exemplified by the "butterfly bank" mentioned in the opening paragraph of this Article. Thus far, mitigation banking has been used relatively infrequently under the ESA, although interest in it appears to be growing.

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Although the FWS has authorized the purchase of credits from various banks to mitigate adverse impacts to endangered species, it has not yet issued any formal or informal policies with regard to endangered species mitigation banking. As just described, the state of California's 1995 "conservation banking" policy purports to govern wetlands, endangered species; and certain other forms of mitigation banking. The federal wetland mitigation banking guidance and the California conservation banking policy differ significantly. Whether either of these serves as a good model for the development of federal endangered species mitigation banking policy is open to debate. It is clear, however, that any effective federal endangered species mitigation banking policy must address at least those issues explored next.⁵⁵

Should the Preservation of Existing Habitat Generate Mitigation Credits?

Federal wetland mitigation banking policy strongly discourages the preservation of existing wetlands as the basis for generating bank credits and favors the restoration of former wetlands or the enhancement of degraded wetlands. When preservation is accompanied by restoration, creation, or enhancement, the federal policy allows the generation of credits for the preservation if "it is demonstrated that the preservation will augment the functions of the restored, created or enhanced aquatic resource." However, the "preservation of existing wetlands . . . may be authorized as the sole basis for generating credits . . . only in exceptional circumstances." The rationale for this policy preference is that most existing wetlands are already "protected" (at least from being filled) by CWA § 404. Thus, the preservation of already protected wetlands as mitigation for the loss of other existing wetlands would result in a net loss of wetlands.

Do the same policy considerations apply to endangered species habitats? Should an endangered species mitigation banking policy also generally prohibit the preservation of existing habitats as a means of generating credits? The California conservation banking policy has no comparable provisions against mitigation through preservation, and most of the conservation banks established in that state simply preserve existing habitats. At first glance, there appear to be some important differences that may justify an approach more receptive to preservation in the case of endangered species. First, habitat that is currently not occupied by an endangered species is also not protected by the ESA, yet it may nevertheless be valuable for the species in the future. Preserving suitable but currently unoccupied habitat may make it more likely for the species to expand its current distribution and to recover. Second, there is no prohibition against taking endangered plants and therefore no prohibition against destroying their habitat. That is, endangered plants and their habitat are not "protected," at least not off federal land. Finally, although endangered animals benefit from the ESA's taking prohibition, that prohibition is no guarantee that today's habitats will still be tomorrow's. Successional change, catastrophic events, and even the absence of natural disturbances can result in the long-term or permanent loss of endangered species from the habitats they now occupy. Once endangered animals are gone, the law's taking prohibition no longer matters.

Based on these considerations, any formal policy governing endangered species mitigation banking should embrace preservation as an appropriate means of generating credits, though it should note that in some exceptional circumstances, preservation may not be appropriate. For example, if currently occupied habitat is likely to continue to be occupied more or less indefinitely without active management, then the protection afforded that habitat by ESA § 9 may be sufficient to ensure the site's long-term protection. In those circumstances, agreement by the landowner to protect a site that is already, as a practical matter, likely to be protected anyway, should not give rise to mitigation credits.

Because endangered species habitats often require some form of active management to continue their value to endangered species, a mitigation banking policy should require that preservation of existing sites be accompanied by a strong management commitment and the resources to fulfill it. Without a commitment to manage and the resources to do so, mitigation credit could be given for sites that will eventually cease to offer any benefit to the species they were intended to help conserve.

How Large Should Endangered Species Mitigation Bank "Service Areas" Be?

Federal wetland mitigation banking policy generally prefers that banks "service" nearby areas, usually in the same watershed. That is, banks should provide mitigation credits to offset the loss of wetlands in the same watershed (or smaller area).⁵⁶ The rationale for this policy is that wetlands provide many site-specific benefits (e.g., stormwater retention, groundwater recharge, pollution filtration, biodiversity, and recreation) that cannot be replaced by compensating in another watershed. Do valid policy considerations dictate a similar approach for endangered species?

Again, the differences between wetlands and endangered species may justify a different result. First, except for aquatic species, "watersheds" do not often serve as useful demarcations for endangered species. Second, if the ESA's goal is to improve the survival prospects of a species sufficiently that it can be considered recovered, that goal is to some degree independent of where a species is found today. Although endangered species offer significant local benefits, the ESA is not principally concerned with those local benefits. Rather, its overriding concern is that a species be sufficiently secure in enough places that it is not likely to become endangered again in the foreseeable future. To meet this goal, it may be enough to ensure the species' [30 ELR 10548] survival in some, but not all, the localities where it now occurs.⁵⁷

These considerations suggest that recovery plans or similar undertakings should guide the determination of bank service areas. For example, many recovery plans set goals of establishing one viable population on protected habitat in each of several identified geographic areas.⁵⁸ At a minimum, those geographic areas should serve presumptively as banking service areas: banks located in a given area can sell credits to offset impacts elsewhere in the same area. In some circumstances, however, credit trading across recovery areas might serve recovery goals (e.g., when recovery goals for the red-cockaded woodpecker have been met in the Sandhills regions of North Carolina, future mitigation for impacts in the Sandhills could properly go toward meeting recovery goals in others areas where recovery goals have not yet been met). Such an approach would both hasten the recovery of endangered species and enhance the economic viability of mitigation banks.

Where no recovery plan exists, or where it fails to specify recovery goals for specific areas, the location of mitigation banks is probably more important than the delineation of their service areas. Typically, the goal should be to locate mitigation banks where they can support (or contribute to) viable populations by linking or buffering already protected areas. By securing these linkages or bufferings, recovery prospects for an imperiled species may be improved, notwithstanding the loss of habitats elsewhere that are isolated and too small to support viable populations. Thus, in these circumstances, the service area is essentially unlimited, with strategically sited banks able to sell credits to offset impacts anywhere else that the species occurs. The important point, however, is that such banks must genuinely be "strategically sited," with a particular conservation objective clearly in mind.

What Is the "Currency" for Mitigation Banking Credits and Debits?

An important and difficult issue in wetland mitigation banking is establishing a common currency for valuing credits created by restoration, enhancement, or other activities at the bank site and similarly valuing what is lost at the impact site. Wetland mitigation policy seeks to ensure no net loss of wetland "function," but in the absence of a clear measure of function, acreage often serves as a rough surrogate for it. How should the currency of credits and debits be measured in the case of endangered species mitigation banks? Will the answer to this question be different for each species? Would it ever be appropriate to use some measure of habitat as the currency, without knowing the precise extent of use of that habitat by a particular species? Any useful policy governing endangered species mitigation banking must resolve these issues.

In theory, any action that either hurts or helps an endangered species can be reduced to a common currency, the likelihood that the species will survive for some period of time. If we assume that a particular endangered species has a 50% probability of surviving for another 100 years and that a proposed development action would, if unmitigated, reduce its survival probability to 40%, then mitigation measures would fully compensate for the development impacts if they restored the species to a 50% survival probability.

Unfortunately, as a practical matter, our ability to quantify precisely current survival probabilities and the impacts of helpful or harmful actions is rudimentary to nonexistent. But even though they cannot quantify such probabilities precisely, regulators nevertheless base many of their mitigation requirements on intuitive or crudely quantified assessments of such probabilities or use a convenient substitute. For wetland mitigation, wetland acres often serve as a convenient surrogate for a more sophisticated assessment of functions and values lost and gained. For endangered species, acreage is more of a problem, because the value of any given acre to a particular endangered species always depends on a host of variables. These variables include configuration, the size of the habitat patch of which it may be a part, its proximity to other habitat patches, its position up-wind or downwind of pollution sources, the presence or absence of exotic species, its overall condition, and others. We have no neat formula by which to weigh each of these many variables and produce a meaningful index value to assign to the acre.

Because of these difficulties, the practice of existing mitigation banks varies widely. A recent agreement establishing a North Carolina Department of Transportation bank for the red-cockaded woodpecker refers to mitigation credits without ever defining what they are. An International Paper agreement for a mitigation bank near Bainbridge, Georgia, concludes that a credit is earned when a new "active cluster" (i.e., a spatially associated group of trees with one or more cavities currently being utilized by one or more red-cockaded woodpeckers) is established at the mitigation site. Under the proposed Saipan Upland Mitigation Bank in the Northern Mariana Islands, a mitigation credit consists of protecting habitat associated with an existing pair of nightingale reed-warblers, plus enhancing sufficient unoccupied habitat to provide the conditions needed by a pair of reed-warblers. Some of the conservation banks in California equate credits with acres of a particular type of habitat preserved or destroyed. These varied approaches reflect not merely the absence of a clear policy but also the practical reality that the varied circumstances and needs of particular species will inevitably produce different "currencies" to define bank credits and debits.

Should Mitigation Banks Generate Credits for Activities on Public Lands?

Federal wetland mitigation banking policy limits the use of mitigation banks on publicly owned lands. Part II.B.2 of that policy provides that banks may be sited on public or private [30 ELR 10549] lands. However, the policy goes on to say that credits generated by mitigation banks on public lands "should be based solely on those values in the bank that are supplemental to the public program(s) already planned or in place, that is, baseline values represented by existing or already planned public programs, including preservation value, should not be counted toward bank credits." On September, 10, 1999, the FWS issued a policy that generally prohibits compensatory wetland mitigation on National Wildlife Refuges because the FWS is already "authorized to restore degraded habitats within the National Wildlife Refuge System and . . . will be restoring these lands in the future, irrespective of off-Refuge development."⁵⁹ Ironically, in the case of endangered species, it is not uncommon for the FWS to approve HCPs in which the mitigation for the loss of habitat on private land is carried out on public land, including federal land, even though federal land managers are also authorized (indeed, arguably required) to restore and improve habitats for endangered species on their land.

The argument for allowing mitigation on public land is that public agencies may lack the resources to carry out the restoration, enhancement, or management activities on their land that would help endangered species. Supplementing agency budgets with revenues derived from mitigation assessments enables conservation activities to be completed sooner on public lands than would otherwise be the case. That argument is sometimes true, yet it is troubling. There is a danger that the private resources contributed by the banker will not simply supplement agency budgets but will also displace them. As revenues for conservation management from private banking sources rise, appropriated public funds for those same activities may fall. To the extent that happens, the apparent mitigation on public lands will fail to compensate for losses elsewhere. This is especially worrisome in the case of federal lands because of the affirmative duty imposed on federal agencies by the ESA to promote the conservation of endangered species. Another concern is that allowing banks to be located on public lands (federal or nonfederal) may create incentives for entrepreneurs to enter the banking business, but it does not create an incentive to use private land for conservation purposes.

For these reasons, a formal policy governing endangered species mitigation should generally disallow the use of federal lands for mitigation purposes, including mitigation banking. For other public lands (e.g., state or local), a formula similar to that in the federal wetland banking interagency guidance seems appropriate. The number of credits in such circumstances "should be based solely on those values in the bank that are supplemental to the public program(s) already planned or in place."

Should Mitigation Credits Be Sold Before They Are Earned?

Federal wetland mitigation banking policy allows limited "advance sales" of credits in order to capitalize the banks. Bankers cite the need for a more liberal allowance of advance credit sales as a financial necessity, whereas many environmentalists urge that no credits be given until the mitigation is a proven success. Are the considerations different for endangered species than they are for wetlands? This is not an issue when the preservation of existing habitats generates mitigation credits because the credits are earned as soon as the site is dedicated to conservation purposes. Note also that landowners who have created, restored, or enhanced endangered species habitat under "safe harbor" agreements may be able to become mitigation bankers by relinquishing their rights to remove the habitat improvements they have made.⁶⁰ When the habitat has been improved under a safe harbor agreement, the concern about advance credit sales also disappears because the credits are realized as soon as the landowner gives up his rights to return to baseline conditions under the safe harbor agreement.

In other circumstances, when a bank wants to earn credits by restoring or enhancing currently unoccupied habitat, the question of whether any credits should be available for sale before the restoration or enhancement has begun (or before its success has been demonstrated) should perhaps hinge on whether the restoration or enhancement techniques are well established and known to be generally successful or whether they are largely experimental. If they are well known and generally successful, advance credit sales could be permitted with greater confidence. Conversely (and probably more typically), if they are experimental and the likelihood of their success is highly uncertain, advance credit sales should not be permitted. A formal endangered species mitigation banking policy should try to reflect these principles, though any rule short of an absolute prohibition against advance credit sales will unavoidably put a considerable amount of discretion in the hands of those who implement the policy at the field level.

Should Mitigation Credits Be Given Only for Permanently Protected Habitat?

Federal wetland mitigation banking policy requires that once all the credits in a bank have been sold, the underlying property must be given permanent protection through deed transfer or conservation easement. Should that same policy always apply to endangered species mitigation banking, or in some circumstances can a less-than-permanent-protection arrangement legitimately generate credits?

Some endangered species occupy early successional habitats that in time will mature and no longer support those species; other endangered species may survive on sites that are so small and so isolated that the species has a low probability of remaining on the site much longer. Once such habitats are no longer occupied by an endangered species, no ESA prohibitions encumber those sites, at least according to how the law has been interpreted thus far. Therefore, when the owners of such sites want to develop them and are required to mitigate that development, it is at least an open question whether the required mitigation should necessarily be in the form of a site protected in perpetuity. One might address this problem in either of two ways: (1) compensating for the loss of transitory habitats with less-than-permanent mitigation or (2) insisting that mitigation always be permanent but adjusting the mitigation ratios downward when the habitat being lost is transitory. A formal endangered species mitigation banking policy should probably favor the permanent [30 ELR 10550] protection of the mitigation site while allowing one or both of the preceding options in appropriate circumstances.

Whatever the duration of the mitigation commitment, it is important to have in place both the resources and an effective mechanism for maintaining the biological values of the mitigation site throughout that period. Often, mitigation sites are subject to edge effects from incompatible land uses on neighboring lands. Others suffer from a policy of "benign" management resulting in erosion, invasion by exotic plants, and a lack of physical security. When such sites are near population centers, active management is often necessary to prevent the loss of the very values that the sites were established to preserve. It is critical, therefore, that the expected costs of future management needs be assessed and that sufficient financial resources be available to meet those costs.

The basic yardstick for deciding how much is needed is the average annual cost of management over the long term. The objective is to establish a funding source that provides enough income to cover annual stewardship costs and that also keeps pace with inflation. Unfortunately, there is no easy way to determine this, and managers around the country are struggling to devise formulas for calculating these costs. The costs vary widely with the nature of the land, the type of ownership, the scope of permitted activities, and year-by-year circumstances.

California has a system of establishing expected management costs and the size of endowments needed to meet them that is widely used by both public agencies and nonprofit land trusts. This system was developed by the Center for Natural Lands Management and is known as the Property Analysis Record (PAR).⁶¹ The PAR is a computerized data-base methodology that helps land managers calculate the costs of land management for a specific site. It does this by analyzing the characteristics and needs of the property from which the management requirements are derived. It helps specify the management tasks and estimates both their costs and the necessary administrative costs. The PAR generates a concise report that serves as a well-substantiated basis for long-term funding, including endowments.

Sequencing and Mitigation

As a general matter, wetland impacts must be mitigated in a prescribed sequence: first avoiding impacts, then minimizing unavoidable impacts, and finally compensating for the remaining impacts. The federal wetland mitigation banking policy purports to be faithful to this policy, although some conservation interests worry that the practical effect of the mitigation banks is to tempt regulators to skip rather lightly past avoidance and minimization and proceed instead directly to compensation in the form of purchasing credits from a bank. Bankers deny that this is the case but urge that the policy be less demanding with respect to sequencing. The argument for sequencing is that every wetland is important and that our ability to compensate for wetland losses through restoration and enhancement (or wetland creation) is imperfect at best.

Are those arguments as persuasive for endangered species? The idea that it is always better to protect any habitat that is currently occupied by an endangered species than to compensate for its loss elsewhere is hard to defend, given that many currently occupied habitats are practically indefensible in the long run because they are too small, too degraded, or too isolated to contribute meaningfully to the recovery of the endangered species now occupying them. Even though our ability to create, restore, or enhance habitats for endangered species is clearly imperfect, in some cases it may be less imperfect than our ability to maintain currently occupied habitats so that they remain occupied.

Perhaps because of these differences between wetlands and endangered species, there has never been, for endangered species mitigation purposes, a formal sequencing requirement comparable to that used for wetlands. It is worth noting that whereas avoiding wetland impacts serves the stated goal of no net loss of wetlands, merely avoiding endangered species impacts does not necessarily advance the goal of recovering imperiled species. By itself, it simply perpetuates the existing, unsatisfactory status quo. In most instances, to enable recovery, those areas currently lacking formal legal protection or beneficial management must receive it, and those areas not currently occupied by endangered species must become occupied, or both. Unless public funds to accomplish this are made available, the only alternative may be to do so through well-designed mitigation programs that trade other areas less important to the recovery of the species. For these reasons, endangered species mitigation banking policy need not track the sequencing requirements found in the wetland banking guidance.

Should Banks Be Available Only for Some Kinds of Impacts?

Some wetland mitigation banks can sell credits to compensate for wetland losses in connection with only some kinds of projects. For example, some can sell credits only to mitigate the impacts of small projects authorized by nationwide general permits; others can sell credits only for projects affecting wetlands beyond the Corps' jurisdiction (but still regulated by state or local laws). The rationale for these limitations is that larger projects should mitigate on-site wherever possible, whereas mitigation for very small projects on-site is often expensive, of little ecological value, and likely to fail. Thus, banks provide a convenient mitigation alternative for the less sophisticated and less wealthy "little guys" who are attempting to satisfy CWA § 404 requirements. Should endangered species mitigation banks also be designed primarily to serve little guys (e.g., those that qualify for "low-effect" HCPs)?

Although some banks may be purposely designed to cater to some subset of projects requiring endangered species mitigation, there does not appear to be a compelling reason that endangered species mitigation banking policy should limit the availability of bank credits to any particular category of potential purchasers. As a practical matter, bigger projects affecting larger areas may have more on-site mitigation opportunities available to them, but even for these projects, the alternative of buying credits from a strategically located and well-designed bank may yield greater environmental benefits.

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Public and Private Banks

Wetland mitigation banks may be either publicly or privately owned. Private bankers complain that publicly owned banks compete unfairly because (1) they use under-priced public goods; (2) they are sometimes owned by the same agencies that act as regulators, who can steer permittees toward their own banks rather than the private banks; and (3) public banks are generally not required to meet the same financial assurance requirements that private banks must meet (e.g., posting of performance bonds).⁶² Some independent observers echo these criticisms and urge that public agencies stay out of the banking business (other than to generate credits for their own internal use). Should endangered species mitigation banking policy allow or encourage both public and private mitigation banks?

Some public endangered species mitigation banks may be established primarily or exclusively to meet the future mitigation obligations of the public agency establishing the bank, such as the North Carolina Department of Transportation Bank. Unless they sell credits to private third parties, they do not compete with private mitigation banks in any meaningful sense. Conversely, the proposed Saipan Upland Mitigation Bank is a public bank established for the purpose of facilitating private development by selling mitigation credits to private developers. Its circumstances, however, are unique because of the legal restrictions on who may own land in the Northern Mariana Islands. Elsewhere, publicly owned mitigation banks offering credits to third parties could stifle the development of genuine entrepreneurial banks. Although that would be an undesirable result, preventing it by means of an outright prohibition against public banks could have undesirable conservation consequences, too, particularly if the market for endangered species mitigation banking remained too uncertain to attract much private investment. To the extent that mitigation banking policy addresses this issue at all, it ought to seek to minimize the potential conflicts of interest in which public agencies serve as both regulators and mitigation bankers.

Uniformity Versus Spontaneity

Federal wetland mitigation banking policy imposes uniform requirements on federally approved mitigation banks. The process of creating banks is prescribed; their basic elements are delineated; and other features are mandated in a policy that stresses uniformity rather than creativity, flexibility, and spontaneity. Should that also be the case for endangered species, or are the circumstances concerning endangered species too varied, the experience with mitigation too limited, and the potential for banking too fluid to warrant similar uniformity? Should endangered species mitigation banks be allowed to develop more or less spontaneously out of safe harbor agreements or other arrangements?

At least initially, the argument for spontaneity appears persuasive. An endangered species mitigation banking policy should aim at preventing potential abuses and securing real conservation gains. At the same time, however, it should avoid overly prescriptive and rigid rules that are unlikely to fit well with the many different circumstances that a host of different endangered species with highly varied needs will present.

Conclusion

Mitigating authorized impacts to endangered species through the sale of credits from endangered species mitigation banks is a practice that has already begun and is likely to become much more common in the future. Whether this practice will represent a step forward or backward in the effort to conserve endangered species will likely depend on whether it is guided by thoughtful and carefully articulated policies. At present, however, there are no federal policies to guide the development and operation of endangered species mitigation banks, a vacuum that invites inconsistency, confusion, and ill-conceived efforts.

Many of the important issues with which federal policymakers grappled when developing guidance for the development and operation of wetland mitigation banks must be addressed in any policies governing endangered species mitigation banking. The way that those issues should be addressed, however, will not necessarily be the same in these two different contexts. Differences between wetlands and endangered species, as well as differences between the programs that seek to conserve them, are likely to lead to quite different policy outcomes with respect to some of these issues.

If guided by well-conceived policies, mitigation banking has the potential to contribute positively to endangered species conservation efforts. By creating an opportunity for at least some landowners to turn the presence, or potential presence, of endangered species on their land into a positive asset, mitigation banking can furnish a useful incentive for private-sector cooperation in governmental efforts to prevent the extinction, and foster the recovery, of imperiled species.

[30 ELR 10552]

Appendix: Draft Policy on the Establishment, Use, and Operation of Mitigation Banks Under the Endangered Species Act

Introduction and Purpose

This draft policy provides guidance for the establishment, use, and operation of mitigation banks for the purpose of mitigating adverse impacts to threatened or endangered species under the Endangered Species Act (ESA). Although § 9 of the ESA generally prohibits the "taking" of endangered or threatened species, § 10 authorizes the issuance of permits allowing such species to be taken incidental to the carrying out of otherwise lawful activities. To issue such a permit, the Service (either the U.S. Fish and Wildlife Service or the National Marine Fisheries Service, depending on the species affected) must find, among other things, that the permit applicant has prepared a conservation plan that "will to the maximum extent practicable, minimize and mitigate the impacts of such taking." In implementing this provision, the Service has, on several occasions, allowed the requirement to mitigate the impacts of authorized taking to be met by the purchase of credits from various "mitigation banks." In addition, § 7 of the ESA requires federal agencies to ensure that their actions are not likely to jeopardize the continued existence of listed species or adversely modify or destroy their critical habitat. To meet this requirement, federal agencies (or those whom such agencies authorize or fund) often include a mitigation component in their proposed activities, and the Service has sometimes encouraged them to establish mitigation banks as a means of anticipating and minimizing the impacts of their future activities.

The interest in, and use of, mitigation banks to meet the ESA's requirements are growing. At present, however, the Service has neither a formal policy nor any official guidance pertaining to the establishment, use, or operation of mitigation banks for endangered species conservation purposes. Without policy or guidance, decisions about mitigation banks have been ad hoc and uncoordinated. To provide better coordination within the Service and more consistent and useful information to parties outside the Service, the Service proposes to adopt the Policy onthe Establishment, Use, and Operation of Mitigation Banks Under the Endangered Species Act.

In preparing this draft policy, the Service carefully considered the 1995 interagency Federal Guidance for the Establishment, Use, and Operation of Mitigation Banks Under the Clean Water Act and the Food Security Act. The 1995 Guidance addresses the mitigation requirements of those laws with respect to wetlands and other aquatic resources. The Service also considered the Policy on the National Wildlife Refuge System and Compensatory Mitigation Under the § 10/404 Program, published on September 10, 1999. This latter draft policy also pertains only to mitigation requirements relating to wetlands and other aquatic resources. Although the interagency guidance and refuge policy consider many issues common to any form of mitigation banking, their conclusions are not necessarily transferable to endangered species mitigation. There are important differences between wetlands and endangered species and the goals and requirements of the laws pertaining to each, differences that often dictate different policies governing mitigation banking for wetlands and endangered species.

Part 1. Scope of the Policy

This draft policy applies to the use of mitigation banks by nonfederal parties to meet the requirements to minimize, mitigate, or compensate for adverse impacts to listed species of authorized activities under the ESA. Such activities include those authorized by permits under § 10(a)(1)(B) and those reviewed under § 7.

Part 2. Mitigation Banks as Distinguished From Other Forms of Mitigation

Mitigation under the ESA has many forms. In some cases, to compensate for adverse impacts to listed species, land (or water) is deeded to a public or nonprofit agency for conservation purposes. In other cases, land remains with its current owner, but its use is restricted in some manner to benefit listed species. In still other cases, mitigation takes the form of monetary payments to a public or nonprofit agency, with the payments used to acquire land for conservation purposes, to manage already acquired land, or to perform some other specific task. Mitigation also can be through the purchase of defined "credits" from an approved "mitigation bank."

Several features distinguish mitigation banks from other forms of endangered species mitigation. Typically, in a mitigation bank, the mitigation is carried out before the action that causes the impact to be mitigated. Mitigation banks are therefore anticipatory, established in anticipation of some future demand for mitigation to compensate for the effects of future actions. Mitigation banks are also typically designed to provide a means of mitigating, at a single, larger site, the impacts of future activities at many smaller sites. Thus, mitigation banks are aggregative; they consolidate at a single site the mitigation for activities that may be widely dispersed. Mitigation banks can be designed to meet the future mitigation needs of either those who establish them or third parties. When mitigation banks have been established to meet the future mitigation needs of third parties, the sale of the bank's credits to third parties is typically at a price dictated by the market and is negotiated between the bank and the third party. Once the Service has approved mitigation through the purchase of bank credits by a third party, the legal responsibility for the mitigation, including the responsibility to remedy any failings of the mitigation efforts, is assumed by the bank.

Some habitat conservation plans have features that superficially resemble mitigation banking but differ in other ways. For example, many habitat conservation plans allow individual landowners to meet their obligations by paying a local government a fixed, per-acre assessment on land they develop, with the proceeds used to finance a conservation program by the local government. These payments are sometimes called "wildlife impact fees." The rationale of [30 ELR 10553] these plans is that because the local government has authority over land use within its jurisdiction, it shares the legal responsibility for any incidental taking of endangered species that results from permitted development. In mitigation banking, however, the banker typically has no control over or legal responsibility for the actions of others. Only by selling credits to others does it assume their responsibility for mitigation. In habitat conservation plans financed by special local assessments, mitigation is also typically carried out either concurrently with or after development. The core idea of a mitigation bank is that the mitigation is accomplished first and "banked" for use later. These differences are what set mitigation banks apart from many local or regional habitat conservation plans.

Mitigation banks should also be distinguished from arrangements in which the party carrying out an action that requires mitigation simply pays a set amount into an established fund operated by a natural resources agency or non-profit conservation organization. These arrangements are commonly referred to as in lieu payment programs, because a payment is made in lieu of actually taking any specific mitigation measures. Payments into such funds are generally intended for future conservation actions by the party administering the fund, not for a specific, identifiable mitigation activity.

Part 3. Definitions

For purposes of this policy, the following terms have the following meanings:

a. Bank sponsor. A bank sponsor is any public or private entity responsible for establishing a mitigation bank.

b. Creation. Creation refers to the establishment of habitat for an endangered or threatened species where no such habitat previously existed.

c. Credit. A credit is a unit of measure representing the accrual of conservation benefits for an endangered or threatened species at a mitigation bank.

d. Debit. A debit is a unit of measure representing the loss of conservation benefits at an impact or project site.

e. Mitigation bank. A mitigation bank is a site where habitat for endangered or threatened species is preserved, created, or restored for the purpose of providing compensatory mitigation in advance of authorized impacts to similar resources elsewhere.

f. Preservation. Preservation refers to the protection, usually in perpetuity, of habitat for an endangered or threatened species through the implementation of appropriate legal and physical mechanisms.

g. Restoration. Restoration includes activities designed to restore habitat for an endangered or threatened species at a site where it formerly existed, as well as activities designed to improve the quality of degraded habitat for such species.

h. Service. Service refers to either the U.S. Fish and Wildlife Service or the National Marine Fisheries Service, or both.

i. Service area. Service area refers to the designated geographic area or areas within which the credits associated with a particular mitigation bank can be used to compensate for authorized impacts on endangered or threatened species.

Part 4. Planning Considerations

Carefully designed and appropriately sited mitigation banks can contribute to the conservation of threatened or endangered species. Threatened or endangered species often face a wide array of threats, only some of which fall within the scope of the ESA's prohibition against taking such species. Conservation prospects can be improved by securing management commitments that effectively address those other threats (e.g., invasive exotic species, disruption of natural disturbance regimes, cowbird parasitism), increasing the likelihood that sites currently occupied by threatened or endangered species will remain occupied. Currently occupied sites may be too small or too distant from other occupied sites for listed species to be likely to survive in them over time. Mitigation banks that effectively enlarge such sites or buffer them from external threats thus can improve conservation prospects. Mitigation banks can also protect sites that are not currently occupied by listed or threatened species but that may be important to the future recovery of such species.

Two issues of paramount importance in planning any mitigation bank are the siting of the bank and its management program. Persons contemplating the establishment of a mitigation bank should confer in advance with the Service about both. Although recovery plans for individual species will rarely, if ever, identify particular parcels as desirable sites for mitigation banks or other conservation actions, they often identify broader areas within which recovery efforts will be focused. By siting mitigation banks in these areas, banks can create mitigation opportunities that both increase the options available to regulated interests and contribute to the conservation of the species. For species without recovery plans, or with plans that do not clearly identify those areas where recovery efforts will be primarily focused, conferral with the Service is especially important, to identify those areas it regards as of particular value in conserving the species.

For many species, individual mitigation banks are seldom large enough, by themselves, to support a viable population of a threatened or endangered species over the long term. But if the bank is located next to an existing area managed for the conservation of that species, even a small mitigation bank may increase the likelihood that a viable population can be maintained there. Similarly, if banks are sited to encourage dispersal between two areas managed for the conservation of the species, the bank may increase the likelihood of the species surviving at both locations. In some instances, banks may be able to provide replacement habitat for species currently occupying nearby unmanaged habitats at risk of becoming unsuitable because of succession. Sites that otherwise appear to be good locations for mitigation banks may turn out, on closer examination, to be inappropriate because of anticipated land use changes in the surrounding area. These and other considerations relevant to the siting of a mitigation bank should be taken into account at the outset and discussed with the Service to ensure that the would-be banker's objectives and the Service's objectives for the species are compatible.

[30 ELR 10554]

No less important than siting is the bank's management program. This, too, should be the focus of early discussion with the Service. Seldom will the needs of a threatened or endangered species be met on a completely unmanaged piece of property. More commonly, an active management program—to control invasive exotic species, replicate natural disturbance regimes; prevent an area's use by off-road vehicles, illegal garbage dumpers or others; and address myriad other threats—is essential to ensure that the potential conservation value of a particular property is realized and maintained. These management needs should be anticipated and provided for in any mitigation banking agreement.

As with siting considerations, recovery plans provide a logical starting place for identifying needed management measures for a proposed mitigation bank. Because actual management needs at any site depend on its particular circumstances, early conferral with the Service to identify appropriate management measures at that site is advisable.

Part 5. Development of a Mitigation Banking Agreement

A mitigation banking agreement between the bank sponsor and the Service documents the agency's agreement with the objectives, proposed administration, and management of the bank. The agreement should describe in detail the physical and legal characteristics of the bank and how the bank will be established and operated. In general, the following information should be included:

a. The bank's goals and objectives, including identification of the species for which the bank is to be primarily operated.

b. An accurate legal description and map of the bank property and identification of the bank's owners and managers.

c. A detailed description of existing conditions at the bank site, including the nature and extent of its use by the species for which it is to be primarily operated.

d. A description of the specific management measures to be carried out at the site for the conservation of the species for which it is to be primarily operated.

e. The methods for determining credits within the bank and debits outside the bank, setting performance standards to calculate the availability of credits, and devising accounting procedures to track the creation and use of such credits.

f. The geographic service area within which credits from the bank can be used to mitigate the impacts of other activities.

g. Provisions for long-term management and maintenance.

h. Monitoring, inspection, and reporting requirements.

i. Contingency and remedial action responsibilities in the event that the sponsor does not fulfill the obligations of the agreement or the bank is transferred to another entity.

j. Financial assurances.

k. Provisions for amending the banking agreement.

Part 6. Coordination With Other Levels of Government

Mitigation banks covered by this policy are those established to meet the requirements of the ESA. State or local laws may also impose requirements that can be met by the measures provided for in a mitigation bank. When that is the case, the Service requires that the relevant state or local government entity be given an opportunity to participate in the development of a mitigation banking agreement and to become a party to it. The Service will endeavor to coordinate its requirements with those of state or local government entities to the extent possible in order to minimize expenses, burdens, or duplicative requirements for bank sponsors, project proponents, and other governmental agencies. Although the Service will encourage the appropriate state and local governmental agencies to participate in the development of mitigation banking agreements and to become parties to them, the failure of such other agencies to participate in developing, or to sign an agreement that otherwise meets the requirements of this policy and of the ESA, shall not preclude the Service from entering into such an agreement.

Part 7. Public Review and Comment

Section 10 of the ESA requires that for applications for permits authorizing the taking of listed species, notice must be published in the Federal Register and an opportunity for public comment provided. Establishing a mitigation bank will not ordinarily necessitate an application for a permit. However, the use of credits from an established bank to mitigate subsequently approved actions will require a permit application, notice, and opportunity for public comment, if done pursuant to § 10. If there are significant public concerns about the design or operation of a mitigation bank, it is better to discover them before approving a banking agreement than afterward. Therefore, before entering into a mitigation banking agreement under this policy, the Service will publish in the Federal Register advance notice of its intent to do so and invite public comment on the proposed agreement in the same manner as it does with respect to applications for permits under § 10. In some instances, a mitigation banking agreement may be considered at the same time as a related permit application. When that is the case, the notice-and-comment requirements for each may be combined.

Part 8. Service Areas

Every mitigation banking agreement must specify the geographic area within which credits earned by the bank can be used to mitigate the effects on listed species of actions authorized by the ESA. Service areas should be determined with a view to using mitigation banks to advance the conservation of the affected species. Thus, banks generally should be located within areas designated in recovery plans as focal areas for recovery efforts, and their service areas should correspond to the recovery areas in which they are located. If there is no applicable recovery plan, banks should be sited, and service areas should be designated, to serve a comparable purpose.

Two exceptions to the preceding general guidance should be noted. First, some projects may be located outside a designated focal area for recovery. Banks located within areas [30 ELR 10555] designated as focal areas for recovery efforts should be able to provide credits for such projects. In such situations, the project to be mitigated will have little or no detrimental impact on recovery prospects, and the mitigation bank will aid those prospects.

A second exception to the general guidance regarding service areas concerns projects located in focal areas for recovery efforts and undertaken after the recovery objectives for those areas have been achieved. Such projects should be able to buy mitigation credits from banks located in other recovery focal areas. Allowing such projects to do so will help achieve the recovery objectives in the focal area where the bank is located, without hurting these objectives in the area of the project requiring mitigation.

Part 9. Credits, Debits, and Accounting Procedures

Credits and debits are the terms used to designate the units of trade (i.e., the currency) in mitigation banking. Every mitigation banking agreement should specify the methods for determining credits within the bank and debits outside the bank, setting performance standards to calculate credit availability, and devising accounting procedures to track the creation and use of such credits. If several mitigation banks are created for the same species, the Service will use a consistent methodology for determining credits in each of them and make that methodology publicly available. That methodology should also be consistent with the methodology used to determine mitigation requirements for activities mitigated by means other than the purchase of credits from mitigation banks.

Credits associated with a mitigation activity (as well as debits associated with an activity requiring mitigation) should reflect an assessment of the degree of beneficial (or detrimental) impact of the activity on the prospects for the affected species' survival. In theory, population viability analyses could be used to quantify the degree of impact on survival prospects. In practice, however, the information needed for rigorous population viability analyses is often unavailable. As a result, the units of currency may take the form of surrogates for the extent of impact on population viability, such as occupied acres or nesting pairs beneficially or detrimentally affected. In determining credits or debits, the same types of activities may be weighted differently depending on where they occur (e.g., nearby or far from existing protected areas), or other factors (e.g., quality of habitat at the affected site). The rationale for any differential weighting schemes should be clearly articulated in the mitigation agreement or elsewhere.

In some instances, banks may be designed to conserve habitat types that are typically used by several listed species. In such cases, it usually is necessary to determine that the species of concern generally associated with the habitat type do in fact use the mitigation bank site. If some of the species typically associated with a particular habitat type do not actually use the mitigation bank site, it may be inappropriate to mitigate the impacts of activities affecting that habitat type elsewhere by using credits from the mitigation bank.

In general, three types of activities of mitigation banks can generate credits: (1) habitat preservation (the preservation of specified, existing habitat through a conservation easement, transfer of fee title ownership to a conservation entity, or other appropriate means); (2) habitat restoration (the restoration of habitat for an endangered or threatened species at a site where it formerly existed or the restoration of a degraded habitat to an improved condition); and (3) habitat creation (the creation of a specified habitat where it did not previously exist). When deciding whether the preservation of existing habitat is appropriate as the sole basis for generating credits at a mitigation bank, consideration should be given to whether that habitat is under a demonstrable threat of loss or substantial degradation due to activities not otherwise likely to be effectively controlled (such as invasion by exotic species or ecological succession due to the absence of natural disturbance regimes). Typically, mitigation banks involving either habitat creation or restoration activities also require preservation of the restored or created habitat. Some mitigation banks encompass all three types of activities. The mitigation banking agreement should identify both the activities that will produce the credits and the methodology for quantifying them. In the case of habitat creation and restoration activities, the banking agreement should specify the performance standards that, when met, will result in credits being created at the bank site.

Credits "mature" and become available for use at different times, depending on the nature of the activity producing the credits. In general, credits for preserving existing habitat are available for use as soon as an easement, title transfer, or other satisfactory mechanism ensuring dedication of the site to conservation and management in accordance with a particular plan is in place. Credits for creating or restoring habitat are available for use only after the creation or restoration activities have been successfully implemented and an easement, title transfer, or other satisfactory mechanism ensuring dedication of the restored or created habitat has been put in place.

The price of credits sold to a third party shall be agreed on by the bank sponsor and the third party; the Service will play no role in setting the price of credits. The mitigation banking agreement should require that the bank sponsor establish and maintain an accounting system (i.e., a ledger) to document all transactions involving bank credits. Each time a bank makes an approved credit/debit transaction, the bank sponsor should submit a statement to the Service. The bank sponsor should also submit to the Service an annual ledger report for all mitigation bank transactions.

Part 10. Provisions for Long-Term Management and Maintenance

In general, mitigation banking agreements should provide that the habitat resources in such banks will be conserved and appropriately managed in perpetuity through mechanisms such as conservation easements or transfer of title to a governmental resource agency or nonprofit conservation organization, accompanied by an adequate endowment for long-term management. When conservation easements are used to ensure permanent protection, they should effectively restrict harmful activities that could jeopardize the purpose of the bank, but they need not restrict activities or uses that are compatible with the bank's purposes. In appropriate circumstances, real estate arrangements may be approved that provide for less than permanent protection of the habitat resources in a bank (such as when the adverse effects of the project requiring mitigation are temporary or the habitat resources at the site of the project requiring mitigation [30 ELR 10556] are unlikely to remain there for long, with or without the project). An alternative and generally preferable way of dealing with these latter circumstances is to adjust the amount of credits required to compensate for the anticipated adverse effects (i.e., the mitigation ratio) in light of the expected duration of those effects.

Part 11. Use of a Mitigation Bank Versus On-Site Mitigation

This policy does not presume that the use of a mitigation bank is generally preferable to on-site mitigation, or vice versa. Rather, the purpose of the policy is to ensure that mitigation banks are sited and managed so as to contribute to the conservation of the affected species. Unless mitigation opportunities at the site of the proposed project are also likely to improve the conservation prospects of the species, a mitigation bank should be preferred to on-site mitigation.

Part 12. Use of Public Lands as a Mitigation Bank

Federal land management agencies, like all other federal agencies, have an affirmative responsibility, under § 7(a)(1) of the ESA, to use their various authorities to advance the ESA's purposes by carrying out programs for the conservation of listed species. This affirmative duty is independent of any separate duty of nonfederal persons to mitigate the adverse effects on listed species of activities that they carry out. Accordingly, mitigation of the adverse effects of nonfederal actions should, whenever possible, be carried out on nonfederal lands, and mitigation banks should not be sited on federal lands. Mitigation banks may be sited on other public lands (such as state or local government lands). Mitigation credits generated by banks of this nature should be based solely on those values in the bank that are supplemental to the public program already planned or in place. Existing values represented by ongoing or already planned public programs, including preservation value, should not be counted toward bank credits.

Similarly, federally funded conservation projects undertaken by a separate authority and for other purposes, such as the Wildlife Habitat Improvement Program or the Partners for Fish and Wildlife Program, cannot be used for generating credits in a mitigation bank, at least during the period that the landowner is required to maintain the projects. However, these other authorities typically allow a land-owner to remove restored or created habitat at the end of a specified period. If a landowner agrees to preserve such areas beyond the term of the original agreement, mitigation credits may be issued for doing so. Similarly, a landowner's agreement to protect in perpetuity habitats originally created or restored pursuant to endangered species safe harbor agreements can serve as the basis for credits in a mitigation bank.

Part 13. Monitoring Requirements

The bank sponsor is responsible for monitoring mitigation banks based in whole or in part on habitat restoration or habitat creation activities, in accordance with the monitoring provisions in the mitigation banking agreement to determine the level of success and any problems requiring remedial attention. Monitoring provisions should be specifically described in the banking agreement and be based on scientifically sound performance standards prescribed for the bank. Monitoring should be conducted at time intervals suitable for the particular project type and until such time as the Service has decided that it has been successful. The bank sponsor should submit annual monitoring reports to the Service.

In addition to the monitoring activities required of the bank sponsor, the mitigation banking agreement must allow for the Service's right to enter bank lands in order to evaluate compliance with the banking agreement, the results of habitat creation or restoration activities, and the implementation of requiredmanagement activities.

Part 14. Remedial Actions

The mitigation banking agreement should stipulate the general procedures for identifying and implementing remedial measures at a bank. These remedial measures should be based on both information in the monitoring reports and the Service's inspections. The Service, in consultation with the bank sponsor, will decide on the need for remediation.

Part 15. Financial Assurances

The bank sponsor is responsible for securing sufficient funds or other financial assurances to cover contingency actions in the event of the bank's default or failure. In addition, the bank sponsor is responsible for securing adequate funding to monitor and maintain the bank during its operational life and to endow its proper management thereafter. The total funding requirements should reflect realistic cost estimates for monitoring, long-term management, and contingency and remedial actions.

Financial assurances may be in the form of performance bonds, irrevocable trusts, escrow accounts, casualty insurance, letters of credit, or other approved instruments. Such assurances may be phased out or reduced once the bank has demonstrated that it has met its performance requirements as described in the banking agreement.

1. Ryan Tate, Economic Focus: "Butterfly Bank" May Save Insects—and Developers, WALL ST. J. (California), Apr. 14, 1999, at A-1.

2. North Carolina Department of Transportation, NCDOT to Purchase 9,732 Acres in Tyrell County for Red-Cockaded Woodpecker Preserve, News Release No. 121, Apr. 9, 1999.

3. U.S. Army Corps of Engineers et al., Federal Guidance for the Establishment, Use, and Operation of Mitigation Banks, 60 Fed. Reg. 58605-614 (Nov. 28, 1995), ADMIN. MAT. 35632 (also available from the ELR Document Service, ELR Order No. AD-3037) [hereinafter Federal Guidance].

4. 16 U.S.C. §§ 1531-1544, ELR STAT. ESA §§ 2-18.

5. Act of March 10, 1934, ch. 55, 48 Stat. 401, current version at 16 U.S.C. §§ 661-667e.

6. MICHAEL J. BEAN & MELANIE J. ROWLAND, THE EVOLUTION OF NATIONAL WILDLIFE LAW 404-08 (3d ed. Praeger 1997).

7. 33 U.S.C. §§ 1251-1387, ELR STAT. FWPCA §§ 101-607.

8. ENVIRONMENTAL LAW INST., WETLAND MITIGATION BANKING (Envtl. L. Inst. 1993).

9. KEVIN L. ERWIN, AN EVALUATION OF WETLAND MITIGATION IN THE SOUTH FLORIDA WATER MANAGEMENT DISTRICT, vol. 1 (Erwin Consulting Ecologist, Inc., Fort Myers, Fla.: Report for the South Florida Water Management District, West Palm Beach, Fla., 1991).

10. See, e.g., Cindy C. Holland & Mary E. Kentula, Impacts of Section 404 Permits Requiring Compensatory Mitigation on Wetlands in California, 2 WETLANDS ECOLOGY & MGMT. 157-69 (1992); Robert J. Reimold & Sue A. Cobler, Wetlands Mitigation Effectiveness, Contract 68-04-0015 (Boston: U.S. Environmental Protection Agency, 1985); and Millicent L. Quammen, Measuring the Success of Wetlands Mitigation Banking, 8 NAT'L WETLANDS NEWSL. 6-8 (1986). A somewhat more sanguine assessment of wetland mitigation efforts is contained in Siobhan Fennessy & Joanne Roehrs, A Functional Assessment of Mitigation Wetlands in Ohio: Comparisons With Natural Systems (Ohio EPA Final Report to the Environmental Protection Agency, June 1997). Based on 10 mitigation wetlands, this report concluded that more wetland acres were established at the mitigation sites than were lost at the impact sites, although the acreage established at the mitigation sites was somewhat less than required by the mitigation ratio of 1.5:1 required for the 10 sites. Furthermore, there was no significant difference in the overall floral diversity at the mitigation and reference sites, although much of the diversity at the mitigation sites was composed of non-native species. The study also concluded that "from a functional perspective, mitigation projects are not yet measuring up to natural sites with respect to flood water retention, water quality improvement and habitat provision," although some of these differences may have been due to the relatively young age of the mitigation sites (all were between two and five years old).

11. Letter from Benjamin N. Tuggle to John Ryan (Apr. 18, 1996), reprinted in Senate Comm. on Env't and Public Works, Hearing on Wetland Mitigation Banking, 104th Cong. 644 (1996).

12. STEPHEN BROWN & PETER VENEMAN, COMPENSATORY WETLAND MITIGATION IN MASSACHUSETTS (Sept. 1998) (Massachusetts Agricultural Experiment Station report prepared for the Massachusetts Executive Office of Environmental Affairs) [hereinafter MASSACHUSETTS STUDY].

13. MASS. GEN. LAWS ch. 131, § 40 (1997).

14. Both the impacted wetlands and the mitigation sites included in the Massachusetts study were generally quite small; nearly 80% of the impacted wetlands were less than 5,000 square feet (slightly more than one-tenth of an acre). A few somewhat larger projects (up to two acres) were authorized as "variance projects." According to the study, these larger variance projects were "comparable to pilot mitigation banks or other centralized mitigation approaches." Interestingly, all the variance projects were found to be in compliance with regulatory requirements and "were much more carefully designed," although the plant communities associated with them were, again, different from those at the impacted wetlands.

15. MASSACHUSETTS STUDY, supra note 12.

16. Id. at 39.

17. Id. at 40.

18. Id. at 39.

19. Id. at 41.

20. 16 U.S.C. § 1538(a), ELR STAT. ESA § 9(a).

21. Robert H. Wayland III, and Michael L. Davis, Memorandum to the Field re: Establishment and Use of Wetland Mitigation Banks in the Clean Water Act Section 404 Regulatory Program, Aug. 23, 1993, reprinted in 60 Fed. Reg. 13711 (Mar. 14, 1995).

22. Federal Guidance, supra note 3.

23. 33 U.S.C. § 403.

24. Federal Guidance, supra note 3, at 58610, ADMIN. MAT. at 35635.

25. Id. at 58608, ADMIN. MAT. at 35635-36.

26. Id. at 58612, ADMIN. MAT. at 35636-37.

27. Id.

28. Id.

29. Id.

30. Id. at 58611, ADMIN. MAT. at 35636. For a detailed discussion of the 1990 memorandum, see Royal C. Gardner, The Army-EPA Mitigation Agreement: No Retreat From Wetlands Protection, 20 ELR 10337 (Aug. 1990).

31. Federal Guidance, supra note 3, at 58611, ADMIN. MAT. at 35636.

32. Id. at 58609, ADMIN. MAT. at 35635-36.

33. Id.

34. Id. at 58608, ADMIN. MAT. at 35635-36.

35. Id.

36. For information about the Wetlands Reserve Program, see their website at http://www.wl.fb-net.org. For information about the Partners for Fish and Wildlife Program, see http://www.r6.fws.gov/pfw.

37. Federal Guidance, supra note 3, at 58608, ADMIN. MAT. at 35635-36.

38. U.S. Fish and Wildlife Service, Final Policy on the National Wildlife Refuge System and Compensatory Mitigation Under the Section 10/404 Program, 64 Fed. Reg. 49229 (Sept. 10, 1999) [hereinafter FWS Policy].

39. Federal Guidance, supra note 3, at 58611, ADMIN. MAT. at 35636.

40. Id.

41. Louisiana's state wetland mitigation banking policy requires that wetlands in mitigation banks be subject to nonpermanent servitudes, from 20 to 50 years in duration, depending on the type of wetland. See Kathrin Ellen Yates, Mitigation Banking in Louisiana, LA. L. REV. 591, 605 n.103 (1999).

42. Federal Guidance, supra note 3, at 58613, ADMIN. MAT. at 35637.

43. California Environmental Protection Agency (Apr. 7, 1995).

44. CAL. PUB. RES. CODE §§ 21000-2177 (mitigation required for projects that "substantially diminish habitat for fish, wildlife or plants").

45. CAL. PUB. RES. CODE §§ 30000-30900 (requiring applicants for projects along the coast to demonstrate that all feasible mitigation measures have been provided to minimize adverse environmental effects).

46. CAL. FISH & GAME CODE §§ 2050-2116.

47. Memorandum from Gail Kobetich, U.S. FWS and Ron Rempel, California Department of Fish and Game (Jan. 24, 1996).

48. 83 Cal. Rep. 2d 836 (1999).

49. Under the CEQA, CAL. PUB. RES. CODE § 21100, an EIR is essentially analogous to an "environmental impact statement" under the National Environmental Policy Act, 42 U.S.C. § 4322, ELR STAT. NEPA § 102.

50. 83 Cal. Rep. 2d at 843.

51. Id. at 846.

52. Id.

53. Id.

54. See ENVIRONMENTAL DEFENSE, MITIGATION BANKING AS AN ENDANGERED SPECIES CONSERVATION TOOL, Appendix I (1999) (available from Environmental Defense), for case studies on selected mitigation banks.

55. See the appendix to this Article for the authors' recommended draft policy on the establishment, use, and operation of mitigation banks under the ESA.

56. Federal interagency guidance recommends that wetlands mitigation bank service areas be "guided by the cataloging unit of the 'Hydrological Map of the United States' (U.S. Geological Service 1980) and the 'Ecoregions of the United States' (James M. Omernik, U.S. EPA. 1986) or section of the 'Descriptions of the Ecoregions of the United States' (Robert G. Bailey, U.S. Department of Agriculture, 1980)." The federal wetland mitigation guidance recognizes, however, that there may be circumstances in which it is appropriate to use "other classification systems developed at the state or regional level." Federal Guidance, supra note 3, at 58608, ADMIN. MAT. at 35635.

57. The point made here is not inconsistent with the ESA's broad purpose of "providing a means whereby the ecosystems upon which endangered species and threatened species depend may be conserved." Even that purpose does not require that each and every occurrence of a listed species be maintained. Many endangered species occupy entirely artificial habitats, species such as interior least terns that nest on ash islands in power plant ash ponds, or peregrine falcons that nest on bridges and office buildings. Others occupy habitats that may once have been self-maintaining but no longer are, such as many fire-adapted habitats in areas where roads and agricultural fields act as a barrier to the movement of fire.

58. Examples include the recovery plan for the golden-cheeked warbler, which has a goal of one viable, self-sustaining population in each of eight specified regions of Texas, and the recovery plan for the interior population of least terns, which has specific numerical goals for each of five designated areas.

59. FWS Policy, supra note 38.

60. For more information on "safe harbor" agreements, see the FWS' and NMFS' recently published joint policy on that subject, Announcement of Final Safe Harbor Policy, 64 Fed. Reg. 32717 (June 17, 1999).

61. The development of the PAR was funded by EPA and the David and Lucille Packard Foundation. Seminars on its use have been funded by the National Fish and Wildlife Foundation. For more information, see the Center for Natural Lands Management's website at http://www.cnlm.org.

62. John D. McKinnon, Banks Blast Government for Selling Wetland Credits, WALL ST. J. (Florida), Aug. 11, 1999, at F1.