Washington Marketplace: Banking as a Model

Conventional banks play a number of different roles. They provide security for private assets, resources for private investment, and services with a comfortable rate of return for their use. Simply speaking, they make money with money. Banks designed to preserve natural resources do similar things. They provide security for public assets, resources facilitating private investment, and themselves with a comfortable rate of return for their services. Simply speaking, these "green" banks make money by achieving public conservation goals. Returning to the three shared characteristics of all market-based policies already mentioned, these banks define a natural asset (like a species), seek to measure that which they have defined (like a breeding pair), and then arrange for quantities of it to be paid for or invested in through market forces (using credits). As a model for conservation, compensatory mitigation banking is used primary to preserve two types of natural assets in the United States: endangered species and wetlands. In both instances, only a slice of an area's biodiversity is being preserved. Expanding the application of this model to encompass the whole of biodiversity may be possible, but many of the problems programs have already encountered might be amplified though such an effort.

Both types of working "green" banks include the central assumption that a defined natural landscape shares fundamental similarities that should allow for a destructive action taken in one place to be compensated for by a reconstructive action taken in another (hence the label of "compensatory mitigation bank" often used to describe them). The bank then serves as the means through which destructive actions are permanently attached to reconstructive ones through the purchase of credits that represent the resource in play. Mitigation banks require the usual trinity of buyers, sellers, and a market for them to succeed. The buyers in this scenario consist of those undertaking a destructive action, including private and public developers.

The sellers include those who have undertaken some form of restorative action on a natural resource and have had that action approved by a public body. The market then connects buyers and sellers within a predetermined service area, establishes some sort of equivalency between the actions of the two, and then transfers the liability of the first party to the second in exchange for payment. In the end, the buyer fulfills his or her obligation to protect a natural resource by paying someone else to do it for them. These transactions are much more complex in the real world, but the basic process of exchange remains the same.

Those most familiar with species or wetlands banking often assert that these types of banks, and the markets of exchange they help create, differ from traditional banks and markets so much that the word "bank" is simply a metaphor used to explain what is really happening. They argue this because the government's role in mitigation banking is much greater than in traditional banking. The reason is that, as mentioned near the beginning of this paper, mitigation banks ultimately seek to deliver a public, not a private good. This therefore necessitates the government to help answer three fundamental questions that conventional banks answer for themselves: 

• How much of the good should be produced?

• Who should pay for the production of the good?

• Who should carry out the production of the good? (Heal 11)

In mitigation banking the government decides how much of a resource should be protected as development occurs. At the very least, they seek to prevent any further depletion a particular natural resource, where the total amount of it neither decreases nor increases. At the very most, this model could easily operate in a way that has a net a restorative affect on a given natural resource.

Secondly, the government also determines who should pay for the production of natural resources through the creation of regulatory requirements. Banks depend on demand-side drivers to operate. In less rarified terms, this means that the government must first create a societal need to buy what banks have, because people are unlikely to pay for it otherwise (with some public and private conservation organizations being notable exceptions). The government accomplishes this by creating regulations that provide the opportunity for private landowners to participate in banking if certain actions are taken on their land. Opening an account at a traditional bank is voluntary. Opening an "account" at a conservation bank is generally not, as other options exist (like on-site mitigation, in-kind habitat work, or in lieu of payments). Finally, the government also determines who can produce the public good -- or become conservation bankers. Banks require approval by governing bodies before entering the market, they must offer some sort of guarantee that they will continue to operate well into the future, and they must meet strict operating criteria that reflect public preferences. Overall, banks really are more of a device to ensure the efficient delivery of the public good than a representation of what the public good should be.

The Mechanics of Banks

Defining what a mitigation bank should target, or how it realizes the first shared characteristic of all market-based policies, requires the government to answer two questions. These questions are: "What should be preserved" and "Where should it be preserved?" Taken together, these questions define that which is to be measured and then traded (or invested in).

The "what" question is answered by the actual natural asset selected for conservation (whether it is wetlands, a single species, or a specific ecosystem). The "where" question is somewhat dependent on the "what" question. Geography and climate create obvious limitations. Beyond these, banks generally seek to achieve equivalent exchanges, and therefore confine themselves to service areas that keep destructive and constructive actions in relatively close proximity. The "where" question is therefore answered using watersheds, bioregions, ecosystems, or some other geographically determined boundary. When considering the outcomes that mitigation banking seeks to generate, it is useful to remember that exact equivalency between parcels is not necessary. The idea is not to compensate for the destruction of one tree through the protection or planting of another. Rather, the end goal of mitigation should be the preservation or enhancement of natural resources in a way that provides substantial ecological benefit. It may be better to think of this type of policy as one that allows exchanges of functional equivalency.

Measuring what is being targeted, the second shared characteristic of market-based policy, can be very contentious and difficult. Accurate measurement is essential for equivalency to occur and to determine whether the overall impact of the development and associated mitigation represents a loss, swap, or gain of ecological values. If you want to measure a natural resource simply through its quantity, you may facilitate its exchange, but you risk not capturing the true importance of the resource. Using more qualitative metrics may allow for the importance of the resource to be captured more completely, but then the ease with which they can be exchanged disappears, requiring more public value judgments to be inserted in the process that, in turn, leads to a decreased reliance on the market. The most contentious element of the mitigation-banking model involves the credits it produces. Credits are abstractions that measure the specific natural resources being made and destroyed. Banks create them and developers buy them. They can exist because everyone involved in this banking model relies on the assumption that natural resources, to some extent, are interchangeable. Therefore, a credit representing a resource in one place may be used to compensate the destruction of another credit in another place. The government grants them to successful banks to sell. It also assigns them to land being developed. Superficially, this does not appear to be a difficult concept. The difficulty arises when we delve into what exactly these credits represent and whether the assumption they depend on is true and not just practical.

Credits involve two types of value. First, when used effectively, credits capture the importance of the natural resource they represent. More specifically, they represent the subjective and contextual values of the natural resource. It is through the assignment of credits that an urban acre of forest may acquire more credits than a rural one because of its location and the human demands placed upon it. This value includes recognition of the functions of the resource and why those functions are important to humans. Second, credits also represent value in terms of dollars. This allows for their exchange, creating a consistent currency that makes it possible for the destructive and restorative actions to be paired with economic efficiency (the third and final shared-characteristic of market-based polices). The first determination on value is open to a great deal of subjectivity and leads to doubts over the purpose of banks and their true ability to conserve natural resources. How these problems will be resolved is not immediately clear, though current efforts (discussed later in this work) are being made to help banks become more effective at meeting their goals. Ultimately, the exact value, in both senses, may be less important than the consistent evaluation and attribution of value within a service area.

Mitigation Banking and Species

The Endangered Species Act requires compensatory mitigation by developers when their actions result in an unavoidable impact to the species listed under it. The developer may choose from a number of options when fulfilling his or her mitigation obligations. One of them is to use a conservation bank if one is available. Such a bank guarantees that an equivalent amount of habitat, species, or a combination of both will be preserved for the developer in exchange for payment. The developer essentially transfers his or her liability related to the endangered species to the bank and the bank assumes this liability in exchange for payment. Returning to the three shared components of market-based instruments mentioned above (definition, quantification, and privatization) these types of banks first define a species, habitat, or combination of both. They then measure it through the assignment of credits. Then lastly, they allow for these credits to be sold and bought.

The structure of this type of bank breaks down into four pieces: the bank site, the bank instrument, the regulatory agent, and the service area (U.S. EPA).  The first piece, the bank site, refers to the actual natural resource that has been established, restored, enhanced, or preserved. The bank instrument is "the formal agreement between the bank owners and regulators establishing liability, performance standards, management and monitoring requirements, and the terms of bank credit approval" (U.S. EPA).  The third component, the regulatory agent, refers to what is formally called a Mitigation Bank Review Team. This team conducts the regulatory review of banks, approves or rejects them, and then oversees their operation. The final component, the service area, refers to "the geographic area in which permitted impacts can be compensated for at a given bank" (U.S. EPA).

Mitigation Banking and Wetlands

Wetlands banking could have started in the 1970's when the U.S. Government established a no-net loss wetlands policy with mitigation requirements for developers. However, these requirements were not strongly enforced at the outset and the mitigation responsibilities required by them were often ignored or poorly executed (few had the long-term management plans necessary to provide lasting benefits). A rule clarification in 1995 spurred a more consistent and strategic approach to mitigation along with the development of banks. Wetland banks allow developers to compensate for the destruction of wetlands in one place by buying credits that represent an ecologically equivalent area of wetlands elsewhere. Returning once again to the defining characteristics of market-based policies, wetland banks define an area of land, objectify it through the assignment of credits, and then allow for it to be bought and sold.

Wetlands banks include the same four pieces that conservation banks have: the bank site, the bank instrument, the regulatory agent, and the service area (although they may have different names). These pieces also accomplish the same goal of attributing rights and responsibilities.

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