Mitigation Banking and the Risk of Irreversible Damage

A common objection to mitigation banking is that it will somehow put environmentally valuable land at greater risk. People (myself included, at one point in time) seem to believe that that the mere exposure of the decision-making process for which lands will and will not be developed to market forces (mitigation banking, in this case) will systematically place treasured lands at greater risk.

I will argue that mitigation banking is an excellent policy choice and that the economic effects of a mitigation banking market do not materially increase this risk. Accordingly, these markets provide a net benefit – both economically and environmentally.

Here’s my quick and dirty illustration of the economics of mitigation banking, focusing specifically on measured environmental effects:

Quickly summarizing the chart: Since ($) cost is distributed uniformly over some range, over time as inexpensive land acquisitions are made, the cost of mitigation banking increases. Concurrently, the environmental value of lands (assumed to be randomly and normally distributed) and the associated offset level required is captured by project developers seeking mitigation banking trades.

Also concurrently, there is a “downward pressure” presented by interest groups, communities and other conservation entities that in essence removes the most environmentally valuable lands from the opportunity set. Over time, the cost of mitigation banking trades for relatively less valuable lands (randomly distributed across a smaller range thanks to the downward pressure) rises, removing any “environmental arbitrage” (spread between dollar value and environmental value, translated into dollar value through quantity required in offsetting).

Land acquisition costs, then, represent a larger portion of a project’s development. Remember – projects that seek to offset lands with high environmental value will need to purchase a larger quantity of offsets from mitigation banking markets. The incentives (through competitive pricing) created over time increasingly favors less environmentally valuable lands. The economics of mitigation banking make it unlikely that developers will target highly-valued (environmentally) lands, which makes it less likely that irreversible damage will occur in those lands.

Under a situation without mitigation banking, the fate of those lands are left to solely to bureaucratic processes, which are themselves capable of producing errors (or allowing corruption) resulting in the irreversible damage.

Many people (again, including myself at one point in time) have invoked the precautionary principle when proposals for policies like mitigation banking are advanced. This is probably the main counterpoint to the argument that I have made. To an extent, it is valid in that it serves as a risk-measure to correct for the mispricing of mitigation offset levels (e.g. land being undervalued environmentally in terms of offsets required). But ultimately it may lead to wasted resources and political bad will. Mitigation banking, on the other hand, attaches relative environmental value to land in a way that frames the discussion in a less polarized way. At a minimum, it carves a new place in the development decision-making process for “environmental value.” Something that even BANANAs may appreciate.