Compensatory Mitigation and Forest Landowners

frog eggs

Due to recent revisions of the Clean Water Act (CWA), demand in some areas are high for compensatory mitigation sites, which could offer real benefits for forest landowners. These policy changes by the Army Corps of Engineers (the Corps) require mitigation sites have long-term protection, are within the same watershed as the disturbance, and generally prefer mitigation banks where available. This demand is centered around sites with streams and wetlands that are undergoing significant impacts resulting from unavoidable disturbance. In some cases, this spatial demand may correspond with forest landowners willing to place long-term restrictions on their property, thereby allowing them to market and receive payments for ‘watershed’ ecosystem services. In return for any payments, restrictions will be placed on the surface ownership that may include items such as no timber harvesting, no surface disturbance, and other restrictions contractually agreed upon. This type of Payment for Ecosystem Services (PES) is fairly new and many details are yet to be determined or negotiated, but could provide opportunity for landowners to generate revenues outside of traditional streams and therefore may be considered a unique and viable value-added product.

Background on Compensatory Mitigation through the CWA

Compensatory mitigation involves the offsetting of unavoidable damages to wetlands, streams, and other aquatic resources, that are covered under the Clean Water Act (CWA) section 404 (33 U.S.C. 1344). The CWA is the common name for the Federal Water Pollution Control Act (33 U.S.C. 1251-1376; Chapter 758; P.L. 845, June 30, 1948; 62 Stat. 1155; as amended), and section 404 of the CWA provides the Corps the authority over “navigable waters” of the United States, though this is generally expanded to include all waters other than those wholly isolated on private lands. It is through CWA section 404 that the Corps, of the Department of Defense (DOD), gains its authority over compensatory mitigation projects. The United States has long supported the international goal of “no net loss” of wetland acreage and function, and through this support has devised various regulatory tools in order to ensure its achievement. Compensatory mitigation is the result of these regulatory tools. Compensatory mitigation is only employed after all other “appropriate and practical” steps have been taken to avoid and minimize all adverse impacts to the aquatic resources. Yet given this, allows for the offset of these unavoidable negative impacts to be carried out through four methods that include:

Mitigation Methods

  • restoration of a previously-existing wetland or other aquatic site,
  • establishment of a new aquatic site,
  • enhancement of an existing aquatic site’s functions,
  • preservation of an existing aquatic site.

With these methods, there are three mechanisms for providing the compensatory mitigation. These are permittee-responsible mitigation, mitigation banks, and in-lieu fee (ILF) mitigation. The permittee-responsible mitigation is, as the name implies, a method in which the permit holder retains the responsibility that the required compensation activities are completed and successful. This has historically, and remains, the most common method of compensatory mitigation. Mitigation banks provide another venue for compensatory mitigation that allow the permittee to purchase mitigation credits, typically through private for-profit mitigation banks that then carry out the compensatory mitigation, and assumes the responsibility. This is a market-based approach that is increasing in popularity and has become the preferred method by the regulatory agencies. Lastly, the ILF method is similar to the mitigation bank in that the permittee offsets impacts through monetary exchange to support compensatory mitigation. Both banks and ILF often have the mitigation taking place off-site as consolidated aquatic resource restoration. Unlike mitigation banks, state and local governments or non-profit non-governmental organizations (NGOs) generally operate the ILF programs. Each of these methods allows different opportunities to mitigate damages to aquatic resources given benefits and constraints.

Pricing of Services

The determining of potential prices for watershed services presents many challenges as few transactions have taken place and even fewer prices have been made public. Several methods have been explored for estimating market prices, but for this example a simple direct comparison of ILF markets (gleaned from respective state agencies) and then subtracting costs is made, providing an estimated revenue to the landowner. These ILF prices are thought to be comparable, if not low, to the actual costs of the mitigation, as is a common criticism of ILF programs (ELI 2006); however, they provide a reasonable basis for estimating prices of market transactions. Actual transaction prices of existing mitigation banks are generally kept private and are therefore not available for analysis. [This should only be considered a very general estimate. Stay tuned as this topic of determining prices will be explored in much further detail in an upcoming post.] 

Table 1. Summary of regional ILF prices and sources

ILF Program Price per unit Source
National average $240 per LFt ELI 2007
Virginia $375 per credit USACE 2010
Tennessee $200 per LFt Woodard 2005
North Carolina $256 per LFt
$242.12 per LFt
NCEEP 2010
Templeton 2009

Given the range of prices per unit in the Appalachian region (ecoReata’s study area), prices for watershed services, based on linear feet (LFt) estimates and including a 200-feet stream buffer, are estimated at a range of values from $20-35 per LFt to the landowner. This value was derived by taking the national average ILF mitigation prices per LFt, the Virginia, Tennessee, and North Carolina prices and then deducting the average construction costs estimates of $75-400 per LFt (ELI 2007, Jones 2010) and administrative costs, usually stated at 6-40 percent of total cost (ELI 2007, ELI 2002).

A price range of $20-35 per LFt is determined to be a reasonable payment to the landowner for allowing mitigation to take place, though all of these values have high variability. This price equated to roughly 10 percent of the ILF average price, which leaves the other 90 percent for construction and administrative costs. These prices comply with 2000 guidance that states with regard to fees, “a reasonable cost estimate of all funds needed to compensate for the impacts to wetlands or other water functions that each permit is authorized to offset” (USACE 2000). These methods are analogous to those used to derive stumpage values of timber in that it provides an “exchange-based, welfare value”, as a “market price net of the costs of bringing goods and services to market” (Farber 2002), and therefore seem valid.

Prices of $20-35 per linear foot would equate to $4,356-7,623 per acre, calculated as an equivalency of 217.8 linear feet per acre including the 200-foot buffer. This simplified example, granted with rough prices estimates, shows that returns on these PES over a typical ownership period for many landowners could be a significant revenue source on lands that may often otherwise be marginally productive.

Some Additional Considerations

There is much to be determined as to the specifics before landowners should enter into a contract to allow for a PES as described. Included below is a list of topics and comments that may contribute to any discussions on these matters:

slickrock

  • What mechanism is to be used to impose the restrictions? Deed, lease, easement, restrictive covenant, other legal agreement
  • What would be the terms of the restrictions? 20-30 years? 100 years? Perpetual?
  • Would there be any tax benefits or burdens? Additional revenues but also a decrease in property values with restrictions
  • Require an itemized list of specific restrictions that could not take place under the terms of the agreement
  • Who would provide long-term monitoring?
  • Could some impacts be allowed? For example, activities allowed under the Silvicultural Exemption of CWA Section 404 (f) or others as agreed?
  • With potential proximity to mine sites, these areas could have potentially higher conservation values and may reflect well to FSC or other certification bodies
  • It is likely that sites could be chosen in which the timber would not mature within the period of restrictions, which are inoperable or other reasons limiting harvest potential, thereby greatly reducing opportunity costs
  • Sites could be targeted to compliment other management considerations, for example using TESOC locations and habitats

For more information on watershed services and water quality protection, see the Bay Bank and USFS Watershed Services.

References

Environmental Law Institute (ELI). 2002. Banks and Fees: The status of off-site wetland mitigation in the United States. Environmental Law Institute, Washington, DC. Last accessed online at www.eli.org

Environmental Law Institute (ELI). 2006. The status and character of In-Lieu Fee mitigation in the United States.  ELI Publications, Washington, DC. Last accessed online at http://www.elistore.org/Data/products/d16_04.pdf

Environmental Law Institute (ELI). 2007. Mitigation of impacts to fish and wildlife habitat: Estimating costs and identifying opportunities. Environmental Law Institute, Washington, DC. Last accessed online at www.eli.org

Farber S.C., et al., 2002. Economic and ecological concepts for valuing ecosystem services. Ecological Economics 41, 375-392.

Jones, L.B., 2010. DR Allen and Associates PE, Abingdon, VA. Personal communications. September 2010.

North Carolina Ecosystem Enhancement Program (NCEEP), 2010. Schedule of fees. Last accessed online at http://www.nceep.net/pages/fee.htm

Templeton, S.R., et al., 2009. Estimation and Analysis of Expenses of In-Lieu-Fee Projects that Mitigate Damage to Streams from Land Disturbance in North Carolina. Prepared for presentation at the Agricultural and Applied Economics Association 2009 AAEA and ACCI Joint Annual Meeting, Milwaukee, Wisconsin, July 26-29, 2099.

US Department of the Army (USACE), 2010. Norfolk District Regulatory Branch, Virginia Aquatic Resources Trust Fund Prices. Last accessed online at http://www.nao.usace.army.mil/Technical%20Services/Regulatory%20Branch/VAARTF/VAQRTF_ Mitigation_Prices.pdf

US Department of the Army (USACE), US Environmental Protection Agency, US Department of Interior, and US Department of Commerce. Federal Guidance on the Use of In-Lieu-Fee Arrangements for Compensatory Mitigation under Section 404 of the Clean Water Act and Section 10 of the Rivers and Harbours Act. 2000. 66916

Woodard, J., 2005. Tennessee Stream Mitigation Program. 2004 Southeast Watershed Roundtable Presentation. Last accessed online at http://www.watershed-assistance.net/pdf/resources/woodard.pdf

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About Stuart Hale

Stuart is a forest and natural resource professional focused on ecosystem services, GIS/data management, and sustainable forestry. Find him on Twitter.

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