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There is significant movement in the ecosystem market space as a new presidential memorandum seeks to ramp up private investment in conservation and a recent analysis values the marketplace at $100 billion. To help capitalize on this movement a market analyst offers a brief list of recommendations for the rule makers.
21 December 2015 | Recent research shows rapid growth for the U.S. compensatory mitigation credit (CMC) marketplace, placing its value at $100 billion. And researchers determined this figure before the administration of President Barack Obama released a presidential memorandum, which intends to aggressively expand these markets by encouraging new levels of private investment in compensatory mitigation projects.
With both of these developments in mind, there are a series of deliberate steps regulating agencies can take to grow the markets while at the same time rebuilding important ecosystem services nationwide.
$100 Billion and GrowingTwo recent findings identified the billion dollar value of mitigation credits. First, Eco-Asset Solutions & Innovations, a California-based firm focused on mitigation credit development and valuation, undertook a detailed effort in 2014 to collect mitigation credit price information. This highlighted real price trends for wetlands, conservation and water quality credits drawn from bid results, contracts, news stories and other archived references to real-world mitigation credit pricing.
This dataset has helped overcome the lack of transparency that has plagued the CMC marketplace from the beginning – more than 30 years ago, when the market was solely comprised of wetland credits. The data sheds light on historic CMC price trends and regional price variations. This allows developers to know what to expect in terms of return on investment, and buyers to know what to expect in terms of overall project environmental costs.
Second, the U.S. Army Corps of Engineers (ACOE), which oversees U.S. wetlands mitigation banking activity, presented information about the volume of wetland and stream mitigation credit activity from 2005 through 2014 at this year’s National Mitigation Banking Association annual meeting in Orlando. The Corps showed (Fig. 1) that an average of about 11,000 credits per year have been debited from approved mitigation bank totals over the past decade. This information allows us to see, for the first time, the average annual demand for wetland mitigation credits based on the prior ten-year period.
Wetland credit demand, 2005-2015. Average demand has been about 11,000 credits per year.
With these two datasets in hand, it became possible to estimate the annual transaction value for wetland credits in the U.S. The mitigation credit price data gives us an average wetland credit value of $95,000 for the prior ten year period. The average credit value is dependent on the number of price points in the dataset, as well as the recorded value for each mitigation credit trading hands. The $95,000 figure is derived from over 130 price points representing transactions from 2005-2014. If 11,000 credits trade hands each year, at an average value of $95,000 each, the annual transaction value for wetland mitigation credits is over $1 billion in the current timeframe.
Taking the next step, we can estimate the size of the entire wetland mitigation credit market based on the number of approved mitigation credits held by U.S. landowners. That number, which is 775,000, comes from the ACOE RIBITS website. Multiplying the number of approved credits reported in RIBITS by the 10-year average wetland credit value, we see that the wetland mitigation credit market is about $74 billion in size. If we use a more current, 3-year average price for wetland credits - $144,000 - the market can be valued at $112 billion. This reflects the increasing significance of wetland mitigation activity in recent years.
The midpoint between these two market value estimates – the 10-year average vs. the 3-year average – is $93 billion. If we add in the value of the U.S. conservation credit market, species and habitat credits, using the same approach described above, another $6 billion in credit value comes into view. This brings CMC market value to $99 billion. Water quality credits – another form of compensatory mitigation – have been rapidly proliferating across the country, in such places as the Ohio River Basin and the Chesapeake Bay. Even though their value isn't calculated at present there is little doubt that total compensatory mitigation credit marketplace is at least $100 billion strong.
Preparing for the Next $100 BillionThe Obama administration's memorandum directs all U.S. natural resource agencies to foster opportunities for businesses to achieve restoration and conservation objectives. The list of agencies addressed in the Memorandum includes the Environmental Protection Agency (EPA), Departments of Agriculture (USDA) (Forest Service, Natural Resource Conservation Service), Interior (DOI) (Fish & Wildlife Service, Bureau of Land Management, Office of Surface Mines) and Defense (Army Corps of Engineers), as well as the National Oceanic & Atmospheric Administration (National Marine Fisheries Service).
Agencies are instructed to encourage advance compensation, including mitigation bank-based approaches. They are encouraged to collaborate so that integrated policies and guidelines will incentivize private investments needed to produce successful advance mitigation compensation for future development impacts.
The agencies have been gradually moving in this direction anyway. The USDA Office of the Chief Economist established an Office of Environmental Markets as directed by the 2008 Farm Bill. In 2014, the DOI's Energy and Climate Task Force presented Interior Secretary Sally Jewell with a report summarizing strategies for improving the mitigation policies and practices of Interior Department. And this year the EPA has been making efforts to expand water quality markets and trading in concert with the USDA. The EPA also committed to develop an environmental markets data layer for EnviroAtlas, the agency’s ecosystem services management tool.
Progressive as these steps have been over the past few years, the memorandum now directs agencies to create a new set of common strategies and tools facilitating private sector investment in mitigation banking. Landowners – farmers and ranchers as well as business and industry – will take notice. The net effect will likely be to quickly accelerate the development of compensatory mitigation projects. This will lead to an unexpectedly large number of new mitigation credits coming to market in a few years’ time. These developments will also result in a dramatic increase in protection, enhancement, restoration and creation (PERC) of badly needed, sustainable ecosystem services.
These developments will also affect our understanding of ecosystem service values. Nothing sheds light on value more quickly than direct market price signals.
With the above in mind, in order to see results as soon as possible, agencies may want to consider the following steps towards achieving the goals of the president's memo. If the goals can be met, the next $100 billion in value for the U.S. mitigation credit marketplace will quickly be realized.
William G. Coleman has 40 years’ experience in environmental and sustainability management, specializing in ecological asset development and market management for agri-business and energy companies. He currently teaches global change and sustainability topics at UC Berkeley Extension and manages his own consulting enterprise, Eco-Asset Solutions Inc. in the San Francisco area. He can be reached at firstname.lastname@example.org.