Wetland Resource Group Meeting March 9 1993

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level through wetlands creation and, more realistically, wet- lands restoration. So how do we get there? Imagine an application to fill a wetlands area where the fore_one development values of pen-nit denial are exceptionally high and the environmental benefits of avoidance are questionable. Undercurrent inflex- ible sequencing rules, neither the foregone development value or environmental outcomes of permit denial would be considered. And if for some reason the permit is granted, compensation would focus primarily on in -kind and on -site replacement. The economy and the environment stand to lose. We need to„iurn wetlands regulation to a broader goal, by creating markets for wetlands functions and by overcom- ing the inflexibility that creates high economic and environ- mental costs. How do we do that? By recognizing that a market -based policy is the next generation of reform beyond mitigation banking. The mitigation bank is a tool to make off -site compensation for wetlands losses which are permitted in the regulatory program. But there are limitations to the current ideas about banking. First, compensation ratios when a permit is granted seek no net loss of functions. Restoration should achieve a net gain where more than one unit of credit is expected in return for each unit of permitted loss. Also, the mitigation bank relies on the wetlands developer to undertake restoration or creation as the deposit to the bank. For most permit applicants, this is financially unworkable. For the watershed, the wetlands compensations required are too small to realize the scale economies that might be achieved by larger scale restoration. And placing the respon- sibility for successful restoration and creation on people who have neither the expertise, experience, or long-term interest in wetlands and watersheds dooms many restorations to failure. A market -based policy begins with a recognition: the applicant wants a permit. but the regulatory agency wants to protect and restore the ecological functions of watersheds. These incompatible objectives have the potential for deal making, which is the essence of markets. A market -based permitting program will separate the decision on the grant- ing of a permit from decisions about where and when to restore wetlands. A market -based approach includes a permit review proc- ess whereby the magnitude of development value is consid- ered in granting a permit. A share of that development value is then captured by the agency and put toward the benefit of the watershed. The system works through the exchange of money and permits in order to support scientifically sound and well - managed wetlands restoration programs, toward the goal of net -gain. The recipient of a wetlands develop- ment pen-nit makes the money payment either to the permit- ting agency or to a private firm which restores wetlands and sells the credits directly to wetlands developers. I expect to hear opposition to market -based approaches, so let me anticipate two of the arguments. Some in the development community might be opposed to a share -the- gain rule for setting compensation ratios and fees. Yet for the society at large to be willing to move beyond the current- sequencing rules there must be some perceived opportunity to be environmentally better off with- versus - without any given permit being issued. When a permit is granted with a no- net -loss regulatory goal, all of the net economic returns accrue to the applicant. A share - the -gain approach could secure some of that return for wetlands programs. There 6 NATIONAL WETLANDS NEWSLETTER must be a willingness to share gains — not claim extortion or a taking. As noted earlier, the current regulatory program already implicitly imposes a development tax. This proposal simply makes the tax explicit. The wetlands protection establishment also will stand in the way. Its concern is that degraded wetlands can never be restored to their previous condition. Skepticism about wet- - lands creation is even more widespread. This concern is based on past experiences with restoration and creation which have often not been successful. Unfortunately, critics of restoration and creation fail to distinguish between fail- ures of the science and failures from poor application of the science. Most failures are probably attributable to unclear goals. inadequate expertise in doing the restoration, and an absence of monitoring to make modifications to the projects over time. These are institutional failures which must be addressed with policy and program reform, but should not be used as an excuse to reject the possibility of successful restoration and creation. All of the preceding comments lead me to the subject of classification, because the market -based approach depends on classification. Wetlands management to serve the larger purpose of watershed restoration would begin by initiating a planning process of watershed re- design to establish the sizes, types, and locations of wetlands /uplands complexes that will have the potential for long -term survival as func- tioning ecosystems. This could be accomplished in the SAMP (Special Area Management Plan) process under the Coastal Zone Management Act; in the Advanced Identifica- tion Program under §404, or as part of a separate watershed planning authority under state or regional authority. Existing wetlands might be classified into three types based on the following criteria. Criterion one would consider the magnitude of the ecological value to the watershed of the site proposed for development if the permit is denied. This is a critical notion because the criterion acknowledges the possibility of degradation, isolation; and fragmentation even if the wetlands site is saved. The second criterion is the difficulty and cost of restoring or creating lost functions if the permit is granted. The third criterion is the magnitude of the development value to the landowner that will be realized if the permit is granted. The more the development value, the more gain there is to share. With these criteria three classes of wetlands follow: Class I would be those wetlands of exceptionally high ecological value, with functions that are costly or difficult to replicate and for which development values are likely to be -low. Avoidance is the best management strategy for these wet- lands areas and only the most obvious water - dependent and high -value development would be even considered for a permit. Class II wetlands are where the wetlands site now has modest functional value to the watershed, or where the current value will be compromised even if the permit for filling is denied. These should also be wetlands where cost - effective restoration of functions is possible and where de- velopment values may be high enough to achieve the net - gain goal. Some flexibility in sequencing is expected as particular circumstances dictate. Class III wetlands would be areas where a fixed development fee might be established with only limited permit review being required. General rules for classification can be established and maps that describe protected areas and the lower value — fee for development — areas might be depicted. However,