Putting billions to work for wetlands

A proposed new regulatory framework could turn wetland banking in the US into a multi-billion-dollar market. But might a gold rush undermine its environmental effectiveness? Alice Kenny reports

Wetlands mitigation banker Rich Mogensen recently scaled a 20-storey-high natural gas tank. After 210 steps, he reached his goal: a panoramic view of restored wetlands sandwiched inside urban New Jersey. Just over a decade ago, Mogensen convinced his employer, the natural gas transporter Williams Energy, to break free from its business model by converting into a wetland mitigation bank 206 degraded acres it owned amid the 8,000-acre Meadowland expanse. Since then,wetland mitigation banking has blossomed into a booming new environmental market.

Heralded as a tool to enable the private sector to fix environmental problems that had long stymied government bureaucracies, wetland mitigation banks are actual wetlands created, restored or enhanced by private companies or government agencies.

Rich Mogensen, Mid-Atlantic Mitigation: “The more financially secure companies there are doing mitigation banking, the better off and stronger the industry is”

Developers, whose expertise and income lies in building on filled wetlands and not in creating new ones, can buy credits from these banks to offset their destruction of habitats elsewhere.

In the past year, wetland mitigation banking in the US has become the darling of a new class of investor. Private equity funds such as Parthenon Capital and Lyme Forest Fund, institutional investors with billions of dollars under management, have announced investments in mitigation banking ranging between $20 million and $100 million.This new investment approach has already garnered international enthusiasm and is being copied in Australia.

Although Mogensen now works for a smaller company specialising in mitigation banking, EarthMark Company’s Mid-Atlantic Mitigation based in North Carolina, he says he does not mind competition from energy companies and equity funds. After all, he says, “the more financially secure companies there are doing mitigation banking, the better off and stronger the industry is”.

Wetland banking credits worth more than $750 million were traded last year, according to a report released in October by the Environmental Law Institute, a non-partisan think-tank. And the business is poised to triple in value when new government regulations designed to foster the industry are approved.

But does wetland mitigation banking actually work? And how much risk does wetland trading involve? Many regulators say the industry has built a track record for preserving valuable wetlands that offer flood protection, control shoreline erosion, filter water, sequester carbon and provide nourishment and haven to endangered plants and animals. Yet others, including the National Research Council, part of the US’ National Academies, point out that mitigation banking fails to replace lost aquatic functions more often than it succeeds. No definitive study assessing its effectiveness has ever been undertaken.

Mogensen’s sun-baked vista, where wetland banks function and the unrestored wetlands face decay, offers clues to this market’s strengths and potential pitfalls.

Ever since Europeans began colonising the New World,wetlands have been dried out, built over and used as virtual cesspools. Nearly half of the 220 million acres of marshes, bogs, swamps and other wetlands that existed when Columbus sailed to America have been drained, sullied or built upon, according to US General Accounting office data.

“Taken individually, wetland losses …were small and disparate,” comments Florida wetlands mitigation regulator Todd Gipe. “But, collectively, it was like a death by a thousand paper cuts.” For example, had the wetlands surrounding New Orleans not been built upon, they would have acted as gatekeepers absorbing water and fighting off the wrath of Hurricane Katrina.

"In the past year, wetland mitigation banking in the US has become the darling off a new class of investor"

But preserving valuable wetlands has proven a tough endeavour. By the 1950s, the US, flush with investment capital and making room for the post-war baby boom, was losing 500,000 acres of wetlands a year. An already concerned Congress, appalled by waterways so polluted that the once-mighty Cuyahoga River in Cleveland actually caught fire, passed the Clean Water Act in 1972.

The Act’s goals were as ambitious as they were clear: to restore and maintain the chemical, physical and biological integrity of the nation’s waters with no more net loss of wetlands. To reach this goal, the Act mandated that developers create, restore or enhance as many wetlands as they destroy.

Initially, developers responded in a piecemeal, often unsuccessful fashion, using their limited scientific backgrounds to create new wetlands or restore degraded ones. Not surprisingly, the number of wetlands in the US continued to decline. More than 1 million additional acres of wetlands were destroyed without replacement during the next two decades.

Finally, in the 1990s, the government agreed to give a shot to environmental market mechanisms, specifically mitigation banking. A memorandum of agreement signed between the Environmental Protection Agency and the Army Corps of Engineers in 1990 established the legitimacy of wetland mitigation banking; federal guidance published in 1995 encouraged the use of third-party providers – mitigation bankers.

More than 450 approved wetland banks have now been established throughout the US, with an additional 198 in the proposal stage, according to an inventory completed last year by the Army Corps of Engineers.

Between 20% and 30% of all mitigation banks are backed by large corporations. Similar to Mogensen’s former employer, Williams and its mitigation banking subsidiary, Marsh Resources, these corporations are predominantly pipeline or energy companies such as Chevron,Tenneco and Florida Power and Light; corporations that are financially secure, have extra land and are looking for ways to make money on property that often was used previously for oil exploration but no longer has any mineral value.The land may lie within flood plains or wetlands and cannot pass percolation tests required for development approval. Without wetland banking, these areas could be considered nearly worthless: small wonder that landholders have embraced mitigation banking.

The Meadowlands where Mogensen built his bank, for example, rippled through one of the most populated areas in the US and was held in distain by developers that considered it a swampy nuisance. Yet, thanks to mitigation banking, it has become a cash cow.

Making the renovation work required pulling together discoveries in botany, chemistry, biology and mechanics. The company invested $65,000 per degraded acre, burning, spraying, crushing and pulling out phragmites, an invasive, non-indigenous plant that had forced out nearly every other plant species and provided home to only a handful of bird and animal life. Mogensen estimated that it cost Williams about $7 million to restore the Meadowland wetland in the mid-1990s. Its investment yielded nearly three times that amount, a $20 million profit on land considered otherwise undevelopable.

Cat-tails – an interest payment from wetland banking

Although still in its adolescence, the wetland mitigation banking industry is potentially worth $2.4 billion a year, according to the just released study by the Environmental Law Institute, the first comprehensive attempt to put a dollar value to this new market.

As written, the regulations to be issued by the Army Corps of Engineers and the US Department of Environmental Protection (DEP) will require all mitigation providers to meet the tighter, more expensive rules governing mitigation bankers, says Palmer Hough, an environmental scientist with the wetlands division of the US DEP who helped draft the regulations.These companies include developers as well as ‘in-lieu-fee’ providers, paid by developers for promises of future restoration. That’s good news for mitigation bankers, since these competitors currently account for 70% of the market, according to the Environmental Law Institute report. When developers lose the economic incentive to provide their own lower-quality mitigation, they could be spurred to subcontract with mitigation bankers to tap into their expertise, market observers believe.

The regulations, unlike the current ‘guidance’ policing mitigation banking, will provide for wetlands’ long-term stewardship since regulations, unlike guidance, are legally enforceable. And, with the new regulations, all mitigated sites will be mapped and the information made readily available, Hough said. Interested parties, from mitigation bankers to environmentalists, can sue for enforcement.

But some environmentalists, including Jane Wilkinson of the Environmental Law Institute, say they worry that the new regulations will not go far enough to ensure the overall goal of no net loss of wetlands. “Once you create a market, create a profit and have interested parties that lobby Congress,” she says, “they look less critically at the ecological effectiveness of compensatory mitigation.”

So far, there has been only minimal scrutiny of wetland mitigation banking to determine whether it actually meets its ecological objectives. While the Army Corps of Engineers, the main agency assigned to supervise wetland protection, maintains accurate statistics on the amount of wetland compensatory mitigation required, it does not maintain data on whether the amount of wetland compensation required was actually carried out, or whether, if carried out, it met performance standards and proved sustainable, says Jay Austin, an attorney who authored the Environmental Law Institute study.

Smaller studies, including one published by the Ohio Environmental Protection Agency last year, indicate that fewer than half of the banks certified by the US agencies responsible for monitoring them, the Army Corps of Engineers and the US DEP, continue to function as wetlands.

Slipshod policing of the industry could hamper its growth, say mitigation bankers and environmentalists. Staffing at the Army Corps of Engineers, the primary government body responsible for overseeing wetlands mitigation, has been slashed in recent years and is not slated for an increase.

Hough says that the new regulations will address these concerns.“The regulations go farther than we have before,” he says, “tightening financial assurances, providing for site protection mechanisms, ensuring that compensatory mitigation projects are more thoughtfully planned and successfully executed and spelling out who will administer long-term stewardship and how it will be paid for.”

From Mogensen’s vantage point atop the oil tank, mitigation banking has already proved a success.“We climbed up here before this was all built,” Mogensen says, “And I said, what the heck am I getting myself into?”

A decade later, only pockets of phragmites remain. In its place grow cat-tails, brown-tipped spike rush, salt meadow and smooth cord grass along the shoreline. Oak trees, elderberry shrubs and giant chord dominate the upland islands. More than 80 bird species have returned to feast on them, 10 times the number of birds that make their home in adjacent unrestored Meadowland wetlands.

Success here depended on a two-pronged strategy. In the short term, sufficient funds and expertise had to be applied to restore the wetland. In the long term, sufficient funding and management oversight needed to be designated to ensure that the wetland remains restored.

For mitigation banking to flourish and no-net-loss to become a reality, this new industry must prove itself able to consistently provide this type of long-lasting, ecologically effective wetlands that compensate for others destroyed, say environmental groups. Otherwise, it will ultimately lose the environmental support upon which it is built.

With the new regulations still pending approval, the jury is still out. “The proof,” Wilkinson says, “will be in the pudding.”