Army Corps Needs to Examine Rationale for Mitigation Territories

Mitigation bankers have long complained that different regulatory agencies apply different standards, and a study published late last year in the “National Wetlands Newsletter” bears that out – at least when it comes to how the 38 districts of the Army Corps of Engineers determine the amount of territory individual mitigation banks should be allowed to cover.

An extended version of this article will be published in Volume 36, Issue 1 of the Harvard Environmental Law Review in February 2012.

18 March 2011 | With the exception of carbon dioxide, ecosystem service markets are prisoners of their own geography – and with good reason.

If you emit carbon dioxide or other greenhouse gases in, say, Chicago, you can make good on your damage by saving a patch of rainforest in Brazil; but if you damage a wetland in Virginia, you can’t make good by restoring a patch of the Everglades.   If that were allowed, it could lead to all the destruction of habitat across the United States being offset by massive restoration in Florida.   That might be good for Florida, but it would be a disaster for the rest of the country.

That’s why the Army Corps of Engineers delineates geographic service areas where mitigation banks and in-lieu fee programs (ILFs) can sell offsets.

These service areas are the region within which banks may sell offsets, and their size can make or break a market.

Bigger service areas increase competition and bolster credit demand.   They can even help attract mitigation banker investment.   If they’re too big, however, they can amplify degradation hotspots as restoration clusters in one area and damage clusters in another.

One way to prevent the creation of such hotspots is to keep service areas small.   This ensures that damage to wetlands and streams is offset close to home, but could result in thin, inactive markets which lack the credit demand to stimulate investment in restoration before impacts.

The Right Size

Because the nation’s terrain varies widely from region to region, the government gives the Army Corps of Engineers tremendous leeway in determining the optimal size of service areas.   As a result, service areas vary considerably in size, type, and rigor across the nation, according to a study we conducted in 2009.

Unfortunately, the variance we documented doesn’t reflect the geographical variance of a large nation, but rather the administrative variance across the Army Corps’ 38 districts – as well as variance within districts.   Indeed, we found several instances where standards applied led to exactly the kind of distortions we touched on above.

To provide a more effective mitigation system, increased rigor and ecological justification for service areas is needed within individual Corps districts and states to ensure that private mitigation banks, public banks, and ILFs all compete on an even playing field. State and local governments should also ensure that their service area standards do not undermine federal directives to favor mitigation banks and utilize a “watershed approach” to compensatory mitigation.

Regulatory Determinants of Service Areas

Geographic concerns and service areas are at the heart of the federal regulations released by the US Environmental Protection Agency and the US Army Corps of Engineers in 2008 (the Rule). The Rule endorses the use of a “watershed approach” which seeks to strategically locate wetland and stream compensatory mitigation sites where they will best persist over time and restore aquatic resource functions and services.

Service areas are a principal tool for setting ecologically appropriate spatial bounds for the watershed approach. However, the Rule rejects establishing a national preference for the watershed scale or service area size to be used in implementing a watershed approach. These geographic priorities are delegated to regional Interagency Review Teams (IRTs) and ultimately, for the purposes of the Clean Water Act (CWA), to Corps district engineers. The Rule also specifically notes that concerns for “economic viability” can influence service areas.  

The 2008 regulations also establish a preference hierarchy among compensatory mitigation providers, sequentially favoring use of mitigation banks, ILFs, and permittee-responsible mitigation (PRM). Though not mentioned explicitly in the 2008 regulations, service areas are crucial to implementation of the Rule’s preference for mitigation banks. If regulators indeed want to increase use mitigation banks, they must be willing to set bank service areas that encompass enough potential wetland and stream impacts to merit entrepreneurial investment before these impacts occur — particularly for bank sites that strategically address watershed needs.

State governments also can significantly influence service area size, type, and rigor through state assumption of CWA §404 permitting, CWA §401 certification, IRT participation, Memoranda of Agreement with the Corps and EPA, state statutes, and/or state regulations. Furthermore, local governments may pass ordinances that require compensatory mitigation to occur within their boundaries or may impose higher mitigation requirements for compensation trades that move wetlands or streams outside of local jurisdiction.

Spatial Quality vs. Temporal Quality

Two significant components of the overall ecological quality of wetland or stream compensatory mitigation are its spatial quality — the proximity of restoration to impacts — and its temporal quality — the “time lag” between when impacts occur and when lost ecosystem functions are restored.

Spatial and temporal quality may exhibit tradeoffs in wetland and stream mitigation markets. Small service areas enhance spatial quality by keeping ecosystem functions nearby impacts, but may discourage investment in mitigation banking before impacts occur, causing permittees to increasingly rely on lower temporal quality offsets (ILFs and PRM). Exceptional ILFs that provide compensatory mitigation before impacts occur may also experience these spatial-temporal tradeoffs: when a service area is too small, and projected credit demand too low to provide the certainty needed for mitigation before impacts, these ILFs may have to wait until after impacts occur to replace aquatic resources. Alternatively, large service areas may promote increased investment in restoration before impacts by mitigation banks and some ILFs, but naturally allow wetlands and streams to be transferred further from impacts.

‘Hotspots’

When geographic service areas are excessively large, concentrated ‘hotspots’ of wetland or stream degradation may develop as a result of the aquatic resource trading process. Case studies of wetland mitigation banks or ILFs in Illinois, Oregon, North Carolina, and Florida note that wetland trading facilitates a “migration” of wetlands from urban to rural areas, with a parallel pattern emerging for stream mitigation in North Carolina. Generally, this aquatic resource “migration” is a result of simple economics — urban land typically has higher development value than rural land. This systematic transfer of wetlands and streams to rural areas may deprive urban populations of certain aquatic resource functions and services. Moreover, urban-to-rural movement of wetlands and streams is easily preventable — reducing the geographic size of mitigation markets will minimize localized resource losses.

‘No Net Loss’

Service areas also implicate the guiding principle for the CWA §404 program — ‘no net loss’ of aquatic resource coverage and functions. No net loss, which is generally measured on a national or state level, inherently requires specification of an appropriate geographic scale to balance losses and gains of wetlands and streams. The entire US may achieve a goal of no net loss, but this policy is clearly ineffective if certain regions become devoid of aquatic resources and other, distant regions offset these losses through development of abundant aquatic resource supplies.

Stringently enforced service areas can set an ecologically defensible scale at which to balance wetland and stream losses and gains, such as various types of watersheds or ecoregions. Preventing trading of aquatic resources outside of a service area helps to ensure ‘no net loss’ at that scale.

Implications for Ecosystem Services

Service area size may also affect the societal value of the ecosystem services provided by wetlands and streams. Determining the societal value of wetland and stream ecosystem services requires overlaying the geographic extent and quality of particular ecosystem functions and the societal demand for these ecosystem functions. When service areas allow particular ecosystem functions to be transferred from a location with high societal demand for ecosystem functions to a location with low societal demand, the transaction may result in a net loss of ecosystem services. To maintain ecosystem services which are more valuable nearby human population centers, regulators may use social or political boundaries such as city limits or county boundaries in setting service areas.

Study Results

From January to October of 2009, we compiled mitigation bank service area standards and preferences in all 38 Corps districts. We researched publicly accessible laws, regulations, and guidance in Corps districts and states with mitigation siting preferences from January to May of 2009, and then contacted cognizant Corps and state personnel by phone or e-mail from May to October of 2009 to clarify district and state service area procedures. Based on the flexibility of a district’s service area criteria and the rigor with which service areas were implemented, we classified Corps districts as “hard” or “soft.” A full listing of the “hard” and “soft” Corps districts, along with an explanation of service area criteria for each Corps district, is available in our National Wetlands Newsletter article. When available, we also gathered information on ILF service areas and geographic restrictions applied to off-site PRM.

The most common geographic system used for mitigation bank service areas is the US Geological Survey’s nationwide Hydrologic Unit Code (HUC) system. HUCs are delineated based on hydrologic drainage basins or unique hydrologic attributes and are surveyed at a number of levels; HUCs with more digits are more geographically specific. The EPA’s ecoregion system is also a popular geographic system used in service areas. Ecoregions are delineated based on biotic and abiotic factors indicative of ecological conformity, including hydrology, wildlife, land use, soils, climate, vegetation, physiography, and geology. As with HUCs, ecoregions are defined at different levels of geographic specificity. Other national, regional, or local hydrologic or ecological assessments may be used to set service areas, and political boundaries may also influence service areas.

IRTs and Corps districts apply considerably different service area types with different levels of flexibility to mitigation banks across the nation. Some Corps districts, such as those in Alaska, Albuquerque, New England, Philadelphia, Sacramento, and Tulsa designate service areas on a case-by-case basis, while all other Corps districts use some form of geographic guidelines for service areas. Some Corps districts with geographic guidelines also readily allow use of different service area types.

Geographic limits used for primary service areas include 11-digit HUCs (HUC-11s), HUC-10s, HUC-8s, HUC-6s, Level IV ecoregions, Albert ecoregions (regional system), Ecological Drainage Units (EDUs), independent Corps district or state watershed assessments, tidal/nontidal wetland boundaries, counties, cities, and simple 20- or 40- mile radii from banks. State-defined limits include New Jersey Watershed Management Areas, Washington Water Resource Inventory Areas, and Wisconsin Geographic Management Units. The most common watershed scale used for primary service areas is the HUC-8, which is used in 25 of 38 Corps districts; however, the HUC-8 is implemented in different capacities and with different rigor in these Corps districts.

After a bank’s service area is assigned, Corps districts and states also vary in how rigorously they impose use of this primary service area. Some Corps districts or states specify secondary service areas in a bank’s instrument which are used when permittees are not located in the primary service area of any bank; alternately, IRTs may allow banks to sell credits outside of their primary service area on a case-by-case basis. In relevant districts, secondary service areas are often accompanied with higher credit ratios which are specified in a bank’s instrument and are defined by adjacent HUC-8s or HUC-6s, which may further be constrained by HUC-3s, river basins, or Level III ecoregions. When case-by-case use of credits beyond a primary service area is allowed, higher credit ratios, such as 1.5, 2, or 4, often accompany these exemptions.

Different geographic restrictions may also apply to sales of stream mitigation credits. Existing rules, guidelines, or agency practices spatially restrict stream compensatory mitigation in select Corps districts or states by HUC-12, by HUC-8, by physiographic province, within one stream order of an impact, and to streams of a similar habitat designation.

In 2009, ILF service areas exhibited considerable variability. ILFs utilized HUC-12s, HUC-11s, HUC-10s, HUC-8s, HUC-6s, EDUs, state-defined river basins and marine regions, physiographic provinces, major land resource areas, municipalities, counties, states, and general regions (e.g., a peninsula or a portion of a state). It is important to note that while some ILFs used very small service areas, such as HUC-12s, they often simply targeted compensation at that scale and were allowed to expand the geographic area for replacement when necessary. Alternatively, some ILFs which were not compliant with the 2008 Rule operated with no service areas.

A number of Corps districts and states have also developed geographic limits for the location of off-site PRM wetland and stream compensation projects. Off-site PRM is limited based on HUC-11s, HUC-10s, HUC-8s, HUC-6s, Level III ecoregions, Corps-defined watersheds, state-defined watersheds, locally defined watersheds, stream basins, parishes, counties, states, Corps districts, and islands. Distant PRM projects also commonly require use of higher credit ratios.

Implications

Use of a proper watershed scale is critical to the watershed approach, the preference for mitigation banking, and the spatial and temporal quality of compensatory mitigation projects. In addition, IRTs should strive to consistently consider equivalent criteria when setting service areas for all applicants. Accordingly, Corps districts without service area standards would likely benefit from merely establishing service area criteria, and districts that regularly allow exceptions to service area standards would likely benefit from either reducing the number of exceptions or increasing the ecological validity of these exceptions.

In areas with established service area preferences, our study encountered two troubling realities. First, some permittees offsetting linear impacts (e.g. transportation projects), which are frequently government agencies, were granted geographic exceptions allowing them more latitude to use mitigation banks outside of their service areas. Laws, regulations, or guidance in Florida, Missouri, Ohio, and Washington allow linear projects to consolidate impacts across multiple service areas at a single compensation site, and in Minnesota and Virginia specifically grant this ability to government transportation agencies. Allowing impacts to be compensated in other service areas may be ecologically defensible, such as when a permittee consolidates all compensatory mitigation in a high-needs watershed. However, expressly granting service area exceptions to particular permittees or banks without ecological justification undermines one of the primary objectives of the Rule—promoting equivalent standards for all mitigation providers.

Government agencies, including transportation agencies in all of the states with listed service area exceptions, often utilize state-run mitigation banks to offset internal demand for wetland and stream credits. This means that public mitigation banks offsetting linear government projects may be allowed more service area exceptions than other banks. Unless public mitigation banks are demonstrably ecologically superior to comparable entrepreneurial banks, regulators should apply equivalent standards to both types of mitigation providers.

Moreover, some ILFs we studied operated under less restrictive service area standards than similarly situated mitigation banks. Unless ILFs provide advance compensatory mitigation of equal or greater ecological value than banks, ILF service area sizes should not exceed, or even equal, bank service areas to avoid subverting the Rule’s preference for mitigation banks. Service area size is not irrelevant for ILFs—adequate market demand must exist in a service area to justify advance investment in developing a compensation planning framework and the operational procedures required in an instrument. However, as ILFs generally sell wetland or stream offsets to permittees before investing in site-specific land acquisition or mitigation plans, the geographic market size of an ILF is inherently less determinant of its economic viability — if market demand is low in a particular service area, an ILF simply does not undertake as much compensatory mitigation in that service area. Indeed, the ability of ILFs to provide wetland and stream credits in areas without adequate demand for establishment of mitigation banks is a primary reason for their retention under the Rule.

On the other hand, mitigation banks must invest in land acquisition, protection, and mitigation plans before selling credits to permittees, giving them less geographic flexibility to accommodate market demand after-the-fact and making service area size more central to their economic stability. As ILFs increasingly begin to comply with the new operational standards set forth in the Rule, it will be important to track the size, type, and rigor of ILF service areas.

A common factor in these two service area problems is that governments operate both public mitigation banks and ILFs and may experience conflicts of interest when they also regulate these banks or ILFs through the IRT. Government entities should ensure that agencies responsible for administering mitigation banks or ILFs are not also members of IRTs to reduce self-regulatory conflicts.

Conclusions

Even in Corps districts and states with rigorous service area standards, the current scientific and economic rationale used to set service areas leaves much to be desired. Initiatives to better understand the dynamics of spatial-temporal tradeoffs for mitigation, the geographic scales at which ecosystem functions operate, and how these factors contribute to ecosystem service valuation should improve criteria for setting service areas, and more generally, watershed scale.

In the meantime, regulators should be cognizant of the importance of service areas to the overall environmental performance of aquatic resource mitigation markets. While consistency is important, it is also imperative to encourage and reward ecologically successful mitigation projects. When mitigation providers produce projects that result in demonstrable, empirically grounded ecological restoration, regulators should consider expanding the service area to increase the marketability of these credits.  

Additional resources