WETLAND AND CONSERVATION BANKING IN DETAILFederal Wetland Mitigation <strong>Banking</strong> PolicyUnder §404, compensa<strong>to</strong>ry mitigation is required as<strong>the</strong> third step <strong>of</strong> a three-step process designed <strong>to</strong> meet<strong>the</strong> goals <strong>of</strong> <strong>the</strong> CWA and support <strong>the</strong> national no netloss policy (see Box 1). The basic premise <strong>of</strong> <strong>the</strong> §404permitting program is that no discharge shall be permittedif a practicable alternative exists that is lessdamaging <strong>to</strong> <strong>the</strong> aquatic environment or <strong>the</strong> dischargewould cause <strong>the</strong> nation’s waters <strong>to</strong> be significantlydegraded. In order for a project <strong>to</strong> be permitted, itmust be demonstrated that, <strong>to</strong> <strong>the</strong> extent practicable,steps have been taken <strong>to</strong> avoid impacts <strong>to</strong> wetlandsand o<strong>the</strong>r aquatic resources, potential impacts havebeen minimized, and compensation will be providedfor any remaining unavoidable impacts. The three-partBox 1. Evolution <strong>of</strong> <strong>the</strong> Three-Part Mitigation SequenceIn 1980, EPA issued <strong>the</strong> final §404(b)(1) Guidelines; <strong>the</strong> regulations that established<strong>the</strong> environmental criteria by which <strong>the</strong> Corps evaluates dredge and fillpermit applications.(1) One <strong>of</strong> <strong>the</strong> central concepts embedded in <strong>the</strong> Guidelinesis that no discharges <strong>of</strong> dredged or fill material shall be permitted if <strong>the</strong>re is apracticable alternative <strong>to</strong> <strong>the</strong> proposed discharge that would have less adverseimpact on <strong>the</strong> aquatic environment, so long as that alternative does not haveo<strong>the</strong>r significant adverse environmental consequences.(2) In o<strong>the</strong>r words,impacts <strong>to</strong> aquatic resources must be avoided <strong>to</strong> <strong>the</strong> maximum extent practicable.The Guidelines also require that “appropriate and practicable steps” betaken <strong>to</strong> minimize potential adverse impacts <strong>to</strong> <strong>the</strong> aquatic ecosystem before adischarge can be permitted.(3) The Guidelines fur<strong>the</strong>r describe habitat “developmentand res<strong>to</strong>ration” as an appropriate method for compensating for permittedimpacts that destroy habitat.(4)In 1990, EPA and <strong>the</strong> Corps issued a Memorandum <strong>of</strong> Agreement (MitigationMOA) <strong>to</strong> elaborate upon <strong>the</strong> three-part mitigation requirements <strong>of</strong> <strong>the</strong>§404(b)(1) Guidelines.(5) The Mitigation MOA defines mitigation as a threepartsequence – avoidance, minimization, and compensation – each step <strong>of</strong>which has its origins in <strong>the</strong> Guidelines.(6)The Corps…first makes a determination that potential impacts have beenavoided <strong>to</strong> <strong>the</strong> maximum extent practicable; remaining unavoidable impactswill <strong>the</strong>n be mitigated <strong>to</strong> <strong>the</strong> extent appropriate and practicable by requiringsteps <strong>to</strong> minimize impacts and, finally, compensate for aquatic resourcevalues.(7)Resources: (1) 40 C.F.R. § 230 et. seq.; (2) 40 C.F.R. § 230.10(a); (3) 40 C.F.R. § 230.10(d); (4) 40C.F.R. § 230.75(d); (5) U.S. Environmental Protection Agency and U.S. Department <strong>of</strong> <strong>the</strong> Army.February 6, 1990. Memorandum <strong>of</strong> Agreement Between <strong>the</strong> Environmental Protection Agency and<strong>the</strong> Department <strong>of</strong> <strong>the</strong> Army Concerning <strong>the</strong> Determination <strong>of</strong> Mitigation Under <strong>the</strong> Clean Water ActSection 404(b)(1) Guidelines; (6) Mitigation MOA (1990), § II.A; (7) Mitigation MOA (1990), § II.C.mitigation sequence – avoid, minimize, compensate– represents <strong>the</strong> heart <strong>of</strong> <strong>the</strong> agencies’ §404 regula<strong>to</strong>ryprogram.Significant attention has been paid over <strong>the</strong> past 20years <strong>to</strong> improving <strong>the</strong> third step in <strong>the</strong> process - compensation- <strong>to</strong> ensure that compensa<strong>to</strong>ry mitigationefforts are “ecologically self-sustaining,” 9 protected inperpetuity, and ultimately meet <strong>the</strong> program’s no netloss goal. Although technically <strong>the</strong> term “mitigation”refers <strong>to</strong> all three steps <strong>of</strong> <strong>the</strong> three-part sequencingprocess, it is <strong>of</strong>ten used <strong>to</strong> describe <strong>the</strong> third step only.Satisfying <strong>the</strong> Third Step: CompensationCurrently, <strong>the</strong>re are three primary mechanisms supportedby EPA and <strong>the</strong> Corps for permittees <strong>to</strong> meet<strong>the</strong>ir compensa<strong>to</strong>ry mitigation obligations. These are:performing project-specific or permittee-responsiblemitigation, purchasing credits from a mitigation bank,or making a payment <strong>to</strong> an approved in-lieu fee mitigationsponsor. These last two forms <strong>of</strong> compensa<strong>to</strong>rymitigation – mitigation banking and in-lieu fee mitigation– are <strong>of</strong>ten referred <strong>to</strong> as “third party” mitigation,since <strong>the</strong> liability for meeting <strong>the</strong> compensa<strong>to</strong>rymitigation requirements is transferred <strong>to</strong> a third party.(For more on in-lieu fee mitigation see Chapter 4, “ATypology <strong>of</strong> Banks.”.)The Evolution <strong>of</strong> Wetland Mitigation <strong>Banking</strong>Although permittee-responsible mitigation has beenand remains <strong>the</strong> dominant mechanism for meetingcompensa<strong>to</strong>ry mitigation requirements (approximately60 percent <strong>of</strong> all required wetland mitigation nationwidewas satisfied by permittee-responsible mitigationin FY 2003), 10 wetland mitigation banking has becomeincreasingly prevalent since its emergence as an alternativein <strong>the</strong> mid-1980s. The first banks were primarilyadvanced, consolidated mitigation projects developed<strong>to</strong> address <strong>the</strong> future anticipated impacts <strong>of</strong> publicagencies, such as state departments <strong>of</strong> transportation.9 RGL 02-2 (2002); From <strong>the</strong> operational guidelines developed by<strong>the</strong> National Research Council. See: National Research Council.2001. Compensating for Wetland Losses Under <strong>the</strong> Clean Water Act,National Academy <strong>of</strong> Sciences, p. 5. (Hereinafter NRC (2001).)10 Wilkinson, Jessica and Jared Thompson. April 2006. 2005Status Report on Compensa<strong>to</strong>ry Mitigation in <strong>the</strong> United States.Washing<strong>to</strong>n, DC: Environmental Law Institute. (Hereinafter 2005Status Report (2006).8 Environmental Law Institute
WETLAND AND CONSERVATION BANKING IN DETAIL<strong>Banking</strong> <strong>of</strong>fered <strong>the</strong>se agencies an option <strong>to</strong> consolidate<strong>the</strong>ir compensation and do so in advance <strong>of</strong> <strong>the</strong>anticipated impacts.The U.S. Fish and Wildlife Service (FWS or Service)first issued guidance on wetland mitigation banking in1983. 11 Although wetland mitigation banking continued<strong>to</strong> grow over <strong>the</strong> following 15 years, existing federalpolicy on banking did not provide <strong>the</strong> private sec<strong>to</strong>rwith enough assurances <strong>to</strong> encourage a major role in<strong>the</strong> development <strong>of</strong> <strong>the</strong> market.In <strong>the</strong> mid-1980s, a series <strong>of</strong> influential studies werereleased that questioned <strong>the</strong> ecological and administrativeeffectiveness <strong>of</strong> permittee-responsible mitigation.12 In light <strong>of</strong> <strong>the</strong> findings, wetland mitigationbanking gained support as a mechanism that mightserve <strong>to</strong> address <strong>the</strong> deficiencies <strong>of</strong> permittee-responsiblemitigation. Specifically, wetland banking wasviewed as an effective way for compensa<strong>to</strong>ry mitigation<strong>to</strong> be consolidated in<strong>to</strong> larger parcels, <strong>the</strong>reby allowingfor greater financial, administrative, and ecologicalefficiencies. 13 In response, EPA and <strong>the</strong> Corps issuedinterim banking guidance in 1993 and final bankingguidance in 1995. 14Following issuance <strong>of</strong> <strong>the</strong> federal banking guidancein 1995, <strong>the</strong> number <strong>of</strong> wetland mitigation banks,particularly those sponsored by <strong>the</strong> private sec<strong>to</strong>r,soared. The guidance gave state agencies, local governments,and <strong>the</strong> private sec<strong>to</strong>r <strong>the</strong> regula<strong>to</strong>ry certaintyand procedural framework <strong>the</strong>y needed <strong>to</strong> seekapproval <strong>to</strong> operate mitigation banks. 15 (See Chapter11 U.S. Fish and Wildlife Service. June 23, 1983. U.S. Fish andWildlife Service Interim Guidance on Mitigation <strong>Banking</strong>. ESInstruction Memorandum No. 80.12 Eliot, Wendy. 1985. Implementing Mitigation Policies in SanFrancisco Bay: A Critique. Oakland, CA: California State CoastalConservancy; Race, Margaret Seluk. 1985. “Critique <strong>of</strong> PresentWetlands Mitigation Policies in <strong>the</strong> United States Based on anAnalysis <strong>of</strong> Past Res<strong>to</strong>ration Projects in San Francisco Bay.”Environmental Management 9 (1):71-82; Erwin, Kevin L. 1990.“Wetland Evaluation for Res<strong>to</strong>ration and Creation.” In WetlandCreation and Res<strong>to</strong>ration: The Status <strong>of</strong> <strong>the</strong> Science, edited by J. A.Kusler and M. E. Kentula. Washing<strong>to</strong>n, DC: Island Press.13 Federal Guidance for <strong>the</strong> Establishment, Use and Operation <strong>of</strong>Mitigation Banks, 60 Fed. Reg. 58,605 (1995). § I. B. (Hereinafter<strong>Banking</strong> Guidance (1995).)14 <strong>Banking</strong> Guidance (1995).15 U.S. Environmental Protection Agency. Mitigation <strong>Banking</strong>Factsheet. http://www.epa.gov/owow/wetlands/facts/fact16.html.2, “Status – number, distribution, and character <strong>of</strong>banks.”)Additional federal guidance affecting mitigation bankinghas been issued in <strong>the</strong> intervening years, 16 and inMarch 2006, EPA and <strong>the</strong> Corps issued a proposed ruleon compensa<strong>to</strong>ry mitigation that seeks <strong>to</strong> establish “<strong>to</strong>an extent that is feasible and practical, equivalent standardsfor all forms <strong>of</strong> compensa<strong>to</strong>ry mitigation.” 17 Thefinal rule may be issued as early as December 2007.How Wetland Mitigation Banks WorkThe 1995 Guidance defines wetland mitigation banksas wetland or stream res<strong>to</strong>ration, creation, enhancement,or preservation projects undertaken <strong>to</strong> compensatefor unavoidable losses <strong>to</strong> wetlands, streams,and o<strong>the</strong>r aquatic resources expressly for <strong>the</strong> purpose<strong>of</strong> providing compensa<strong>to</strong>ry mitigation in advance <strong>of</strong>authorized impacts. 18 Banks are created when anentity – generally a private entrepreneur, state or localagency, or nonpr<strong>of</strong>it organization – enters in<strong>to</strong> a formalagreement with a regula<strong>to</strong>ry agency.The 1995 <strong>Banking</strong> Guidance established a structure forbanking that is characterized by four distinct components:• The bank site: <strong>the</strong> physical acreage that has beenres<strong>to</strong>red, established, enhanced, or preserved;• The bank instrument: <strong>the</strong> formal agreementbetween <strong>the</strong> bank sponsor and <strong>the</strong> regula<strong>to</strong>ryagency(ies) that establishes liability, performancestandards, management and moni<strong>to</strong>ring requirements,and <strong>the</strong> terms <strong>of</strong> bank credit approval;• The Mitigation Bank Review Team: <strong>the</strong> interagencyteam that provides regula<strong>to</strong>ry review, approval, andoversight <strong>of</strong> <strong>the</strong> bank; and• The service area: <strong>the</strong> geographic area within whichpermitted impacts can be compensated at a givenbank. 1916 RGL 02-2 (2002).17 Compensa<strong>to</strong>ry Mitigation for Losses <strong>of</strong> Aquatic Resources, 71 Fed.Reg. 15,520 (2006) (<strong>to</strong> be codified at 33 C.F.R. pt. 325 and 332, and40 C.F.R. pt. 230) (proposed Mar. 28, 2006), p. 15,521. (HereinafterProposed Compensa<strong>to</strong>ry Mitigation Rule (2006).)18 <strong>Banking</strong> Guidance (1995). §III.19 U.S. Environmental Protection Agency. Mitigation <strong>Banking</strong>Factsheet. http://www.epa.gov/owow/wetlands/facts/fact16.html.<strong>Design</strong> <strong>of</strong> U.S. <strong>Habitat</strong> <strong>Banking</strong> <strong>Systems</strong> <strong>to</strong> <strong>Support</strong> <strong>the</strong> <strong>Conservation</strong> <strong>of</strong> Wildlife <strong>Habitat</strong> and At-Risk Species 9