The concept of mitigating for wetland losses has been around almost as long as the Clean Water Act.
Wetland mitigation was adopted by the Environmental Protection Agency (EPA) in its 404(b)(1) guidelines in 1980,1 and the Department of Natural Resources (DNR) has had the authority since 2000 to consider the wetland mitigation in reviewing applications to impact wetland resources.
The first wetland mitigation banks in Wisconsin were established in 1996, but demand was lacking. The Corps of Engineers (ACOE) allowed most permitees to restore on-site wetland, despite a federal preference for the purchase of credits from a wetland mitigation bank. However, that changed with 2011 WI Act 118, when wetland mitigation was required for all state individual permits. A sudden demand for wetland banks was established, without any supply.
Heidi Kennedy, Marquette 2010, is a natural resources scientist with more than 16 years of experience in natural resources management, regulatory permitting, and environmental compliance working with the Wisconsin Department of Natural Resources prior to joining Short Elliott Hendrickson.
Similar to a subdivision development, a purchase of credits from a mitigation bank purchases an area of land that has been restored to wetland or a wetland has been enhanced. Private wetland mitigation bank are currently charging between $70,000 and $100,000 per credit.
These costs have chafed some developers and others receiving wetland fill permits, with some arguing that it is impacting economic development in the state. But EPA, ACOE, and DNR do not regulate the cost per credit established at wetland mitigation banks. And for those that own and operate a wetland mitigation bank, these costs reflect the economics, risks, and market for wetland mitigation banking in Wisconsin.
Regulatory Process and Costs
The joint Guidelines for Compensatory Mitigation in Wisconsin2 establish a five-step process to establish a wetland mitigation bank.
The first four steps establish the regulatory submittals for approval of a wetland mitigation bank and will take at least two years. These first four steps are an intensive regulatory process that can cost sponsors, i.e., mitigation bank owners, hundreds of thousands of dollars in environmental and engineering services. These costs are significant, considering most of the approved wetland mitigation banks in Wisconsin are under 150 acres, and each acre may only generate 0.25 to 1 credit per acre.
However, once potential credits are approved, the regulatory agencies release a percentage of those credits, which can be sold to help pay back some or all of the initial outlay of money. And if the bank is fortunate to sell the credits relatively quickly it may fund some or all of the construction costs.
Construction costs for mitigation banking typically include breaking drain tiles, filling or plugging ditches, and planting costs for native seed mixes, shrubs, and/or trees. These planting costs are often the most significant cost of construction with a native seed mix costing in the range of $1,500 to $4,000 per acre. In other words, a 100-acre wetland mitigation bank could spend as much as $4,000,000 on native plants alone. And if the plants don’t establish or the shrubs and trees die, there are additional replacement costs.
Once construction is complete, there is another release of credits, and the bank sponsor begins the final step of mitigation banking, monitoring, and maintenance of the bank.
Monitoring and maintenance lasts between 5 and 10 years. This includes reporting to the regulatory agencies, as well as conducting maintenance activities such as burning, chemical treatment of invasive plants, and groundwater monitoring. Depending on the maintenance activities required at the bank, costs of maintenance and monitoring can also cost in the range of $500 to $3000 per acre each year, with costs hopefully decreasing each year as the vegetation becomes more established.
Using a hypothetical example of a 100-acre wetland mitigation bank that is anticipated to generate 80 credits, bank sponsors would likely look to spend at least $20,000 to $30,000 per credit on just the regulatory process, construction costs, and maintenance that are incurred over a period of 7 to 12 years.
This per-credit estimate does not include costs for the long-term endowment, which is required for long-term maintenance of the site, purchase costs of the land, local zoning approvals, and potential tax implications, all of which must be accounted for in setting the price for each wetland mitigation bank credit.
Risks with Wetland Banking
Aside from costs, a wetland mitigation bank sponsor assumes a number of risks in establishing a wetland mitigation bank. There is the risk that the regulatory agencies won’t approve the bank – for example, if the site lacks potential. While the regulatory agencies typically give potential sponsors an idea whether they think the site has potential early in the regulatory process, sponsors do run a risk that the bank will not be approved at a later stage in the regulatory process if the environmental and engineering studies reveal potential pitfalls to successful wetland restoration.
Even after the bank is approved, there are risks for the bank. There is the potential that there is not as much wetland for restoration as what was originally anticipated, or that the bank does not meet benchmarks for native vegetation establishment or hydrology. This means that the site won’t generate as many credits as anticipated or the credits are not released as quickly as anticipated and the monitoring period is extended by the regulatory agencies. Finally, there is the risk that the credits are not sold as fast as anticipated because wetland fill permits are not applied for or granted at the same rate as in the past.
All of these risks increase the costs of wetland mitigation banking. Most bankers build the potential costs of these risks into each wetland mitigation bank credit they sell. How much this risk equates to is unknown, but it could be significant depending upon the sponsors’ evaluation of the risks.
Market Forces Affecting the Price
As mentioned previously, 2011 WI Act 118 created a sudden demand for wetland mitigation bank credits and a lack of supply.
Over the past five years, the supply of private wetland mitigation bank credits has improved, but there are still sub-watersheds that lack an approved wetland mitigation bank, as well as watersheds where the supply is not keeping up with the demand. In these cases, credits are purchased outside of the sub-watershed at private mitigation bank in the same major watershed (Mississippi River, Lake Superior, or Lake Michigan), or credits are purchased from the DNR’s in-lieu fee program, which is typically cheaper than a private mitigation bank, but has its own issues that are a discussion for another day.
Any product in a free market, where the supply cannot meet the demand, will likely inflate prices until there is market equilibrium. However, wetland mitigation bank credit sales are not a product on the free market. Those seeking wetland fill permits are not allowed to bargain or negotiate between wetland mitigation banks for the best prices.
Current federal regulations, the joint regulatory guidelines for wetland mitigation, and administrative rules have established as system that may never reach market equilibrium. Those filling wetlands (applicants) must purchase credits within the same watershed as their project or the closest bank to the proposed wetland fill. The DNR’s administrative process tells applicants how many credits to purchase and who to buy credits from. Applicants have no choice but to pay those prices if they want their wetland fill permit, and must make payment before a permit will be issued.
Only three sub-watersheds currently have more than one approved wetland mitigation bank.3 To date, applicants in these watersheds are still generally inhibited from choosing a mitigation bank.
Not for the Faint of Heart
The purchase of wetland mitigation bank credits can costs a significant amount of money for local governments, developers, school districts, and any other applicant for wetland fill in Wisconsin. The costs of these credits are influenced by the costs of establishing the bank, risks in wetland mitigation banking, and market forces.
While some may question why anyone would want to establish a wetland mitigation bank after reading this, there are a limited few people in this state that have ventured into this market to restore or enhance land in our state that is uneconomical for other types of development, and can make a profit.
However, it is not for the faint of heart. Private mitigation banking takes the financial wherewithal, perseverance, and a good team to be successful.