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Part of the Series Guide to Green InvestingGreen Investing Basics
Investing by Energy Type
Investing in the Environment
Mitigation banking is a system of credits and debits devised to ensure that ecological loss, especially loss to wetlands and streams resulting from various development works, is compensated by the preservation and restoration of wetlands, natural habitats, and streams in other areas so that there is no net loss to the environment.
According to the Ecological Restoration Business Association (ERBA), "mitigation banks are highly regulated enterprises that have historically been proven to deliver the highest quality, most reliable offset to environmental impacts. and a private investment into 'green infrastructure' to help offset the impacts associated with economic growth."
To mitigate means to reduce the severity of something. In this case, mitigation banking is reducing the damage caused to the environment. When a development is likely to damage an ecosystem, the loss is mitigated by preserving a comparable ecosystem in a different area.
A mitigation bank is a site developed for such a purpose, whereas the person or entity undertaking such restoration work is referred to as a mitigation banker. Just as a commercial bank has cash as an asset that it can loan to customers, a mitigation bank has mitigation credits that it can eventually sell to those who are trying to offset mitigation debits. Generally, these purchasers of mitigation credits are individuals or entities undertaking commercial projects.
There are two types of mitigation banks:
When a mitigation banker purchases an environmentally damaged site that they wish to regenerate, they work with regulatory agencies such as the Mitigation Banking Review Team (MBRT) and the Conservation Banking Review Team (CBRT) to approve plans for building, maintaining, and monitoring the bank.
These agencies also approve the number of mitigation credits that the bank may earn and sell with a particular restoration project. Anyone who plans to undertake commercial development on or near a wetland or stream can buy these mitigation credits to offset the negative effects of their project on the local ecosystem. The mitigation banker is responsible for not just the development, but also the future upkeep and maintenance of the mitigation bank.
The U.S. Environmental Protection Agency has defined four distinct components of a mitigation bank:
The Clean Water Act (CWA) was passed in 1972. Section 404 and two other provisions of the CWA made it compulsory to avoid and minimize the impact on designated water bodies and provide compensatory mitigation for unavoidable impacts. Below is a chronological breakdown:
There are over 1200 mitigation banks operating in the United States, with a total credit value of over $100 billion.
Mitigation banking aids in protecting nature and its diversity. The impact of increasing industrialization and urbanization on natural habitats, streams, and wetlands is inevitable. Mitigation banks provide an opportunity to at least partially offset this impact.
A mitigation bank is more efficient than restoring a different ecological site to offset each individual development. This is because it is easier to restore a vast consolidated piece of land than it is to preserve a lot of small sites. The economies of scale and technical expertise of a mitigation bank make it more efficient not just in terms of cost, but also in terms of the quality of restored acreage.
It is easier for developers to buy credits from an approved bank than to get regulatory approvals that might otherwise take months to procure. As mitigation banks have already restored units of affected acreage in the process of earning credits, there is little to no time lag between the environmental impact at a service area and its restoration at a bank site.
The system of mitigation banking effectively transfers the liability of ecological loss from the developer (also called permittee) to the mitigation banker. Once the permittee buys the required credits as per regulations, it becomes the responsibility of the mitigation banker to develop, maintain, and monitor the site on a long-term basis.
If there is no eligible mitigation bank in a specific area, the developer can create their own mitigation project to offset ecosystem loss. This is called permittee-responsible mitigation.
Currently, there are a number of mitigation banks approved in the United States. According to the Regulatory In-lieu Fee and Bank Information Tracking System (RIBITS), developed by the U.S. Army Corps of Engineers (USACE), as of July 2021, there were over 2,000 approved banks.
The foremost challenge to successful mitigation banking is the difficulty of correctly assessing ecological loss in monetary terms. The credits offered to mitigation banks have to be appropriately priced and evaluated by regulators, but although these agencies make use of a number of environmental assessment techniques, it is not easy to fully capture the economic impact of damage to natural resources.
It is also questionable whether the natural habitats and wetlands that took centuries to evolve can be artificially engineered in a span of just a few years. In some cases, the quality of such artificially developed wetlands in terms of floral and faunal diversity has been found to be sub-standard, compared to their natural counterparts.
It is also believed that mitigation banks, as opposed to individual mitigation where developers create their own mitigation sites in the vicinity of acreage destroyed, tend to be located far from the sites of impact, and hence cannot fully replicate the impacted site.
Because development projects can only be mitigated by similar ecosystems, the cost of mitigation bank credits will vary widely by location and impact activity. For example, in Iowa, an emergent wetland credit can range from $35,000 to $55,000 per acre, while a forested wetland credit can cost as much as $75,000.
A wetland mitigation bank must have the potential to restore approximately 100 acres of degraded wetlands, while a stream mitigation bank must cover 4,000 linear feet of degraded streams. Sites that do not meet these thresholds can be combined with other sites in the same watershed to create an umbrella mitigation bank.
Mitigation banking is a complex process that takes several years. The most important part is site selection: the mitigation banker must thoroughly research the site's watershed and service area, and identify the ecosystems in need of restoration and enhancement. The plans must be authorized by the U.S. Army Corps of Engineers and the Inter-agency Review Team. After all the approvals are in place, the mitigation banker is still responsible for maintaining and monitoring the restored ecosystem.
Mitigation banking is a system that transfers the liability of ecological damage from the permittee to the mitigation banker through a system of credits and debits under regulatory guidelines. A mitigation banker develops, restores, preserves, and manages the acreage at a bank site and earns mitigation credits, which are then sold to a permittee or developer for a fee.
This system, despite some of its limitations, still has a lot of advantages. With increasing private investment in the development of mitigation banks and research on ecosystems as well as easing regulatory controls, the future for mitigation banking is bright both for investors and for nature.
