Mitigation banking is a little-known and sometimes misunderstood system. This post offers a quick primer on how mitigation banks are established and used to offset unavoidable environmental impacts of development activities.

Under Section 404 of the Clean Water Act (CWA), dredging and filling in “waters of the United States” is unlawful unless authorized by a permit from the U.S. Army Corps of Engineers (Corps).

Corps regulations provide that permit applicants must first avoid impacts to aquatic resources from their projects entirely, then minimize those impacts to the maximum extent practicable. If impacts to aquatic resources are unavoidable, the permit applicant must provide appropriate compensatory mitigation for the impacts. The purpose of compensatory mitigation is to replace as closely as possible the lost resources, with a goal of no net loss of wetlands or streams.

Mitigation is required so that the permitted project covers the costs of its environmental impacts (“internalizing the externalities,” as an economist would say).

Mitigation under the CWA is governed by the 2008 Mitigation Rule, a joint EPA-Army regulation codified at 33 CFR Part 332. I was privileged to promulgate this Rule on behalf of the Army during my tenure as Assistant Secretary of the Army for Civil Works. The 2008 Rule provides that mitigation in CWA permits issued by the Corps may take three forms: purchase of credits from approved mitigation banks, purchase of credits from “in-lieu fee” programs, or permittee-responsible mitigation.

The 2008 Rule also establishes a hierarchy that guides the Corps in determining the appropriate form the required mitigation should take. First place in the hierarchy is occupied by approved credits from a mitigation bank.

A mitigation bank is not a “bank” as that term is commonly used. Instead, it is an environmental restoration project that generates credits that can be sold to developers to satisfy their permit requirements for compensatory mitigation.

This is how it works. A mitigation bank developer, known as a “sponsor,” acquires a parcel of land for the bank. The best land for establishing a mitigation bank is generally a location where wetlands or streams had existed at one time but were drained and filled, usually for agricultural purposes. The sponsor files a Prospectus with the Corps District having jurisdiction over the location, giving a general outline of its plans for restoring aquatic ecosystem functions on the land.

The Prospectus is reviewed by an Interagency Review Team (IRT) with membership from all state and federal agencies with regulatory responsibilities over the project, which is convened by the Corps District. The IRT advises the sponsor on the likelihood that the proposed mitigation bank would be accepted by the Corps. The idea here is to give the sponsor an early read on the prospects for eventual bank approval before the sponsor has spent a lot of money doing the detailed environmental and engineering analysis that must accompany the application for a Mitigation Banking Instrument (MBI).

Once the Prospectus is approved, the sponsor can go ahead with its application for bank approval, which takes the form of an MBI. This document contains an exhaustive description of the condition of aquatic resources present on the bank site, a detailed description of the work proposed to be undertaken to restore aquatic ecosystem functions on the site, and a description of the improvements to aquatic ecosystem functions expected to be achieved, known as the “ecological lift.” The IRT evaluates this difference between the current and expected site conditions and based on its evaluation determines the number of wetland and/or stream credits the bank will generate when it is constructed.

The IRT also establishes the service area for the bank, usually in terms of hydrologic unit codes, in which credits from the bank will be accepted to offset losses to aquatic resources from permitted activities.

This can be a costly and protracted process, involving lots of back-and-forth between the sponsor and the IRT. Among other things, the sponsor must provide financial assurances to guarantee that the bank will be constructed and that it will be properly maintained. The entire bank must be placed in a perpetual conservation easement with a third-party easement holder and the sponsor must enlist a long-term steward for the bank to maintain its condition in perpetuity and establish an endowment to ensure that the long-term steward has the resources needed to do this maintenance.

Once the pieces are in place, the IRT will authorize release of mitigation bank credits to the sponsor. The sponsor is required to submit regular monitoring reports to the Corps to ensure that the bank’s success metrics are achieved. Released credits can be sold to developers on the open market and used by them to discharge the mitigation requirements of their Section 404 permits. Credits sold are removed from the bank’s ledger maintained by the Corps until all credits are sold and the bank is closed.

The benefits of using mitigation bank credits are substantial compared to the permittee undertaking to perform mitigation itself (“permittee-responsible mitigation”). The risk of mitigation failure is shifted to the bank sponsor. Few developers have expertise in environmental restoration, and even finding a suitable site for the mitigation may be difficult. Most developers prefer to write a check and quickly satisfy their mitigation responsibilities.

The environmental benefits of mitigation banking are also substantial. Instead of producing a patchwork of small, isolated restoration sites, mitigation banks offer larger sites that aggregate the environmental restoration requirements of numerous small permits, resulting in larger sites with greater potential for viable wildlife habitat and higher quality wetlands and streams. The safeguards provided by the mitigation banking approach, including the conservation easement and the financial assurances, provide the regulator with confidence that losses to aquatic resources from permitted activities will in fact be offset. On top of that, the ecosystem restoration is usually already in place when the permitted activity takes place, supported by a strict monitoring system.

Mitigation banking provides a market-based approach to ensuring that the progressive loss of our nation’s wetlands and streams to development can be offset. The mitigation banking industry has grown and flourished, despite the long lead-times, expensive requirements, and close regulatory scrutiny involved in creating and maintaining a mitigation bank.

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