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USING INCENTIVES FOR ECOSYSTEM PROTECTION ANDSTEWARDSHIP

Overview

We've made considerable progress in addressing many 'end-of-pipe' environmental problems in theU.S. over the past three decades. Yet ecosystem degradation has continued, and many ecologicalfunctions -- including water quality and quantity, soil productivity, and habitat -- are impaired orinadequately managed. We generally have not developed the information that people need tounderstand their actions in terms of their effects on ecosystem functions, nor have we placed valueon ecosystem functions in a way that creates incentives for maintaining them. As a result, we havefailed to meet some long-standing environmental goals, and we are not sufficiently well positionedto meet the environmental challenges of the future.

Economic instruments, information policies, and other incentives can help to protect ecosystemfunctions and condition. Sustaining ecological functions requires the involvement of everyonewhose actions affect the ecosystem -- landowners, consumers, business, and governments alike.Information-based policies and economic instruments provide the knowledge and incentives thatthese diverse stakeholders need to make good choices. Information-based policies and economic,social, and other instruments can be a cost-effective way to coordinate action at the ecosystem scale.Also, many individuals are motivated to protect ecosystems by a variety of social or “quality of life”factors such as spiritual and heritage values and recreational and aesthetic enjoyment.

In this context, we define “ecosystem protection and stewardship” as efforts to maintain or restoreecosystem functions such as nutrient cycling, hydrological regimes, migratory, successional, andevolutionary pathways, and disturbance regimes, such as fire, upon which ecosystem renewaldepends. Also included are efforts to maintain or restore ecosystem composition, including genetic,species, and ecosystem diversity. Incentives for ecosystem protection and stewardship may includeanything – money, information, or social and cultural rewards – that motivates activities that help tomaintain or restore ecosystem function or conditions. Performance is measured through relevantindicators.

Objectives

Many people recognize the need to use incentives to increase the effectiveness of ecosystemprotection efforts, and a growing number of innovative efforts are already underway. Experiencewith incentives that motivate actions to protect ecosystems, however, is limited. One reason is thatmost efforts to protect ecosystem functions and conditions (beyond establishment of protectedareas or reduction of pollutant point sources) are relatively recent. Another reason is that it is oftennot clear which of the many possible actions will do the most to improve ecosystem stewardshipand protection since past efforts have focused on reducing pollution and protecting human health.


Objectives include:

• Providing an overview of incentives that are available for ecosystem protection and stewardship;• Providing insights from public and private sector innovators on how incentives for ecosystem

protection and stewardship can be used;• Identifying key elements in the design and implementation of incentive programs for ecosystem

protection and stewardship from public and private sector perspectives;

Content

I. Overview: Options and Strategies to Use Incentives For Ecosystem Protection andStewardship. This section will survey and categorize the range of incentives that can beused to achieve ecosystem protection. Included will be economic, information, andsocial/cultural incentives and the ecological stewardship and protection goals they are bestsuited for. To provide insight into how these types of incentives have been used, the sectionwill examine one California's use of ecologically based incentives, including the role ofincentives in that state’s overall policy and institutional framework.

Douglas Wheeler,Hogan & Hartson, former California Secretary of Resources - Views onwhere the greatest opportunities exist for expanding the use of incentives forecosystem protection and stewardship.

Nels Johnson, Senior Associate, World Resources Institute – Overview of incentives forEcosystem protection and stewardship

II. Designing Effective Incentive Programs. This section will look at the use of incentivesfor ecosystem protection in a non-governmental relationship between a conservation groupand private landowners. The section will focus on how strictly voluntary efforts, such asThe Nature Conservancy’s Forest Bank program, can be used to achieve environmentalgains that go beyond regulatory requirements and government capacities. Still, such effortsrely on a supportive policy framework.

Kent Gilgis, Director, Forest Bank Program, The Nature Conservancy - Views on what policychanges would help to make the use of incentives, such as those used in the ForestBank, more effective and widespread.

III. Integrating Incentives and Regulatory Frameworks. This section will focus on howincentive-based approaches can be integrated with existing environmental regulations. It willexamine how incentives can be used to complement or substitute for regulatory approachesto ecosystem protection, drawing from lessons learned from implementing ecosystemmanagement in Florida. Florida's ecosystem management efforts include voluntary,incentive-based partnerships with businesses, a team permitting approach that savesregulated industries money and achieves environmental benefits beyond legal requirements,and educational efforts to encourage a conservation ethic among Florida residents.


• Ernest Barnett, Director of Ecosystem Planning and Coordination, Florida Department ofEnvironmental Protection – Views on integrating incentive-based and regulatory approachesfor ecosystem protection in Florida.”

Incentive Approaches to Ecosystem Protection

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An Overview of Incentive Approaches to EcosystemProtection

Gwen Parker, Nels Johnson, Paige Brown

I. Introduction

Despite significant progress in addressing many environmentalproblems, ecosystem degradation continues to be widespread. Citizens,businesses, governments and the non-profit sector have sometimesworked together to stabilize or reverse threats to ecosystems, such ashabitat loss or non-point source water pollution. These cases, however,tend to be the exception rather than the rule. Environmental regulationshave and will continue to play an important role in protectingecosystems. But the pace, extent, and many dimensions of ecosystemdegradation -- and the demonstrated cost and limited sphere ofinfluence of existing regulatory programs -- make it clear that moreflexible, far-reaching approaches are needed (Meyer 1999). Incentiveprograms can help fill that need by complementing, and in some casessubstituting for, traditional regulatory approaches. Some states andcities have long recognized this potential and have pushed ahead withincentive-based approaches to ecosystem protection and stewardship.This paper provides a brief overview of different ways incentives canbe used for ecosystem protection and stewardship.

A few definitions and criteria are needed to frame thediscussion. We define "ecosystem protection and stewardship" asefforts to maintain or restore ecosystem functions such as nutrientcycling, hydrological regimes, migratory, successional andevolutionary pathways, and disturbance regimes (such as fire) uponwhich ecosystem health and ultimately human livelihoods depend. Alsoincluded are efforts to maintain or restore ecosystem composition,including genetic, species, and ecosystem diversity. Althoughtraditional approaches to pollution control certainly contribute toecosystem protection, we examine efforts that are place-based and dealwith ecological function or condition.

"Incentives for ecosystem protection and stewardship" aredefined as anything that motivates action to maintain or restoreecosystem function or condition. To fulfill this role, incentives forecosystem protection and stewardship need to be designed differentlythan incentives used for other environmental goals. For ecosystemprotection incentives to be effective, they should be:


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• designed to alter patterns of behavior within a defined area.The scale and boundaries of the area are determined based onecosystem function and/or condition;

• coupled with a monitoring system that tracks changes inecosystem function and/or condition. Ideally, the incentive andmonitoring programs are integrated so that people are encouragedto respond to the monitoring results;

• evaluated through indicators that measure ecosystem functionor condition. Such indicators should be reasonably easy tomeasure at appropriate intervals.

Since the use of incentives for ecosystem protection is relativelynew, few programs incorporate all of these elements. Nevertheless,these characteristics are becoming more common as new efforts emergein various parts of the country to encourage ecosystem protection andstewardship.

II. Types of Incentives for Ecosystem Protection

Incentives for ecosystem protection and stewardship can becreated in many different ways. We have grouped them into fourcategories – economic, regulatory, risk reduction, and information(Table 1). The examples below, while only a small sample, dorepresent the broad spectrum of incentive-based approaches that can beused for ecosystem protection and stewardship. Some approachesrepresent modifications of incentives commonly used to achievepollution reduction and other environmental goals, while some areuniquely suited to ecosystem protection efforts.

A. Economic

Economic incentives have been widely used to prevent orreduce pollution, but they are only now being adapted and used toencourage ecosystem protection and stewardship. Economic incentivesare generally created in three ways: through pricing mechanisms,marketable permit systems, or by defining liability rules. This sectionaddresses the first two.

1. Pricing: Taxes, Charges and Subsidies

Taxes and charges can be used to discourage behaviors thatdamage ecosystems, and subsidies can be used to encourage behaviorsthat protect them. For pricing mechanisms to work, the charge, tax orsubsidy has to be set high enough to change the behavior(s) that affect


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Table 1: Types of Incentives for Ecosystem Protection

Type of Incentive Means of Implementation Example(s)

Quantity Mechanisms:Tradable Development Rights

Marketable Permits

• New Jersey Pinelands DevelopmentCredits and TransferableDevelopment Rights

• Nutrient trading

Economic:These mechanisms createincentives for ecosystemprotection by establishing aprice, a property right, orliability rule for theprovision of ecosystemfunctions or conditions.

Pricing Mechanisms:Subsidies

Taxes and Charges

• Public Benefit Rating System inWashington state (tax reductions);USDA Environmental QualityImprovement Program

• Dutch Manure Surplus charge

Cross-compliance • Team permitting in FL ecosystemmanagement agreements

• Green Permits in OR• Green Tier in WI

Regulatory:These measures givepeople/firms who takeactions that protectecosystem functions orconditions privilegedtreatment within theregulatory system.

Assurance • Habitat Conservation Plans• Assurances provided to businesses

taking part in Wisconsin Departmentof Natural Resources' EnvironmentalCooperation Pilot Program

Compensation • Defenders of Wildlife WolfCompensation Trust Fund and WolfHabitat Fund

Managing Risk:These measures address theadditional risk that actions toprotect ecosystem functionsor conditions can create forthe agent or for members ofhis/her community.

Insurance • New crop insurance program atUSDA

Product Information • EcolabelingInformation:These measures seek tomotivate change byproviding information aboutthe ecosystem impacts ofdifferent productionprocesses or daily behaviors.

Information on EcosystemStatus and Functions

• Water quality monitoring projects inthe Penobscot Bay Network and theCasco Bay Estuary Project

the ecosystem function or condition. The mechanisms should also bespatially targeted, coupled with monitoring efforts, and evaluated in


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terms of their impact on ecosystem functions or conditions. Very fewprograms meet all of these criteria, but many meet some of them.

The pricing mechanisms that are most commonly used forecosystem protection are different forms of subsidies, which aredefined here as payments for the provision of desired ecosystemconditions or services. Subsidies can take many forms, includingreductions of non-environmental taxes and direct payments. Income taxand property tax deductions can create powerful incentives forconservation activities such as conservation easements, land donations,habitat restoration, and wildlife management (Brown 1999). Forexample, Minnesota encourages land donations and conservationeasements to protect wetlands and native prairie by making thedonations and easements tax-deductible. Conservationists have alsowidely but unsuccessfully advocated reductions in federal estate taxesfor inherited lands placed in conservation easements as a strategy tomaintain natural habitats and open lands in the face of escalating landprices and development pressures (Keystone Center 1996). Elsewhere,namely in several New England states, property taxes for landsmaintained in “current” uses such as forestry, agriculture, or wildlifehabitat qualify for tax rates that are stable or increase at less than realestate market values.

A good example of how tax reductions can be tailored toencourage ecosystem protection is the Public Benefit Rating System(PBRS), a land tax program in Jefferson and King Counties inWashington state (Brown 1999). Property taxes are usually based onthe appraised fair market value, which primarily reflects the property'sdevelopment potential. The PBRS complements this way ofdetermining property taxes with a scoring system in which points areassigned to specific open-space resources determined to be of publicbenefit. For example, property owners in King County receive points ifthey preserve or restore open space features such as salmon andwildlife habitat and stream buffers. The more points the landowneraccrues, the lower the property tax--and the lower the pressure on thelandowner to exploit the land's development potential. Although thePBRS targets tax reductions on lands with valuable ecosystemconditions or services, it is not coupled with a monitoring program.

The U.S. Department of Agriculture's Environmental QualityImprovement Program (EQIP) is a well-known example of using directpayments to encourage conservation. EQIP, which was establishedthrough the 1996 Farm Bill, targets financial, educational, and technicalassistance to priority areas that are designated on the basis ofenvironmental sensitivity and natural resource concerns. The financial


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assistance includes incentive payments for practices such as nutrientmanagement, manure management, integrated pest management,irrigation water management, and wildlife habitat management (USDA1999). Economists are now exploring ways to target agriculturalfinancial assistance even more carefully so that it can more effectivelypay for the provision of environmental services such as carbonsequestration and nutrient cycling from farmland (Mooney and Antle inpress).

Direct payments for ecosystem services don't have to flow frompublic funds. For example, water and electric utilities are payinglandowners for conservation actions that protect water quality or waterflow regimes in Costa Rica and the United States (Castro et. al. 1998;Landry 1999). The Nature Conservancy's pilot “forest banks” inVirginia and Indiana represent another innovative approach to directpayments for ecosystem services (Gilges 1999). In exchange for"depositing" the right to grow, manage and harvest trees on their landin a Forest Bank, landowners receive a regular financial return or"dividend payment". In turn, the Bank manages timber production in away that will sustain ecosystem functions. Finally, although they are acontroversial strategy for reducing greenhouse gas emissions under theFramework Convention on Climate Change, carbon sequestrationprojects have attracted more than $30 million in investments fromelectric utilities. These projects may involve forest protection,improved forest management, reforestation, or agroforestry activities(Brown et al. 1997; Dixon et al. 1993).

There are many examples of charges or taxes on emissions oron the use of polluting products, though few have been set at levelshigh enough to change behavior. Rarer still are cases in which a chargeor tax has been both set sufficiently high and targeted to protect anecosystem function or condition. The Dutch Manure Surplus Chargesuggests a promising approach, however (Hanley et al. 1997). Thecharge kicks in when the phosphate content of the manure applied tothe farmer's land goes above and beyond the needed, allowed level.Although the surplus charge is not coupled with monitoring in thiscase, a targeted charge such as this is more likely to have the desiredeffect on the ecosystem -- in this case on the ecosystem function ofnutrient cycling -- than a general tax on fertilizer use.

3. Tradable Permits and Transferable Development Rights

Like pricing instruments, quantity instruments like tradablepermits are less commonly used for ecosystem protection than for moregeneral environmental goals. In general, quantity instruments are used


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to achieve two aspects of ecosystem protection: to restrict pollution tolevels that the ecosystem can assimilate, and to restrict the totalquantity and the configuration of development in ecosystems that needto retain a large, contiguous area of natural vegetation to maintain theirbasic functions. Tradable permits are often used to achieve the formergoal, while transferable development rights are used for the latter.

The New Jersey Pinelands Commission uses two systems oftransferable development rights (Liggett 1999; New Jersey PinelandsCommission 1999). For both systems, land is categorized based on itsecological features (among others), and environmental and economicmonitoring programs are carried out cooperatively by the PinelandsCommission and the National Park Service (New Jersey PinelandsCommission 1998). The first system, which began eighteen years agoand functions at the regional level, is the Pinelands DevelopmentCredits (PDC) system. Under this system, the Pinelands Commissionallocates development credits to landowners in areas that are designatedfor preservation or agricultural production. Developers owning land inareas designated for growth can purchase the credits and use them toincrease the densities at which they can build. To date, the PDCprogram has protected more than 13,000 acres.

The second system, which was established in 1992 and works atthe local level, is a density transfer program. This program addressesareas that are designated for rural development and forest managementwhich are not covered by the PDC system. Under this system,developers can purchase land (rather than development credits) andtransfer the density allowed for the purchased parcel to a parcel of landthat is already under development. The New Jersey Legislatureamended the Municipal Land Use Law in 1996 to allow allmunicipalities to use this growth management tool (Liggett 1999).

Many programs have used tradable permits to limit airpollution. A number of states--including Michigan, Minnesota, andWisconsin--are exploring how watershed-based tradable permitprograms can be used to protect or improve water quality (Faeth inpress; Great Lakes Trading Network 1998). Although experience onthis front is still limited, such a watershed-based market can allocatepollution reduction effort across point and non-point sources within awatershed. This allows water quality goals to be met at much lowercost than can be achieved by focusing on point sources alone.

B. Regulatory IncentivesMany programs seek to encourage regulated industries to go

beyond compliance by reducing regulatory burden and risk for


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companies that demonstrate superior environmental performance. Theregulatory incentives employed in these programs take many forms,including cross-compliance, streamlined permitting or reportingrequirements, and assurance that efforts to improve environmentalmanagement will not be penalized in the future. As with the use ofeconomic incentives, relatively few of these programs are gearedtoward ecosystem functions and conditions per se. A few notableprograms do explicitly seek to protect ecosystem functions orconditions, however. Those that do not can still help by reducing theburden of pollutants on ecosystems.

1. Cross-compliance

Cross-compliance measures create incentives for ecosystemprotection and stewardship by making benefits under existingregulations conditional on ecosystem protection efforts that go beyondlegal requirements. The programs usually require firms to enter into anagreement or contract in which specific, measurable environmentalperformance goals are set.

The team permitting option under Ecosystem ManagementAgreements in Florida is a good example of this approach (Barnett1999; Florida DEP 1998). The team permitting option offers acoordinated and streamlined permitting process to businesses that enterinto an Environmental Management Agreement. The first team permitin the state, which was issued for CF Industries and HillsboroughCounty in 1997, involved a land exchange with permanent conservationrestrictions on the property received by the company. The companyalso agreed to provide long-term management for 97 protected acres.

Oregon and Wisconsin are undertaking or exploring similarinnovative uses of cross-compliance, though their programs do notseem to have as strong an orientation to ecosystem protection asFlorida's. Under the Green Permits program in Oregon, facilities havethe opportunity to gain regulatory flexibility--including limited waiversof environmental laws, permitting flexibility, and streamlinedregulatory interactions--in exchange for greater demonstratedenvironmental performance (Oregon DEQ 1999). Although the GreenPermits program does not focus on ecosystems, it can recognize andreward demonstrated environmental performance in areas of ecosystemprotection--such as protection of riparian habitat--in ways thatregulatory permits can not. The program requires the use of anenvironmental management system that includes the provision ofinformation to the community.


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The Green Tier program that has been proposed for Wisconsinwould similarly reward demonstrated environmental performance withincreased flexibility (Meyer 1999). Green Tier has been proposed aspossible future development of the path breaking EnvironmentalCooperation Pilot Program, a comprehensive innovation agreementbetween EPA and the state. In the Green Tier program, firms would beable to choose between a "Control Tier" and a "Green Tier". Theformer would involve complying with the usual, relatively inflexibleregulatory framework. The option of participating in the second, moreflexible tier would primarily be open to businesses with a solid recordof compliance in the control tier. However, under certain conditions itwould also be open to those with a less than perfect compliance recordas an opportunity to shift from sub-performance to exemplary conduct.

In either case, participants would be required to enter into aperformance contract that is negotiated to meet the needs of all partiesinvolved. The parties could include business, local or state government,non-profit groups, or other entities. As currently proposed, theperformance contracts could be designed to address many threats toecosystems, including diffuse sources of water pollution andunsustainable forest management. Businesses are now contacting theWisconsin Department of Natural Resources to negotiate pilot projectcontracts.

2. Assurances

Regulatory assurances are used to exempt companies orlandowners from future legal penalties or restrictions in exchange formutually agreed actions that go beyond current legal requirements.Habitat Conservation Plans (HCPs) are the most prominent example ofa regulatory assurance incentive for ecosystem protection that appliesto landowners. HCPs were conceived as a mechanism to reconciledevelopment and land use on private lands with Endangered SpeciesAct regulations. The Endangered Species Act was amended in 1982 toallow “incidental taking” (killing, harming, or disrupting the essentialhabitat of an endangered or threatened species incidental to otherwiselawful activities such as land development or logging) provided thelandowner submits and funds an approved HCP. The HCP is a plandeveloped by the landowner to minimize and mitigate the impact of theproposed development or land use on the endangered or threatenedspecies (Bean and Wilcove 1997; U.S. Fish and Wildlife Service 1997).

Landowners who undertake conservation measures under anapproved HCP may gain "assurances" that they will not be required toprovide additional funding for mitigation or be subject to additionalland use restrictions beyond that described in the plan. These


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conditions hold even if additional information, or changingcircumstances such as a discovery of new trends, indicate thatadditional mitigation is needed for the targeted species. The assuranceswere developed in 1994 to provide incentives for landowners toparticipate in costly, long-term HCPs by offering regulatory certainty(U.S. Fish and Wildlife Service 1997). Rigidity caused by assurances inthe face of new scientific information, or a natural disaster such as aflood, disease, or fire, could result in species extinctions. However,controls such as developing monitoring systems and ensuring adequatefunding for necessary changes can help keep assurances from having anegative effect on threatened or endangered species.

Both the number and size of HCPs are increasing.Approximately a dozen HCPs had been approved as of 1992, but 197had been approved by September 1996, and about 200 are indevelopment (Minette and Callinan 1997; U.S. Fish and WildlifeService 1997). According to the USFWS, the early HCPs were lessthan 1,000 acres, but of the 200 in development, 25 are over 10,000acres, 25 are over 100,000 acres, and 18 are over 500,000 acres. Somehigh-profile HCPs have been in California, such as for multiple habitatsin San Diego, including coastal sage scrub where up to 200 species ofplants and animals may be threatened or endangered due to the growthof the area. The plan promises habitat set-asides in return for zoningother parts of San Diego for unrestricted development (Ayres 1997).Ideally, larger HCPs will result in more comprehensive, ecosystem-level planning for threatened and endangered species, and provide aflexible means for landowners to meet regulatory requirements.

Whether these benefits are being realized is subject to debate.Concerns about HCPs have emerged at all levels, from specific HCPsto the context and requirements for the plans (Bean and Wilcove 1997;Murphy et. al. 1997). For HCPs to be effective, and not result in apiecemeal loss of species and habitats, plans should be subject toindependent scientific review and assessment. Monitoring should verifyoverall impacts on the target species.

Assurance is also given to businesses that participate in theWisconsin Department of Natural Resources' EnvironmentalCooperation Pilot that EPA will not subject them to undue scrutiny fortaking part in the experiment (Meyer 1999).

C. Managing Risk

People often simplify or modify ecosystems to wield greatercontrol over a desired environmental outcome, such as food production,


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or safety from predators or fire. Actions that help to protect or maintainecosystem functions or conditions may re-introduce environmentalrisks that people have tried to avoid. For example, efforts to reintroducefire in forest ecosystems in the western United States have met stiffopposition from homeowners that live in the suburban/wildlandinterface where many homes have been built in recent decades (Cleavesand Haynes 1999). The instruments examined in this section createincentives for ecosystem stewardship by insuring people against orcompensating them for these types of risk.

1. Compensation for Bearing Risk

Protecting ecosystem functions or conditions can generate broadpublic benefits, but also expose people to increased risks. Broadsupport for ecosystem protection efforts can be encouraged bycompensating the individuals or groups for the risk that they bear. Oneexample is the Defenders of Wildlife's Wolf Compensation Trust Fund.It reimburses livestock owners for documented losses to wolfpredation. This fund is used in areas, such as in the Northern Rockies,where wolves have been reintroduced or are naturally expanding theirranges from populations in Canada. Some states, such as Minnesota,have similar programs to compensate livestock owners for losses toendangered predator species. Defenders has also set up a Wolf HabitatFund, which awards landowners $5,000 if they allow wolves to raisepups on their land. Defenders paid a total of $36,603 to ranchers from1987 to August 1997. They have also paid $5,000 to Plum CreekTimber for allowing wolves to raise pups on its land (Brown 1999).

2. Insurance

New forms of insurance are a promising tool for helpingindividuals and businesses manage the increased exposure to risk thatmay be associated with practices that protect ecosystem functions andconditions. Such risk management tools are needed because risk-aversion is often a reason that ecologically harmful practices areadopted in the first place.

The new crop insurance program at USDA is a good example ofhow insurance can be used to encourage ecosystem stewardship(USDA 1999). The new crop insurance program allows farmers toadopt more financially risky but environmentally preferablemanagement practices by indemnifying farmers if weather conditionslead to crop losses where the environmentally preferred practices are inplace. For example, many farmers apply more fertilizer than would beneeded for a successful crop under normal rainfall conditions as ahedge against the possibility that heavier than normal rains might makethem lose fertilizer. Similarly, they may apply fertilizer in one heavy


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application rather than two more targeted, temporally spacedapplications because heavy rains might keep them from accessing theirfields later in the summer. Farmers' rates of returns are low enoughthat it is often difficult for them to not be risk averse in these ways. Thenew insurance program provides a way for farmers to manage theirfinancial risk while reducing the risk to the environment. Anotherpotential application of insurance would be to offer reduced premiumsto home- and landowners who make their property "fire safe" throughproper management in areas where fire is an important part ofecosystem management.

D. Information

All of us can contribute to ecosystem degradation without beingaware of it through our consumption choices and everyday actions likecaring for our lawn and garden. Reliable, straightforward informationabout the ecosystem impacts of different production processes or dailybehavior can motivate significant changes in behavior.

1. Product Information

Ecosystems produce a wide range of goods and services, someof which can be marketed. Many goods, such as timber or rangeforage, are basic commodities whose production may be relativelysustainable compared to alternative uses such as urban development.Frequently, however, their production generates serious ecologicaldamage. Among other reasons, ecological damage results becausemarkets have not provided information on the ecological impacts ofproducts that allows consumers to choose those with the fewestimpacts. Certification of sustainable management practices, or“ecolabeling,” is becoming a major factor in the marketing of timber,agricultural products, and fish. The incentive to producers forsustainable practices may come from market premiums or throughmaintenance or expansion of market share.

One of the better known examples of ecolabeling involves thestandards established by the Forest Stewardship Council (FSC). TheFSC is an independent, non-governmental membership group made upof representatives of environmental organizations, the timber trade,forestry professionals, indigenous groups, and forest productcertification organizations from around the world. FSC uses anindependent certification system, which evaluates environmentalperformance against a set of standards. The FSC evaluates andaccredits forest management certifiers such as Scientific CertificationSystems and Smartwood, based on a set of 10 principles addressingenvironmental, social, and economic issues. As of August, 1999 over


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39 million acres of productive forest land are certified worldwide (5million U.S.) in accordance with FSC standards, and millions more arecoming online. The U.S. market for certified forest products isgrowing rapidly as business leaders like The Home Depot, Nike, andthe architectural firm HOK are turning to certified forest products as ameans of putting their environmental policies in to action (FSC 1999).Because this interest exists, The Nature Conservancy is exploring waysto label and sell sustainably produced forest products from Forest Banklands (Gilges 1999).

The potential benefits of certification can be divided into marketand non-market benefits. Some possible benefits of certification arenew markets, increased market share, price premiums, andenvironmental or co-benefits, such as enhanced biodiversity. If donecorrectly, certification can yield non-market benefits such as improvedsoil fertility and water quality, and restoration of native species, amongothers.

Seven Islands, a certified timber producer in Maine thatmanages about one million acres of forest, noted several benefits fromcertification. First, the certification process led to improvements inmanagement and forest practices (McNulty and Cashwell 1995). Also,when increased regulations came into effect, the overall timber yield inMaine was reduced, but Seven Islands yield remained constant becausethey had instituted sustainable forest management that went beyond thenew state regulations. Additionally, Seven Islands benefited fromincreased timber prices from reduced supply.

2. Information on Ecosystem Status

Programs that provide basic information on ecologicalconditions and trends can unleash considerable energy and effort toimprove conditions. One effective way to do this is to encouragevolunteers to collect data on important indicators of ecosystemcondition. For example, the Penobscot Bay Network and the CascoBay Estuary Project in Maine use volunteers for water qualitymonitoring. Minnesota and Wisconsin have “lake watch” programs, inwhich volunteers collect specific water quality information. These“backyard” monitoring efforts, when they are well designed, appear toachieve the intense and sustained interest of volunteers, who frequentlybecome engaged in other efforts to protect ecological conditions(Keystone Center 1996).

III. Conclusion


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This brief overview has not addressed the role of social andcultural incentives – perhaps the most important incentives of all. Thedesire to identify oneself or one's business as a member of a place-based community can be a powerful motivator for action. The promiseof better standing and trust within the community can also spur greaterstewardship. Social norms that ostracize ecologically destructivebehavior may achieve longer lasting and more widespread change thanany other type of incentive – as demonstrated by the dramatic shift inAmerican attitudes towards tobacco.

Incentives represent a second generation of tools to protectecosystem functions and promote sound stewardship. Compared toregulatory approaches, incentives have both advantages anddisadvantages. They are more flexible, easier to adapt to localcircumstances, and often more economical. But, the transition to usingincentives can be difficult and time consuming. Moreover, given ourlimited experience with incentives, predicting their impact onecosystem functions and condition is an inexact science.

Two conditions are likely to make incentive approaches moreeffective for ecosystem protection and stewardship. First, sincestakeholders are diverse – encompassing industry, agriculture,households, and small to large landowners – protection efforts need touse several types of incentives to be effective (Young et al.1996).Second, incentives are often most effective in combination with aregulatory framework. Relying on incentives alone would not only beextremely costly, but it would suggest that people and their institutionshave no basic responsibility to maintain a safe and clean environment.Instead, future progress in ecosystem protection and stewardship islikely to come through innovative approaches that seek to adaptivelyuse both a range of incentives and a co-evolving regulatory frameworkthat ensures environmental improvement at least cost.

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Landry, C. 1999. Saving Our Stream Through Water Markets: A PracticalGuide. Bozeman, MT: Political Economy Research Center.

Liggett, L. 1999. Density transfer: the Pinelands experience. New JerseyPinelands Commission Report. Address:http://www.state.nj.us/pinelands/density.htm

McNulty, J.W. and J. H. Cashwell. 1995. The land manager’s perspective oncertification. Journal of Forestry. April: 22-25.

Meyer, G. 1999. A Green Tier for Greater Environmental Protection: AWorking Plan. Proposal for the Wisconsin Department of NaturalResources. Address:http://www.dnr.state.wi.us/org/caer/cea/reinvention/green%5Ftier/speeches/

Minette, M. and T. Cullinan. 1997. A Citizen’s Guide to HabitatConservation Plans. National Audubon Society, Washington, DC.

Mooney, S. and J. Antle. Forthcoming. Designing efficient policies foragricultural soil carbon sequestration. To be published in Advances inSoil Science. Springer-Verlag, New York.

Murphy, D.D., P. Brussard, and G. Meffe. 1997. A Statement on ProposedPrivate Lands Initiatives and Reauthorization of the EndangeredSpecies Act. Stanford University, Palo Alto, CA.

New Jersey Pinelands Commission. 1998. Annual Report. Address:http://www.state.nj.us/pinelands/98annual.htm

New Jersey Pinelands Commission. 1999. A Summary of the New Jersey PinelandsComprehensive Management Plan. Address:http://www.state.nj.us/pinelands/cmp.htm

Noss, R.F., E. T. LaRoe III, and J. M. Scott. 1995. Endangered Ecosystems of theUnited States: A Preliminary Assessment of Loss and Degradation. USDIBiology Report. No. 28. February.

Oregon DEQ. 1999. Green Permits and the Environmental Management SystemsIncentives Project: Update. Corvallis: Department of Environmental Quality


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Address: http://www.deq.state.or.us/od/green%20permits%20&%20EMSI/greenpermits.htm

U.S. Department of Agriculture. 1999. Natural Resources Conservation ServiceWebsite: 1996 Farm Bill Conservation Provisions. Address:http://www.nhq.nrcs.usda.gov/OPA/FB96OPA/MiscFB.html

U. S. Fish and Wildlife Service. 1997. Website, Division of EndangeredSpecies. Habitat Conservation Plan. Address: http://www.fws.gov

Young, M.D. et al. 1996. Reimbursing the Future: An Evaluation of

Motivational, Voluntary, Price-Based, Property-Right, and RegulatoryIncentives for the Conservation of Biodiversity. Part 2. BiodiversityUnit Paper No. 9. Canberra, Australia: Department of the Environment,Sport and Territories. Address:http://www.erin.gov.au/life/general_info/biodivser_9/part_2/contents.html

The Forest Bank: A Market-Based Tool forProtecting Our Working Forestland

Conservation of Functional Forest Landscapes(September 6, 1999)

Background

The Nature Conservancy

Since 1951, The Nature Conservancy has pursued a mission ofpreserving the plants, animals, and natural communities that represent thebiological diversity of life on earth by protecting the lands and waters theyneed to survive. We have pursued this mission through a range of protectionstrategies—ownership, conservation easements, and related managementagreements among others—that ensure conservation-oriented stewardship ofecologically sensitive places.

In 1999, the Conservancy surpassed a major milestone—successfulprotection of over 11 million acres of important natural habitat in the U.S.Internationally, we have helped secure another 60 million acres. Our successhas been built on innovation, a commitment to action driven by sound science,and a record of strong and effective partnerships.

In spite of our accomplishments, we know that to achieve missionsuccess in the decades ahead, we must become even more strategic andcreative in developing effective conservation tools. We know that landacquisition at the scale we have practiced will not suffice. Indeed, the task ofdeveloping innovative, market-based, replicable strategies for conservationwill be the primary challenge in the coming years.

The Center for Compatible Economic Development

In 1995, the Conservancy created a special operating unit called theCenter for Compatible Economic Development (CCED) to develop andimplement new businesses, land uses, and products that would help achieveconservation goals.

CCED grew from the realization that to achieve conservation success,we must positively engage people and communities where we work. Ruralcommunities, however, usually value economic well-being and job creationabove conservation. Long-term conservation success, therefore, must promoteeconomic development and improvement in the quality of life for target ruralcommunities while maintaining or enhancing the environment in surrounding

Conservation of Functional Forest Landscapes

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landscapes. One of the promising business concepts developed by CCED isThe Forest Bank.

Overview of The Forest Bank

An Old Problem

Forested land often provides the ecological matrix surrounding andsupporting critically threatened species and habitats. As the intensity ofhuman use of the forest increases, the conservation buffer provided by theforest decreases. Threats such as fragmentation, erosion, sedimentation, andunsound harvest practice can affect many aspects of a forest, from its viabilityfor forest species to the direct impacts on watersheds and aquatic health.

The intensity of forest use is increasing. As a brief example, a recentDepartment of Forestry study in Virginia looked at removals versus growthfor all timberland in different regions of the state. After filtering out land thatwas inoperable (due to slopes, parcel sizes, or configurations) and land thatwas unlikely to remain in timber production (as measured by populationdensity), the data showed that removals of hardwood exceed growth on

suitable timberland in the mountains of southwest Virginia—home to theClinch Valley, a critical area for biodiversity conservation in the U.S.—byupwards of 34%. This same courageous report states that across Virginia,hardwood removals exceed growth by 19%. Our experience in analyzingpotential Forest Bank sites in Wisconsin, Michigan, Missouri, and Indianaconfirms this unsustainable trend.

Private land bears an inordinate share of this burden, with recentchanges in wood supply trends having intensified the demand from privatelyowned forests domestically. One cause may be that production in the nationalforests has dropped to nearly a third of peak levels in the 1980s. Areas like

Hardwood Growth and Removals: Virginia (in million cubic feet)All land and suitable rural timberland

Annual growthAnnual on suitable land/

Survey Unit All Suitable All Suitable Removals Removal balanceCoastal Plain 3,722 2,047 127.89 74.73 125.24 -40.3%Southern Piedmont 4,108 2,411 140.58 81.06 91.23 -11.1%Northern Piedmont 3,662 1,727 93.10 43.37 40.22 7.8%Northern Mountains 3,568 1,989 70.99 40.83 28.83 41.6%Southern Mountains 4,778 1,868 98.68 40.06 60.96 -34.3%Statewide Total 19,838 10,042 531.24 280.05 346.48 -19.2%

from Virginia Dept. of Forestry

Growing Stock Annual Growth


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Timber Harvested in cubic feet(% of total U.S.)

49%

12%

6%

33%

central Appalachia and the Lake States are seeing the pressure on non-industrial private forestland (NIPF) increase dramatically.

Looking more closely at the NIPF ownership, a 1994 Forest Servicesurvey reports that 90 percent of NIPF owners nationwide have holdings of100 acres or less. This group represents a total of 118 million acresnationwide, or about 30% of the nation’s private forest land. As the report’sauthor states: “It is this portion of the resource where concern aboutfragmentation and rapid turnover is concentrated.”

The nature of harvesting practices on private lands has significantimplications for the health of our nation’s forests and, hence, for theconservation of biodiversity. According to FIA data, about 49% of all timberharvested comes from private, non-industrial land. Yet, only 5% of NIPFowners have a management plan for their woods, and this number is muchlower for parcels under 100 acres. Furthermore, land in this group turns overon average every seven years, an event that often drives decisions to harvesttimber.

These NIPF owners often make choices regarding harvest anddevelopment for reasons unconnected to ecological concerns and withoutprofessional advice or support. The need for cash to meet estate, education, ormedical needs may force a landowner to liquidate his/her forest asset. If thelandowner does not have the knowledge or time to ensure good forestmanagement and silviculture, the resource is often degraded and conservationvalues are compromised.

NIPF ownership is vulnerable to significant external pressure,beginning with the short-term, economic needs of the landowners themselves.These can be exacerbated by loggers and mills whose incentives and volumerequirements favor a quick conversion to cash. Simply stated, a consultingforester who earns a living on 8% of the harvest has an incentive to overcut.

Forest Ownership (%)

43%

17%

10%

30%

Private Non-IndustrialNationalForest

Other Public

PrivateCorporate

From T. Birch. USFS Resource Pub.1994

Source: FIA data


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Similarly, a logger who has bought a 100 acre boundary on a sealed bid oftenhas little incentive to construct a skid trail that minimizes erosion if he candrag the timber out through a stream bed more easily.

In order to protect the conservation values of any given site, TheNature Conservancy needs to direct the management and harvesting decisionsof the forest that surround and compose that site. At the same time, thelandowners need liquidity for their forest asset to meet urgent financial needswhen they arise.

While the landowner’s need for liquidity creates an ecological threat, italso represents a business opportunity. The Forest Bank is designed to offerlandowners a new option that gives them the financial liquidity they need inthe short-term while managing the resource sustainably over the long-term.

Genesis of The Forest Bank Concept

A Case Study: The Clinch Valley, Southwest Virginia

Extending more than 2,200 square miles across the mountains ofSouthwest Virginia and Northeast Tennessee – the Clinch Valley is home toone of the highest concentrations of rare and endangered species in the UnitedStates. Part of the Cumberland and Southern Ridge and Valley ecoregion, thesite includes the headwaters of the Clinch, Powell and Holston rivers, theformer two being the only remaining free-flowing tributaries of the TennesseeRiver system.

These rivers are the sole remaining habitat left on earth for severalspecies of freshwater mussels. All told, there are 30 federally listed species inthe Clinch Valley, including 18 mussels and 4 fish. The Nature Conservancyrecently ranked the Clinch and Powell watersheds first and third in a scientificevaluation of the biodiversity in all watersheds across the United States.

Like much of Appalachia, the Clinch Valley has a vibrant forestecosystem, with a wide assortment of hardwoods. The region is 75 percentforested, including over 670,000 acres of oak-hickory-type timber stands.And like other rural areas rich in timber resources but comparatively pooreconomically, the Clinch Valley is vulnerable to reckless or unsustainableharvesting of its timber resources. Indeed, inappropriate logging practicesrepresent a critical threat to the health of the watershed—with sediment run-offprojected to persist in suspension or as bedload for as long as 150 years.

As the coal mining that has driven the economy of the region recedes inimportance, the absence of other obvious economic development alternatives hasbegun to focus attention on the forest as a source of income generating activity.Landowners, in turn, are feeling new pressure to cut and sell timber that would


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otherwise be conserved, increasingly so as the market prices for timber continueto rise. Since 1986, the amount of hardwood cut annually in the region has morethan doubled, while the amount of softwood cutting has increased sevenfold.The state of Virginia has recognized the ecological importance of promotingresponsible logging by recommending that all operations follow bestmanagement practices. Unfortunately, a 1997 field audit found that 92% of alllogging sites studied were not in compliance with state-recommended BMPs.

Protection of the entire watershed through traditional acquisitionmeasures is not financially feasible. Instead, the Conservancy began looking fora solution that would:

• allow us to direct the harvesting operations on significant forest acreagewhile keeping the land in private ownership;

• provide liquidity to landowners to meet urgent financial needs;

• use the resource, inasmuch as possible, to pay for itself.

The Forest Bank Solution

A Simple Concept

The Forest Bank is an idea developed for and marketed primarily toprivate, non-industrial landowners. These landowners can make a deposit—or a transfer of the perpetual right to grow, manage and harvest trees—to TheForest Bank, while retaining fee simple ownership of the underlying land. Instructure, the deposit is designed to resemble the familiar CD used by savingsbanks.

In exchange for their deposit, the landowner will receive:

• An ironclad promise from The Nature Conservancy that the depositedforest will remain a working forest, and will henceforth be managedsustainably to support the ecosystem of which it is a part;

• A modest, regular financial return, or “dividend payment,” calculated onthe basis of the deposited timber’s appraised value;

• The option to withdraw the cash value of the deposit at the landowner’srequest (subject to certain penalties similar to a CD);

In contrast to virtually every other effort to promote sustainableforestry on private lands, The Forest Bank strategy guarantees permanentworking forests—and permanent control of forest management decisions—through the irrevocable acquisition of timber rights. It does so by providinglandowners with an economic option that meets their financial needs.


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Target Market

The Forest Bank is designed for private landowners with a desire tomaintain and preserve their forests, on the one hand, and a need for access toits financial value, on the other hand. The following are just a few indicatorsunderscoring the appeal that the Forest Bank is likely to have:

• In an effort to understand the motivation behind forest ownership, theU.S. Forest Service recently conducted a survey of non-industrial privatelandowners. It found more than a quarter of the respondents ownedforestland because it is part of a residence; and those listing recreation oraesthetic enjoyment as a primary objective accounted for another 20percent. Only 9 percent own the asset as a land investment, and a mere 3percent list timber management as the primary purpose.

• In the course of completing Forest Bank feasibility analyses, weconducted one-on-one interviews with private landowners in the ClinchValley. These landowners controlled about 4,500 acres—less than 0.6%of the forested watershed but fairly typical landowners otherwise. About70% expressed a direct personal interest in the Forest Bank, and nearlyall believed the idea would appeal to other landowners in the region.

• In the Blue River region of southern Indiana, we identified a sample setof landowners from one subwatershed called Twin Creek and appraisedthe timber for each of them. With actual forest values in hand, we metlandowners to test their interest. Over 35% of the landowners indicatedthey would deposit their land, and another 25% said they wanted moreinformation.

Business Goals

We intend to develop The Forest Bank as a business for forestconservation that complements the mission and activities of The NatureConservancy. Our plan is to prove the concept at a small handful of sites inour first 2-3 years. If the pilot projects are successful, we are able to meet oureconomic and conservation objectives, and we can raise the capital to expand,we intend to build this into a national program that could protect hundreds ofthousands of acres of working forests at multiple sites.

We foresee four potential business lines within The Forest Bank.These are:

• Small Landowner Deposits—aggressively secure timber rights fromNIPF owners and manage collectively to achieve economies of scale anda fair return for landowners.


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• “Anchor Tenant” Acquisitions—identify larger acquisitions (>10,000acres), either through creative deposit options with large landholders orthrough direct purchase of fee simple rights.

• Reforestation Program—identify funding sources (e.g. carbonsequestration markets) and create a program to enroll low-valuetimberland or non-forested lands and plant with trees. This isparticularly important in mixed-agriculture areas where aquatic diversityis a conservation goal.

• Targeted product marketing—use the TNC brand and coreconstituency of over one million members to market products usingsustainably produced timber, particularly focusing on creating marketsand/or adding value to secondary species and lower grade material fromForest Bank sites.

Although the Forest Bank concept was initially developed to addressthe first operation, recent developments within the Conservancy—in particularthe acquisition of 185,000 acres of forestland from International Paper inMaine—have caused us to think about a role for The Forest Bank incoordinating and financing the large timber acquisitions that will undoubtedlybe a part of The Nature Conservancy’s future.

Current Development

Pilot Sites

• The Forest Bank has successfully raised nearly $2 million in capital for apilot site in the Clinch Valley;

• The Nature Conservancy has pledged up to $5 million of its assets tosecure initial depositors in the Bank;

• The Clinch Valley Forest Bank recently hired an Operations Managerwith over 12 years of experience in wood procurement with GeorgiaPacific and others, and we are poised to accept our first deposits inescrow this fall;

• A second pilot site in southern Indiana is nearly ready to accept a handfulof deposits and has pledged up to $225,000 of its own assets to securethe bank;

• We are completing analyses at potential pilot sites in the Lake States,Missouri, and Louisiana.

Obstacles to Replicating The Forest Bank at a National Scale

There are a number of issues which we must address if we are to buildThe Forest Bank into a national program for the protection of working forests.


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First, to be successful we have to ensure a deposit transaction forlandowners that does not trigger an immediate capital gains event. This hasrequired an exhaustive and expensive request for an IRS private letter ruling.In addition, if and when we receive the letter ruling we will have to create adisclosure document and file with the SEC. We estimate the total cost of thisprocess to be at least $250,000 just in outside legal expenses, and closer to ahalf-million dollars in total. Few NGOs have the financial wherewithal toreplicate this kind of venture capital to create innovative programs.

Second, we need to develop access to substantial capital to operate theBank. We estimate proof-of-concept capitalization for each of our pilot sitesat $2-3 million. With four pilot sites, we must raise up to $12 million inoperating capital.

Beyond the proof-of-concept phase, our ten-year target for the ClinchValley Forest Bank is 60,000 acres in deposited, which creates a liability inpotential withdrawals of $30 million. While the Conservancy may be able tofinance one bank at this level, it is clear that to create a national impact, wemust be able to access low-cost capital in the private markets.

One option for us is to pursue a clarification in the tax code regardingthe use of tax-exempt bonds for the purchase of timber assets by a non-profit.The current law is unclear because it probably allows use of tax-exemptfinancing to purchase timberland for preservation but may not for workingforests. We believe a non-profit with the clear purpose of forest conservationshould qualify for tax-exempt financing to purchase working forestland.

Third, success in many of the Conservancy’s project sites will requirethe reforestation of land currently in agriculture or poorly-stocked forest. Weknow landowners with no current timber value will not be attracted to theForest Bank, so we need to create alternative financing vehicles that willreward them for putting their land into timber. We would like to pursuecarbon sequestration markets to fund this, but we believe direct governmentsupport through stewardship payments like CRP or WRP is one of the bestways to convince landowners to set aside unsuitable agricultural land.

One alternative is to offer a landowner a Forest Bank option coupled toa 15 or 20 year CRP or WRP. They might receive set aside payments for thedesignated period but must agree to reforest the land with suitable timberspecies. If they enroll simultaneously in the Forest Bank, they might beguaranteed that once the land comes out of WRP, their standing timber isvalued and their deposit is initiated, thereby generating continuing paymentsand access to capital.


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Conclusion

The Conservancy’s track record in protecting 11 million acres of landis estimable, and the expertise it has accumulated provides a good foundationfrom which to launch The Forest Bank. TNC already operates through 50state offices and nearly 100 project offices based in local communities.Current plans call for the establishment of hundreds more local Conservancyoffices during the coming decade.

The Forest Bank builds on this local connection and on the credibilityof The Nature Conservancy itself. We will build local operations that helplocal people meet their goals while protecting local forests and functioningecosystems. At the same time, we want to use the national scope and brandidentity of The Nature Conservancy to grow a business that can be effective atprotecting forest ecosystems throughout the United States.


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Forest Bank Core Principles

• Maintain and enhance the health of the forest and the plants and animalsthat depend on it.

• Optimize the sustainable return to our depositors and manage each forestdeposit in an exemplary way.

• Protect the forestland soil productivity and the water quality of thestreams and rivers.

• Create economic value from the forest resources by pursuing premiummarkets for our products.

• Manage native forest systems to produce high quality timber over thelong term.

• Emulate the natural processes and patterns of the forest and minimize thenegative impacts of our harvests.

• Conduct The Forest Bank with integrity beyond reproach.

• Continually reassess our methods and operations and look for ways toimprove The Forest Bank.

Mission StatementThe mission of The Forest Bank is to work in partnership with private landowners

to promote the economic productivity of working forests while protecting theecological health and natural diversity of the landscapes in which they occur.

"Expanding the Toolbox: Use of Market Mechanismsto Effect Ecosystem Management"

Douglas P. WheelerEnvironmental Practice Group

Hogan & Hartson, LLPWashington, D.C. and Los Angeles

(Formerly, California Secretary for Resources)

The emergence of ecosystem management as a strategy in science andin public policy as a means by which to reconcile economic andenvironmental objectives has necessitated the development of tools, whichare better suited to this purpose than the existing regulatory framework.Although recent surveys affirm that ecosystem management has gainedcredence nationwide, and market-based incentives are being rapidlydeveloped to meet a variety of local and regional needs, I am best able todiscuss the recent experience of California in adapting this approach to someof its most vexing natural resource and environmental issues.

A couple of years ago, William Stevens of the New York Times’"Science Times" described California's attempt at ecosystem-scale habitatconservation as "(t)he nation's most ambitious attempt to reconcile thepreservation of nature with urban development". That program-- the NaturalCommunities Conservation Planning initiative-- continues apace despite achange of gubernatorial administrations in Sacramento, and enjoys theindispensable support of Secretary of the Interior Bruce Babbitt .

NCCP and comparable ecosystem initiatives elsewhere have profoundimplications for environmental policy at all levels of government. Policymakers are challenged to find solutions which engage stakeholders, reflectbalance between economic and environmental objectives and which offeropportunities for cooperative planning in lieu of the regulatory straitjacket. InCalifornia, we have as the test bed for such experimentation a region thatSecretary Babbitt describes as "the 800 pound gorilla of urban development":intensely contested, enormously valuable, biologically rich, portions of fivesouthern counties. In this region, conflict between land uses had resulted inparalysis, where neither regulation or litigation had been effective inprotecting the environment on one hand or providing certainty of process forthe private sector on the other. It has been California's experience thatcollaborative planning is effective in managing entire ecosystems if privatelandowners can be encouraged to participate, through use of appropriateincentives. It thus becomes possible to move from regulatory constraints,

Use of Market Mechanisms to Effect Ecosystem Management

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which may protect a single listed species, such as the threatened Californiagnatcatcher, to focus on the entire coastal sage scrub natural community. Thismore proactive habitat-based approach makes possible the protection of thetarget species, together with a host of others-- listed and unlisted--which alsocomprise the ecosystem. There are nearly 6,000 square miles of coastal sagescrub in the five-county NCCP planning area. Acting on advice of eminentconservation biologists, more than 30 local jurisdictions and countless privatelandowners are working on regional and subregional plans for management ofthis extensive resource. To date, more than 200,000 acres of the mostproductive habitat have been protected absolutely, through use of varioustechniques, including on-site mitigation, mitigation banking and conservationbanking.

These tools have their legal origins in the mitigation requirements ofthe California Environmental Quality Act (CEQA) and, to a lesser extent, theFederal Endangered Species Act. Until recently, on-site mitigation has beenutilized to compensate for specific development impacts, and for theprotection of a single target species. This single site, single species approachis not well suited to the comprehensive planning requirements of ecosystemmanagement. Typically, the result is a patchwork of habitat fragments,lacking in quality and connectivity. It is not unexpected, thus, that the use ofmitigation has been expanded to more nearly reflect a planned approach, inwhich designated areas of specific habitat types are made to serve thepurposes of ecosystem management. In the case of mitigation banking, alandowner is generally given incentive to acquire and manage habitat, whichis remote (off-site) from the area of project impact. The "bank" can be drawnupon for "credits" to meet the landowner's mitigation needs, or as a source of"credits" for sale to similarly situated third parties. "Conservation banking" isa further refinement of this concept; a third party, such as a real estate orbanking firm, without mitigation liability of its own, will acquire and re-sellfor profit an area of habitat which has been "pre-qualified" to meet the specificrequirements of an ecosystem plan, as occurs in the case of an NCCP regionalpreserve. The use of conservation banks is widespread in California, andadditional variants are under development as a means to harness the profitmotive in the service of effective resource management. In a 1996 catalogue,the California Department of Fish and Game identified 39 conservation banksin 12 counties, with an estimated aggregate value of $40 million. Accordingto CDFG, these conservation banks "advance effective habitat conservation byencouraging the bundling of mitigation 'credits' at sites recognized to be highpriorities for habitat protection and restoration (and) provide a mechanism thatassigns a monetary value to habitat…."

The California experience with the development and use of suchmarket-based incentives to conservation is not unique. In its national surveyof ecosystem management projects in 1996, The Keystone National Policy


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Dialogue on Ecosystem Management found that "…the bottom line is largelywhat motivates industry, private landowners, and the consuming public". "Itis therefore essential", the Keystone Dialogue concluded, "to developmechanisms that encourage private landowners and resource users to invest inhealthy ecosystems through their market transactions". Nor is the use of thesetools limited to terrestrial applications, such as endangered species habitat andwetlands. In fact, one of the earliest attempts to establish "environmentalmarkets" in the United States took the form of emissions trading under theClean Air Act. To cope with its prolonged drought in the early 1990's,California established a "drought water bank" to serve as a temporaryclearinghouse for the sale of water rights at market prices. This use of themarket mechanism to apportion scarcity, though not without problems, has setthe stage in California for the establishment of a broader, more permanentwater transfer policy. Among bidders for augmented supplies from theDrought Water Bank were environmental resource managers, including theCalifornia Department of Fish and Game and the United States Fish andWildlife Service.

In its survey of ecosystem management practices, the Keystone Centeridentified other examples of market-based incentives. Not all of these entailpayments or credits to private interests. Keystone notes that in the case of theFieldstone Habitat Conservation Plan, a real estate developer was"compensated" for its commitment to a habitat conservation plan byassurances from USFWS that it had satisfied the Endangered Species Actrequirements of 63 species for a period of 30 years. Such assurances tolandowners are now sanctioned by the "no surprises" policies of SecretaryBabbitt, and can represent a substantial cost avoidance to participatingdevelopers. Other incentives identified by Keystone include:

n conservation banking, as already noted, a means to assure that thedesignation of mitigation lands will conform to regional planningrequirements;

n forest certification, in which timber harvesting and manufacturingis verified by independent authority to be ecologically sound andsustainable;

n preferential tax treatment for income, property and estate taxpurposes, in which conservation uses are recognized andencouraged;

n instream flow rights, analogous to the purchase of water rights forenvironmental purposes, above, in which private and non-profitagencies are authorized to acquire water rights for non-consumptive uses;


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n commercial and recreational use of species, in which sustainablecommercial utilization of non-threatened species serves to assuretheir protection, such as oaks in the south and Midwest and Pacificyew and ponderosa pine in the west;

n effluent trading in watersheds is authorized by the EnvironmentalProtection Agency pursuant to the Clean Water Act, and has beenutilized on a trial basis in the Tar-Pamlico watershed of NorthCarolina;

n grass banking permits ranchers of Arizona and New Mexico to restovergrazed ranges and public allotments by moving cattle to a"grass bank" owned by a non-profit organization, in return forconveyance of conservation easements on ranchers' land;

n emissions credit trading bank, created by City of Chicago tostimulate economic development, facilitates trade and donation ofexcess emissions credits; and

n individual transferable quotas, in which holders of quotas have alegally defined right to catch a specific quantity and type of fish,have been used in New Zealand since 1986 to alleviate problemsof over-capitalization and over-fishing.

The variety, flexibility and beneficial impact of these mechanisms argue fortheir use, as appropriate, to supplement-- but not entirely supplant—ourreliance on local, state and federal regulation to protect the public interest inenvironmental resources. In her new book, "The Morning After Earth Day",Mary Graham of the Kennedy School of Government at Harvard arguespersuasively that "(s)uccessful accommodations between commonenvironmental interests and private property rights are possible", if notimperative. We have come to appreciate that there are legal and practicalimpediments to our reliance solely upon regulatory constraints. The growinguse of market mechanisms and financial incentives to effect ecosystemmanagement and other environmental goals is ample evidence of Ms.Graham's thesis, and should be cause for optimism that the long-anticipatedFifth Amendment trainwreck can be averted.

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Florida’s Incentive-Based Environmental Protection:Alternative Regulatory Approach

(October 6, 1999)

Introduction

The Department of Environmental Protection (DEP) began developingits Ecosystem Management Initiative in 1993. The department had three goals:provide better protection for the state’s ecosystems; establish an agency culturethat supports a systems approach to environmental protection; and encourage aconservation ethic and sustainable lifestyle in Florida’s citizens. EcosystemManagement is now at work in Florida. Highlights include:

• The development of a team permitting approach that has saved privatesector participants hundreds of thousands of dollars and resulted in clearand substantial environmental benefits that could not have been achievedthrough traditional permitting.

• A Partnership for Ecosystem Protection Program that is reducing wasteand pollution in Florida through voluntary, incentive-based partnershipswith Florida businesses. As of May 1997, four Florida businesses (a powerplant, a chemical manufacturer, a dry cleaner, and a major manufacturer ofpaging systems) have taken up the challenge and become Partners inEcosystem Protection.

• Greater protection for Florida seafood consumers and less red tape for theseafood industry through a state/federal partnership to improve theinspection of bluecrab processing facilities. In 1997 the partnershipreceived the Vice President’s Heroes of Reinvention Hammer Award whichrecognizes excellence in government programs.

• A Private Lands Initiative for Florida farmers, foresters and ranchers whichrecognizes the value of these industries to Florida’s economy and to itsecosystems. The initiative seeks to protect these land uses through permitstreamlining, acquisition of development rights, technical assistance, andadvocacy for tax reform and other measures to help ensure that farms,ranches and forests remain a viable part of Florida’s landscape.

• A return of government to the people through the department’s landmarkEcosystem Management Area Teams. The department has divided thestate into 24 major ecosystems and has established at least one team in eachecosystem. The teams are open to all citizens and governments of

Alternative Regulatory Approach

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jurisdiction. Their task is to reach consensus on a future vision, identifyimportant environmental issues, and develop and implement an action planto protect ecological functions on a regional scale.

• More efficient management of Florida’s public lands is being pursuedthrough a variety of interagency and citizen partnerships. Interagencypartnerships have reduced costs and improved efficiency through sharing ofequipment, resources and expertise. Citizen partners have accomplishedmany resource management tasks, particularly in the area of ecologicalrestoration that would go undone at current funding levels. Among theirmany activities, they have grown and planted sea oats, mangroves andseagrasses, removed invasive exotic species, cleaned up shorelines, andprovided surveillance for the Florida Marine Patrol through theCoastWatch program. In fiscal year 1996-97, the Florida Park Servicealone logged volunteer hours equivalent to 30 percent of its full time workforce.

• More and better environmental information is being put into the hands ofgovernment staff, elected officials and citizens than ever before in historythrough an increased emphasis on science and technology. Decision-makers can now integrate such things as satellite habitat imagery, air, waterand biological data, demographic information, and transportation and landuse maps. This has proven essential to the protection of irreplaceableresources such as Wakulla and Ichetucknee Springs, the Indian RiverLagoon, and the Everglades/Florida Bay ecosystem.

• Educating Florida citizens on the many ways individuals can save moneyand resources while improving the home or workplace environment is agoal of the department’s Environmental Citizenship Campaign. Thecampaign encourages Florida citizens to become active participants inresolving environmental problems by providing them with information onthe causes of environmental problems and challenging them to “do theirpart” to keep our state clean and healthy.

Background

Florida's environmental programs evolved over the past 30 years toaddress serious air and water pollution problems and the loss of much of thestate's historic wetlands. Most of these programs are regulatory; that is, theyprohibit or restrict a person's ability to engage in activities, which may harm theenvironment. This regulatory approach has been successful in reducingpollution, protecting human health and slowing the loss of wetlands, but due inpart to its site specific (as opposed to system oriented) approach, it has notstemmed the tide of gradual environmental decline. Another problem is that the


3

adversarial nature of regulation has strained relationships between government,regulated interests, and the public. There is a growing sense of need for amore cooperative approach.

The application and enforcement of regulations has also been aproblem. Regulators often have little or no flexibility to exercise professionaljudgement on a case-by-case basis. In some cases, individuals are required tomeet higher standards than good conservation really requires, while in othersthe opposite is true.

Redundancy of reviews becomes an issue when an applicant must go tomore than one agency for a review of substantially the same information. It isespecially troubling to applicants when they are required to mitigate the sameimpact more than once because of differing requirements of the reviewagencies.

The relatively short expiration dates for permits are a problem forcertain activities—agriculture for example—where it may take many years torealize the full return on investments in land and equipment. Long-termassurances are needed to properly plan such investments.

Finally, there are certain activities, which could be better addressedoutside the normal permitting arena. These are routine activities for whichstandards (Best Management Practices) can be readily established. Examplesinclude installation of drinking water distribution lines and maintenancedredging of channels.

To address these problems the Florida Department of EnvironmentalProtection developed an approach that maintained existing regulatoryprograms with certain modifications and complimented them with alternativeprograms as discussed below. Regulatory standards are continued to beupheld and enforced; however, this approach seeks solutions that are:

• consensus-based within the framework of the law rather than adversarialand entrenched;

• based on pollution prevention instead of end-of-pipe control; and

• flexible, rather than rigid ways to meet environmental standards.

A major desired outcome is the development of alternatives to thecurrent regulatory process that achieve a clear benefit to both the environmentand the applicant that would likely not occur if traditional regulatory methodswere applied. A second outcome is process improvement. While there may


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also be environmental and applicant benefits, the primary purpose is to improveefficiency without reducing environmental protection or increasing the burdenon the applicant. The third type of outcome is to relieve undue burdens onapplicants and eliminate disincentives to good stewardship.

The one type of incentive-based regulatory approach that hasdemonstrated the most promise to achieve the desired outcomes is teampermitting. The Department of Environmental Protection’s ecosystemmanagement initiative developed an innovative approach to “team permitting,”an alternative to traditional permitting that can be chosen by an applicant whena project or activity requires permits from multiple agencies or levels ofgovernment. The team permitting approach was codified into law by the 1997legislature with the passage of Committee Substitute for Committee Substitutefor House Bills 1119 and 1577 which created Section 403.075, FloridaStatutes. The legislation, introduced by the business community and supportedby the DEP, authorizes the Department to enter into “ecosystem managementagreements” (team permits) with other state agencies and regulated entities tocoordinate all requirements and timetables that apply to a regulated activity.Applicants in pilot projects have indicated that this has resulted in significanttime and cost savings. In exchange for these applicant incentives, the lawcontains criteria to ensure that Floridians receive greater environmentalbenefits from than would have been attainable through traditional permitting.

One of these safeguards is that the Department may only enter into anagreement if the applicant agrees to meet all applicable standards and criteriaset by law and provide a ‘net ecosystem benefit’ (NEB) to the affectedecosystem. The NEB requirement ensures that the result will be more favorablethan would occur through traditional regulatory processes. A secondsafeguard is that the agreement also must result in a reduction of overall risksto human health and the environment compared to activities conducted inabsence of the agreement. A third safeguard is that the agreement may grantno exemptions or variances except those that are available under existing rulesand laws. And finally, the Department may terminate the agreement if theapplicant violates the terms of the agreement, if it is determined that the NEBcannot be achieved, or if the applicant is experiencing an economic hardship orcompetitive disadvantage as a result of the agreement.

The law provides incentives for applicants as well. Those listedspecifically in the legislation are: coordinated regulatory contact per facility;permitting process flexibility; expedited permit processing; alternativemonitoring and reporting requirements; coordinated permitting andinspections; cooperative inspections that provide for informal resolution ofcompliance issues before enforcement action is taken; and authorization foralternative means of environmental protection so long as the end result is equal


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or reduced risk to human health and the environment compared to traditionalpermitting. The law also clarifies that these agreements are entirely voluntaryin nature. No one can force an applicant into this alternative process and anapplicant can opt out at any time in favor of traditional permitting. Team Permitting

It can take years to obtain all the permissions, approvals, and permitsneeded to conduct some kinds of major environmental activities in Florida. Partof the problem is the wide variance between the environmental responsibilitiesof all the agencies—local, regional, state, and federal—that can be involved.And, while all environmental requirements may have been met at the end, noone can be certain of the overall effect the activity will have on Florida's air,water, lands, and living resources.

Under the team permitting concept, all of the agencies which may beinvolved in granting permission to conduct an activity are brought together toconsider the request. In addition, the identifiable third parties—citizens, citizengroups, environmental and business organizations—all are invited toparticipate. The proposal is considered as a whole, and while individual permitsmay still be issued, as the process goes on each involved agency, the applicant,and all the third parties will be aware of and will consider the overallenvironmental effects of the proposed activity. The concept allows a processwhich normally might take four or five (or more) years to complete to be donein much less time—sometimes as short as one year—saving time and money onthe part of the applicant as well as the involved agencies and other parties.

A major—and overriding—consideration in the team permittingconcept is that, in return for the expedited regulatory procedures, there will bea net environmental benefit from the activity after it is permitted. Thus far,team permitting projects have resulted in wastewater discharges being removedfrom waterways, significant reductions in the use of water for industrialprocesses, complete elimination of pollution sources, and more.

Case Study – CF Industries

On March 6,1997, DEP joint permit 10 29-296061 and ERP292958303 was issued by the Florida Department of EnvironmentalProtection, Southwest District, to CF Industries. This permit is the culminationof a first-ever team permitting effort involving the applicant, the HillsboroughRiver greenways Task Force, and many local, regional, state and federalagencies. Through the efforts of this team, CFI received all land use approvalsand environmental permits in just 20 months. A normal permitting process(obtaining all local, regional, state, and federal permits) requires at least four


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years. Since that time, the Department, its Ecosystem management partners,and other applicants have successfully negotiated other team permits in variousareas of the state.

CF Industries, a phosphate fertilizer producer with a plant in NortheastHillsborough County, faced a big problem. The company hoped to begin anew, lined phosphogypsum stack, and shut down its 30-year-old, unlined stack.Environmental issues included possible ground water contamination, and thepotential for sinkhole formation under the stack. Had CFI attempted to buildthe stack without the team permitting process in place, the company wouldhave needed permits from eleven local, state, regional, and federal agencies,each in separate permitting activities.

Fortunately, CFI was willing to commit to working as a member of theteam permitting effort, the first team-permitting effort in Florida. The elevenagencies, worked with interested third parties, such as the Sierra Club, theAudubon Society, and groups interested in land use, natural systems, andwatersheds.

Key to the success of the team permit is the net ecosystem benefit(NEB). The NEB in this case study was defined as benefits that were gainedfrom the project, over and above what would have been gained if thetraditional regulatory process had been used. The permitting team identified thefollowing positive actions that exceeded minimum ordinary permittingthresholds:

• Early closure (by 2 years) of a major contamination source;

• Installation of a double liner underneath the stack;

• Providing connections for wildlife corridors;

• Development of a detailed restoration plan;

• CFI agreed to exchange 1,983 acres adjacent to other County landfor1,558 acres of County land around the existing CFI phosphate complex,with the result that the County received a net benefit of 380 acres;

• CFI agreed to provide long term management of and conserve, throughpermanent property restrictions, upland/wetland habitat and wildlifecorridors on 975 acres it received;

• CFI has also agreed to use 2 million gallons per day (mgd) of treated PlantCity wastewater, thereby reducing CFI's groundwater consumption.


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Clearly, the environmental benefits of the project were worth theincentives that streamlined, expedited permits provided for the applicant. Thisexample and others show that incentive-based environmental protection isworking for Florida—for the environment, for citizens, and for the businessesthat support our economy. Ecosystem Management is not any one project orprogram. It is a philosophy that recognizes and seeks to preserve and restorethe intricate connections between all parts of the environment, including ourhuman communities. It is a pathway to a sustainable future for Florida.

USING INCENTIVES FOR ECOSYSTEM PROTECTION AND …pdf.wri.org/incentives_conferencestream3full.pdf · 2018-09-21 · II. Types of Incentives for Ecosystem Protection Incentives for

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