Environmental Markets: The Power of Regulation

Abstract

In their Perspective (“Restoration of ecosystem services for environmental markets,” 31 July, p. [575][1]), M. A. Palmer and S. Filoso call for direct measurement of ecosystem processes and third-party verification. This step is a critical one for the burgeoning compensatory mitigation industry to preserve, or recover, its credibility. However, Palmer and Filoso did not mention those who actually control ecosystem markets and did not consider how more rigorous restoration quality checks could provide an economic incentive to reduce ecosystem impacts in the first place. Ecosystem service markets are odd in that they are created and controlled by regulation. For aquatic ecosystems, for example, the Clean Water Act (CWA) and the first President Bush's administration created a cap-and-trade program for wetlands and later for streams. This produced a demand for restored ecosystems through fiat, not through an inherent consumer need for ecosystem service commodities. The U.S. Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (USACE) determine the presence of wetlands and streams on the landscape, their condition, and any requirements for compensation when these ecosystems are affected by development. Thus, by regulating the presence of existing wetlands and streams that might be affected, these two federal agencies are responsible for creating demand for these ecosystem services. In turn, these two agencies bear responsibility for the presence of the supply of restored ecosystem services through approval and certification of specific restoration projects. If the quality and integrity of restoration are lacking in existing aquatic ecosystem service markets, the blame rests largely on the shoulders of EPA and USACE, and these are the agencies through which aquatic ecosystem restoration policy changes must occur. We agree with Palmer and Filoso that more stringent criteria must be established for restoration as part of ecosystem markets, and we suggest that EPA and USACE quickly institute more stringent standards. But we also emphasize the economic and ecological implications of such changes. Making the success criteria of restoration more rigorous will undoubtedly increase the cost of restoration: Project engineering will initially prove more difficult and therefore more costly; financial risks will increase with greater uncertainty, causing investors to increase required rates of return; and verification of project success, whether direct or through third parties, will represent an additional expense. The net result is an increase in mitigation costs, which will need to be recouped by charging more for mitigation credits. This will, in turn, drive up the costs of affecting aquatic ecosystems, serving as a deterrent to damaging them. That is, increased restoration quality requirements could reduce the demand for compensatory mitigation by providing incentives for avoidance. This is likely the most substantial benefit of more expensive restoration. [1]: /lookup/doi/10.1126/science.1172976