Classic Jurisdictional Overreach

A big day for water resources as Corps issues the first 404 permit on Mars.

And the Oscar for Ecosystem Services goes to...

There's a new French documentary out with the compelling English title of Banking Nature, by Sandrine Feydel and Denis Delestrac.  The title in French is a little more clear about the aim at the financialization of nature rather than wetland and habitat banking per se: Nature, the new El Dorado of Finance.  It aired February 2nd on Arte and looks very well done.  Check out the trailer:


However, I'm someone who hated the Oscar-winning documentary Inside Job because of the way the interviewer simply wanted to beat up his interview subjects and score points with an audience who is scared and confused about finance.  As much as I agreed with his points, I think the film was damaging to critics of finance and the editing was pure partisan hackery.  Let's hope this documentary brings critical force to bear in a way that is genuinely educational -- more Life and Debt, less Inside Job.

While we're on the topic of movies about ecosystem services, Best Short Satire goes to a fun little piece on how Biodiversity Offsetting can make your dreams come true...


Biodiversity offsetting, making dreams come true from Global Motion on Vimeo.

Stacking Ecosystem Services

Given my long hiatus from posting, I should probably devote a full post solely to our article on stacking, released last year, which has been 5 years in the making... the co-authors are a diverse group including two social scientists, an urban planner, an academic hydrogeomorphologist, a professor of environmental law, and a stream restoration professional.

On the way to getting this article into print -- after eight rounds of review at three journals -- we faced some unique challenges.  Honestly, the odyssey may well be turned into another article called "Writing about Stacking Ecosystem Services".  We were all called to defend, to each other and to reviewers, some key assumptions we make about how ecosystems operate and how commodities are defined.

There's one tension I want to highlight specifically, and it surfaced repeatedly in the peer-reviews performed by economists.  Twice (at two different journals) we received reviews from economists that were longer than our manuscript.  Something about the way we were treating this topic was deeply disturbing to the axioms of mainstream economics, and it was our characterization of the "ecological problem" with stacking:  If you sell salmon habitat and water quality from the same spot, what if the same functions operate to create those two services?  Doesn't that mean that the two credits aren't fully separable?  This calls into debate some very basic issues in the definition of a commodity.

In short, we believe that ecosystem service credit commodities aren't fully discrete and separable from the functions which create them.  To our friends from economics, this was simply unintelligible:

The second concern was the “Ecological problem: integration of underlying functions.”  I frankly don’t understand this concern.  Ecological systems are complex and interdependent. Ecosystem processes jointly produce multiple ecosystem services.  Management changes leading to changes in ecosystems simultaneously affect the provision of multiple services.  Separately accounting for ecosystem services does not deny the joint and interconnected nature of their provision.  ...  There a close analogy with industrial processes characterized by “joint production” resulting in the production of multiple commodities from an integrated process.  ...  This whole section seems fundamentally misguided and I recommend deleting it entirely.  

The underlying assumption from this reviewer is that the identity and existence of a commodity is defined ONLY by its ability to be consumed and desired, NOT by its production process.  You can't really challenge that and still stay in the same model-world as mainstream economists.  And we learned that the hard way.  

This is something to keep in mind when reading economists writing on ecosystem services: they can't think the relationship between the service commodity and the functions that create it in a way that an ecologist would.  It appears to be an axiomatic conflict.  To say that a commodity called a "salmon habitat credit", once produced, is affected by other kinds of production that happen at the site is like saying that because your car and my car were produced at the same factory, the way I drive my car affects your car.

This is clearly not true with cars.  So why is it true with ecosystem services?  The answer reveals a lot about the limitations of the economic model world with regard to nature.


Of course, this is not to whine about the long process of academic publishing -- that's life in the big city.  And we are very grateful for the long hours spent dealing with our article by many editors and reviewers.  We all learned an awful lot.

But is it really Stacking?

So I've been standing up in front of some very smart people this year -- at a meeting of the Chesapeake Bay Environmental Markets regulators' forum, and again at the ACES conference in Washington DC -- and saying things like "what the ESA/404 banks in California do is NOT stacking, and what the Willamette Partnership does IS stacking."  It takes some gumption to say this in front of people like Deblyn Mead (who manages the ESA banking program) and Chris Hartley (OEM), because environmental markets are literally pretty much what these folks say they are.

In an effort to provide some conceptual clarity to the realm of stacking, myself and 5 other authors put out a paper in Frontiers in Ecology and the Environment last March called "Stacking Ecosystem Services".  Faced with a multitude of definitions of stacking, we broke it down this way:

Ecosystem unbundling: representing an ecosystem as composed of discrete and divisible functions and/or services. Ecosystem unbundling is a prerequisite to both credit stacking and credit bundling.
Credit stacking: selling credits representing two or more spatially overlapping ecosystem services as separate commodities, each compensating for different permitted impacts.
Credit bundling: selling credits representing a collection of conceptually discrete but spatially overlapping ecosystem services as single commodities.
Double dipping: selling the same ecosystem service credit, however defined, multiple times.

Now, that helps a bit.  There's a real difference between conceiving of an ecosystem as a set of functions or services, which is done all the time in settings like REDD+ and systems ecology, and actually taking the further step of transacting those services individually.

We believe that stacking requires the spatial superposition of more than one transactible credit type. This rules out what I call a "Schrödinger's Credit" situation, where a piece of land can potentially be transacted as many different credit types, but once that transaction has occurred, no further transactions on that space are possible.  Like Schrödinger's famous Cat, prior to the transaction the credit exists in many possible states, and true nature of the credit is not observable until the transaction is made.  This would describe the approach to crediting at FWS' habitat banks that sell credits for multiple habitat types, and combined ESA/404 banks.

By this logic, what Willamette Partnership does is stacking.  On a given piece of land, multiple credit types are simultaneously transactible: salmon habitat, water quality, wetlands.  When one salmon credit is transacted, the other credit types are still available.

However.  TWP measures their credits using system developed by Parametrix, Inc. called "Ecometrix".  One can argue (as we do in our paper) that the functions which support the existence of the salmon credit are also involved in supporting the water quality and wetlands credits -- and so transacting one credit should affect the number of credits of other types that remain to be sold.  [footnote: for at least two economists reviewing our paper, this was such an outlandish claim as to disqualify the paper from publication.]  And Ecometrix can accommodate this interrelationship: If "salmon habitat" is 70% related to "water quality", then the sale of one salmon habitat credit can reduce the number of water quality credits still available by 70% of a credit.  This is still a stacked market, just one that recognizes the interconnection between the stacked credit types.

The reason Willamette Partnership's market is not stacked, I was told, is that the interrelationship between all credit types is set at 100%.  That is, the sale of one salmon credit requires the full removal of a similar proportion of wetland and water quality credits from the ledger. So this could instead be considered a form of credit bundling -- where the sale of one salmon habitat credit also "comes with" one of each of the other credit types.  In fact, the opposite of stacking.

 

I get this argument, and I agree to a certain extent.  Except that the structure of the market is still that of a stacked market, where multiple single credit types are transactable and certain assumptions are made about the relationship between them.  Whether the assumption is that they are 0% related or 100% related doesn't change the structure of the market.  It doesn't make much sense to say that a market where the relationship is set at 99% is stacking, and where it is set at 100% it is something else entirely, for which we need a different name.

For me, a bundled ecosystem service credit market has a structure in which there is a single ecosystem service credit commodity, say "salmon habitat", whose relationships with other services on the site are recognized, relevant, and may even affect the number of credits available.  But they are not defined as separate commodities.  Imagine a sound mixing board with a single fader.  The number of credits available can increase or decrease, and the status of other services is not accounted for in credits.

A stacked ecosystem service credit market, on the other hand, is more like a multi-channel mixing board where the faders are connected with servos.  When one is decreased, the others can change as well.  Move the salmon credit fader down a notch, and the servos connecting it to the other faders move them down as well.  10%, 70%, 100% -- it doesn't matter, it's still the structure of a stacked market.

We make assumptions about what the appropriate relationship between salmon credits and water quality is, just like a sound tech will decide what the proper relationship between guitar and keyboard volume is.

Outcomes are a different question, and I think it can reasonably be said that the Willamette Partnership's system produces outcomes very much like a bundled credit market.  But that doesn't make it a bundled credit market.  By the same token, a 100-channel sound board can be made to produce a sound identical to a single-channel system.  But that shouldn't hide the fact that it is in fact something much more interesting and complicated.




UPDATE: Response from a reader who should know, presenting the counterargument and a different analogy.  Soundboard Faders or Chemical Compounds? Discuss!

"I believe that the WP credits/market is bundled (“credits representing a collection of conceptually discrete but spatially overlapping ecosystem services as single commodities”)- so long as the market rules or underlying science does not allow for unbundling. Their credits can offset either WQ or fish habitat impacts, but not both unless they are part of the same mitigation action (WQ and fish habitat), and only then if approved by the appropriate regulatory agencies.

I feel that the analogy of bundled credits as chemical compounds (individual elements do not retain their individual properties and cannot be separated by physical means) as opposed to a mixture (where individual components retain their own properties and can be separated).

For example, a riparian buffer improves water quality and fish habitat, in a bundled scenario the permitee would be allowed to purchase the credit either as a WQ credit or a habitat credit, or as a credit that includes both WQ and habitat BUT, due to the nature of the credit would be unable to separate it into a WQ credit and a fish credit for use in different mitigation actions.

Conversely, consider a riparian buffer where wood duck nesting boxes have been installed, the nesting boxes provide spatially overlapping ecosystem services which could be sold as separate commodities (with approval of the regulatory agencies and market administrator), wherein the activities that generate the WQ/fish habitat credits and wood duck credits function independently.

From a pragmatic standpoint, drawing the distinction between stacked and bundled credits is an effort to reduce uncertainty surrounding the rules governing market transactions, and the real value is – as you suggest - acknowledging that there is “something more interesting and complicated” in acknowledging that there is value in the linked ecosystem services provided by the conservation actions."

Stacking Ecosystem Services is real, again

You may be familiar with the concept of ecosystem service "stacking" -- if not, read Alice Kenny's wonderful piece about it for EcosystemMarketplace.com.  Essentially, the idea is that because a single parcel of land can contain many different ecosystem functions, and therefore services, that one should be able to sell many different types of environmental credits from a single parcel of land.

The debate over whether this is "additional" or "double dipping" or even legal has been very interesting but very small, since Jessica Fox first wrote about it in 2006 (although I'd been hearing wetland bankers spitballing he concept since I first started going to the NMBA conferences in 2000).  But here's been almost nothing to go on except hot air -- actual cases of stacking almost don't exist.  There was an arguably accidental case in which a wetland banker in North Carolina was able to sell water quality credits from a wetland bank that had already sold all its credits, but this appears to have been more a matter of unclear rules and entrepreneurial enthusiasm rather than a consciously-structured stacked market.  There are combination wetland and species banks in California which are often called "stacked", but are definitely not stacked:  while each parcel can contain either ESA species credits and wetland credits, when a parcel is used to compensate for wetland impacts, it then becomes ineligible to compensate for ESA impacts.  This is not stacking. 

THIS is stacking (courtesy of Jessica Fox, Roy Gardner, and Todd Maki 2011):

The only real case of stacking that I know of is the Willamette Partnership's site at Half Mile Lane outside of Portland, a pilot project organized by the US EPA and the Oregon Department of State Lands to create a site containing several accounting units, with each unit containing many kinds of credit.  Some units combine wetland/stream, water quality (temperature), and salmonid habitat, and one kind of credit can be sold without the others disappearing.  It's a fascinating case, and I talk about it in a paper coming out in Frontiers in Environment and Ecology with a bunch of other folks soon.

But a new case has just cropped up, from the Sauk River in Minnesota.  The Conservation Marketplace of Minnesota and the American Farmland Trust are launching a project in the Sauk watershed to develop carbon credits stacked on water quality credits, primarily on ag lands, to provide credits both to the global carbon market and to point-source polluters holding NPDES permits locally.  As with many ecosystem service pilots, from the farmer's end it probably looks a lot like any other ag support program like CRP or EQIP, in which they receive money for environmental improvements without having to become "environmental entrepreneurs" or marketers of any kind.  Minnesota ran its private wetland banking sector that way for years, with the "bankers" being mainly farmers who registered their restored wetlands with the state BWSR, and this is following true to form.  The Stearns County SWCD is the executing agency, and the Conservation Marketplace of Minnesota itself was set up with USDA Conservation Innovation Grant money.  It seems that a lot of the energy behind ecosystem services payment systems continues to be aimed at filling the gap in environmental regulations that provides exemptions to the agricultural sector.

I find it interesting that CMM and AFT are embracing the term "stacking" -- see especially AFT's publicity here -- a term which is technical and wonky and probably a bit off-putting.  It'll be interesting to see where this goes.

Jimmy Carter and the Archaeology of Market Environmentalism, Part II

So it turns out that Jimmy Carter was quite the market-warrior.  The step or stage between the dreams of RFF in the 1960s and the implementation of wetland and air markets in the 1980s is a bit of a missing link -- a kind of Australopithecus afarensis, to make an evolutionary analogy.  Like the development of bipedalism in modern humans, the turn to market-based policy did not develop overnight, but was something largely initiated and well underway by the time the Reagan Administration took power in 1981.  Let's look at the evidence.

As I said in the last post, there was a lot of academic interest in environmental markets going back well into the 1960s.  But by the mid 1970s, this talk seemed to have filtered into policymakers' discussions pretty regularly.   The concept of wetland banking was advanced as early as 1974 by Gosselink, Odum and Pope's pamphlet, slender but immensely influential among regulators,  The Value of the Tidal Marsh:

Setting up wetland "banks" where the owner is paid not to develop (as in "soil banks") is perhaps a feasible "delayed option" procedure in cases where outright purchase cannot be made at a particular time.

A bit later, the USFWS' Edward LaRoe mentioned at a 1977 conference that "We are examining the concept of 'mitigation banks.' where large restoration project could be used to mitigate a number of small projects."

And then of course there were the Ford Administration initiatives around compliance with the Clean Air Act's new source performance standards.  The first version of the "bubble" concept in late 1975, in which management of individual sources was left to the polluter as long as their net emissions met the standard.  This "no net gain/loss" principle reinforced the substitutability of different packets of pollution that has been at the root of market approaches to pollution ever since.  The principle of offsetting pollution was formalized in a December 1976 ruling, and the banking of these offsets was explicitly allowed in the 1977 amendments to the CAA.  The degree to which these efforts were outgrowths of the Nixon Administration's retreat from the strong regulatory approach, or were born from California's regional challenges to CAA compliance, is something I'm sure other scholars have covered.

But fiddling around on the margins of the CAA and CWA is one thing; setting general federal policy is another, and that began with Carter.

In 1977, two months after taking office, President Carter issued Executive Order 12044, directing "regulatory agencies to find ways to achieve their goals with reduced burden on the private sector."  This is ambiguous language in the sense that it doesn't say "go make markets", but it is unambiguous in its rejection of command-and-control policy and in light of the market-friendly recommendations that emerged from this directive.

In 1979 Carter told Doug Costle, his EPA Administrator, to convene the US Regulatory Council (think of it as the precursor to Reagan's Council on Regulatory Relief and Quayle's Domestic Policy Council) to report on ways to use "Alternative Regulatory Approaches".

The resulting Program on Alternative Regulatory Approaches (PARA) made its report to Carter in June of 1980 (although the results were not published until September 1981).  It comes in the form of an Overview paper, and issue papers on 5 different topics:

• Information Disclosure: On the theory that a fully-informed populace will be able to engage in Coasian bargaining on the issue of environmental pollution, one strategy has frequently been to simply inform people of the level and toxicity of contaminants, and allow the public to vote with their feet and dollars, rather than to impose regulatory limits.  An extreme example of this came to my attention recently in Kentucky's 2010 report on its 303(d) list of impaired waters, which, after noting the large number of rivers which were considered "impaired" for recreational usage, the author explained that this information might help Kentuckians choose among their recreational options.  Nothing about the demonstrated need to clean it up.
• Performance Standards: Rather than dictating precise procedural operations and equipment specifications, why shouldn't the government simply set the marks and let industry figure out how to hit them?  If industry can figure out a cheaper way to meet the NAAQS for lead or to stay under a TMDL for temperature, they should be allowed to do so rather than have their actual designs and practices dictated by outsiders.  The downside of the focus on standards rather than process is this: if the standard is, say, no net carbon increases, then a new gas-fired power plant is "equivalent" to a new solar array, even though one is dramatically different from the other in moving us past dependence on fossil fuels.  Gotta be careful in defining the goal.
• Marketable Rights: this is the old-tymie name for what we now call pollution credits markets, and the primary example was the already-extant experiment occuring under the Clean Air Act's bubble and offset policies.  Expansion to other areas such as water, EM bandwidth, and airport landing slots was considered desirable: any situation in which "distributing a limited number of rights to scarce resources that private parties can buy, sell, or trade as market needs dictate can remove the government from difficult, contentious, and lengthy decisions about who can 'best' use the limited resources."  Wouldn't want that kind of thing in the public square, no siree.
• Tiering: This is the regulatory expression of Jefferson's famous phrase: "there is nothing more unequal than the equal treatment of unequal people", or, more simply, a version of the 80/20 rule.  Different industries or polluters should be treated differently, according to the severity of their pollution and their scale.  This makes all kinds of sense from the perspective of a time-strapped agency: focus most effort on the few large (Tier 1) sources of pollution, and you will have dealt with most of the overall problem.  Lower-tier polluters can be held to different standards because it is an inefficient use of time for a regulator to focus on them.  This is not so much about markets as about the flexibility to recognize important differences in the regulated community and to allow regulation to fall more lightly or heavily on some members to achieve policy goals.
• Monetary Incentives: This would indicate the suite of Pigovian (from economist AC Pigou) excises and fees that could motivate compliance in lieu of regulatory enforcement.  If undesirable behavior is made more expensive, it will decrease.  If desirable behavior is made profitable, it will increase.  Unfortunately, the government is still generally setting the level of tax or fee that is appropriate, which was the entire point of Coase's argument against Pigovian taxes -- the fee would ideally be set by negotiation between parties to the issue at stake.

Carter's statement on the release of these documents, describing them as the direct result of his 1977 EO, is something that in retrospect we tend to call Reaganesque, but has actually been a fairly constant message from 1977 to the present:  

Alternatives that allow flexibility or use market forces can make regulation more cost-effective. Such approaches can cut cost and red tape without sacrificing legitimate regulatory goals. They can also promote innovation, putting private ingenuity to work finding better long-term solutions to regulatory problems.

The US Regulatory Council took up PARA's work and immediately held a conference on the topic of Innovative Regulatory Techniques in July 1980, putting out the following documents, which framed the entire issue as a turn toward "market-oriented" approaches.

• An Inventory of Innovative Techniques
• Innovative Techniques in Theory and Practice: Proceedings of a Regulatory Council Conference
• Regulating with Common Sense: A Progress Report on Innovative Regulatory Techniques

I mean, under what President would you expect to see the following said in the Introduction to a policy document?:

"Market-oriented approaches generally leave regulated entities more freedom to devise their own means of achieving regulatory goals.  This puts the ingenuity and relevant expertise of the regulated sector to work at solving public problems in the most cost-effective way, and imposes fewer indirect costs of governmental intervention in private sector affairs."

Markets, check.  Freedom, check.  Private-sector ingenuity, check.  Against costly government intervention, check.  Carter,... WAT?

In fact, it looks like the Carter Administration was working on this in a pretty focused way right up to the November 1980 election.  He lost, of course, but we know how this story unfolded, and we know that Carter's initiatives didn't end with Carter.  Flexibility in environmental regulation was a (smallish) part of a broader bipartisan, if not Democratic-leaning and frankly pro-environment, movement toward less-rigid governmental regulation, manifested in Congress as the 1980 Regulatory Flexibillity Act (debated starting in 1977 -- text here) authored by two progressive liberal senators, Iowa's John Culver and Wisconsin's Gaylord Nelson, the father of Earth Day.

It thus seems clear in retrospect why the Reagan Administration's initial stance toward EPA powers was to dismantle them rather than to make them more "flexible", but at the current historical remove we tend to associate these achievements with the Administration under which they bore fruit rather than the Administrations that planted them.  The PARA documents (perhaps being Carter-tainted) were not, themselves, referenced directly until Al Gore's Reinventing Government initiatives in 1993 -- but I'm sure they were not far from the minds of the Reagan Administration architects of wetland, air and water quality markets.  Together they read like an extraordinarily prescient future history of the next 30 years of environmental policy.

I've yet to really process them in full, but they were hard enough to locate that I thought turning them loose on the Internet would be a public service. Even Interlibrary Loan had failed me since I started looking for them in 2007.  All I knew is that they were held by the Administrative Council of the US, a federal advisory office that had been terminated in 1995 by the 104th Congress, and its archives dispersed.  Fortunately, ACUS was reinstated as an agency in 2009, and they've spent the past 4 years reconstituting their archives which held these documents among many, many others.  Thanks to their diligent work, these documents survived!

But if I had to say one thing about this set of documents, it would be this: Notice that the point is not markets.  The point is regulatory flexibility in pursuit of enhanced compliance, and the tool is sometimes markets.  Markets only come to the fore when they are hitched to an already-existing and defined state policy goal.  And tend to result in an increase and intensification of state involvement, rather than its withering-away.

Jimmy Carter and the Archaeology of Market Environmentalism, Part I

I've been interested for many years in the question of how, where, and when exactly policymakers began to listen to the notion that environmental problems are best solved by the turn to markets, or the construction of policies that simulate market-like interactions.  Of course, this has been a broad social turn since the 1980s that seeks to privatize public or socialized goods in a move labeled by some as "neoliberalism".  Under these policies we are no longer "patients" but "consumers of medical services"; not "students" but "consumers of educational services"; and of course instead of simply living, we are "consumers of ecosystem services."

It's pretty common to gesture to the Reagan Administration as the birth of these policies at the national level -- David Harvey, perhaps the best critical chronicler of "neoliberalism", begins his story by pointing to the figures of Thatcher and Reagan, but then shows how we arrived at the moment where they could be seen as pivotal figures.  While it's true that a lot of people who supported market-led policies got jobs in those Administrations, Harvey's correct: market environmentalism did not spring from Ronnie's forehead.  The ground had been well laid for years prior to Reagan taking office, and I've just gotten hold of some of the key documents from that period that shed some interesting light on the history of market environmentalism.

First, though, I just want to acknowledge the academic and economic groundwork that had been laid by Ronald Coase and JH Dales.  Dales laid out with amazing precision, in 1968, the nature and elements of a credit market in water quality -- even to the point of predicting a derivatives market in water quality credits.  Coase's 1960 article "The Problem of Social Cost" was introduced to me by my economics professor as "the most widely-cited and least-read paper in the world".  Which is a pity, because Coase is very readable.  His argument was widely misunderstood as this: "Hey, environmental problems can be solved simply by letting the injured party negotiate with the polluter over the value of the damage.  The state's only role is to guarantee the rights of the injured to negotiate."  In this way, the two parties could arrive at the least-cost solution and the state could neither seek rents nor enforce imprecise or overzealous goals unrelated to people's actual interests as expressed in negotiations.

Coase's article is routinely invoked as the philosophical underpinning for the move to market-like negotiations in environmental policy.  So it's worth reading what Coase himself said about that article, writing 28 years later, noting that his scenario assumed that all parties had access to perfect information about the environment:

"The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave."

Crucially, Coase was trying to point out to us that the "Coase Doctrine" can't really apply to most real world problems, in which transactions costs can be high and good information about the environment can be hard to come by.  Since much of what constitutes "the environment" is still the subject of cutting-edge research and a steep public learning-curve, Coase's warning is relevant: "It would be unreasonable to assume that people could include in contracts a reference to rights of which they are unable to conceive."

But none of this stopped the move toward the the incorporation of economic instruments in environmental policy -- which, after all, was coming from many directions, not least the requirements in the 1970 National Environmental Policy Act that the government seek to account for hard-to-quantify environmental impacts of projects, the long-standing cost-benefit analysis requirements of projects approved under Water Resource Development Acts, and a host of other requirements that the government account for environmental damage. 

How did this happen?  How did we go from Dales' 1968 paper to the use of air pollution offsets in California in 1977?  To the proposal of wetland mitigation banking in the Lafayette Field Office in Louisana in 1981?  There were intermediate steps, and by their nature they are mostly unrecorded discussions or left their marks in office memoranda that have been long since landfilled.  But there are a few traces, and over the next few years I'll be seeking out more traces and talking with some of the people who were there at the time.

The take-home message, however, is that it didn't start with Reagan.  From the very beginning of the Carter Administration, in 1977, Carter was asking for a coordinated effort to rethink and streamline regulation in ways that are recognizable today in market environmentalism.  In fact, the suite of documents he commissioned in 1977, and which were delivered to him in June 1980, read as a remarkably prescient future history of regulatory reform and market environmentalism.  People in my generation may not realize that Al Gore's "Reinventing Government" initiative  (thoughtfully archived at the University of North Texas) was really a re-iteration of Carter's initial push.  If anything Reagan's first two years (1981-2) marked a retreat from market environmentalism, as his EPA and Interior appointees pursued more of a scorched-earth policy toward environmentalism, endeavoring to dismantle the regulatory structures built in the 1970s.  It was only after his EPA Administrator Anne Gorsuch Burford (charged with contempt of Congress) and his Interior Secretary James Watt both resigned in 1983 that the Reagan Administration returned to what was essentially a Carter-esque track toward regulatory reform and market environmentalism.

And what was it that Carter's advisers recommended?  We'll see in the next post.

Wetlands no longer part of the Public Trust in Wisconsin?

A disturbing ruling from Wisconsin's Supreme Court held Wednesday that the state DNR could not use the Public Trust Doctrine to protect wetlands, and must instead engage in a "balancing" of economic and environmental interests.  This is a hard kick at one of the foundations of Wisconsin environmental law -- and at something that is dormant in most states, but in a formal sense underlies much of US environmental law.  The Public Trust doctrine holds that certain resources are held in trust by the government for the public good; it comes from English law and was incorporated into Wisconsin's Constitution (Article IX, Section 1) to guarantee that all navigable waters are "common highways and forever free".   See the WisDNR's page on it, with a great documentary, here.  Far from withering away through lack of use, or applying only to intertidal areas, as it has in most states, it has been aggressively broadened in Wisconsin to offer protection to almost any feature associated with access and rights to water and water quality.  It forms the foundation of Wisconsin's powerful Shoreline Zoning law, which is responsible for an immense amount of conservation success in the northwoods.

I can imagine that the same kinds of arguments that have been used federally ("nexus", etc) might apply to the connection between wetlands and the waters clearly protected under the PT Doctrine, but as far as I know this is new territory for the State and such arguments will have to spendsome time in the courts, and DNR might have to write some creative regs and guidance to make it clear how the PT Doctrine reaches wetlands.  For now, it looks like a setback, and the decision explicitly says that reducing property value through wetland protection (as the DNR has arguably done at Lake Koshkonong) could create a regulatory takings problem.  Exactly the kind of charge that the PT Doctrine had rendered irrelevant.

Is Wisconsin going to join the rest of the nation in neutering the Public Trust doctrine through neglect and/or frontal attack?  The Doctrine has been such a powerful legal guarantor of the public right to a clean environment; that would be a great loss.

Bankers demand more effective regulatory oversight

Interesting news out of California from earlier this year (still getting caught up, my apologies).  Due to budget cuts, the California Department of Fish and Wildlife had to freeze the review of all new wetland and habitat banking applications in March 2012.  Bankers and environmental consultants brought up a solution which had been proposed many times before in various forms, even without an application freeze, but it had always faced ethical questions and objections:  application fees should be raised to cover the staffing costs of effective review.

California Senate Bill 1148 approved this system, and DFW is now firing on all cylinders again. Opponents of similar proposals have noted that it can look an awful lot like "buying your own regulator", setting up a fiscal incentive for a state agency to guarantee the general health of the mitigation banking sector.  Earlier versions were less subtle: one proposal would have simply paid the salary of a full-time staffer at state or federal agencies directly out of a pot of money created by the bankers.  I've always seen it at least in part from the bankers' side: they are desperate for effective and knowledgeable regulators who have lots of time to focus on banking, and they will pay for them if necessary.  The truth is somewhere in between, but I've seen a lot of good faith from all sides in these kinds of situations.

More evidence of the real symbiosis between regulators and the regulated community, so distant from the purely-oppositional relationship that is usually assumed to exist. Could you imagine if Wall Street worked this way?  Goldman Sachs and JP Morgan demanding legislation requiring them to hand over millions of dollars to ensure effective regulation of their activities?  It's worth thinking about why it doesn't.

I think I've used my weekly quota of Futurama memes, but in this context it's hard not to point to this one.

Koontz Redux

That was a long post.  Let me sum up.

1) The majority said that any compensation conditions attached to a permit should have a "nexus" and "rough proportionality" with the impact -- but gave no general guidance about how this should be determined, nor indicated exactly what about the specific facts of the Koontz case lacked nexus and rough proportionality.
2) It looks as though what bothered Alito (although I'm entirely reading between the lines here) was that:

• The compensation site was on state-owned land
• It was "several miles away" from the impact site
• It involved a great deal more acreage than the impact site.

3) Both majority and dissenting opinions stress that simple permit denial would be an effective and efficient way of avoiding any takings issues at all.

Finally, and this is something I'm hearing informally as well as on SCOTUSblog -- it's unclear whether this will actually impact practice much.  Arguably, the architecture of the current mitigation regulations ensures that compensation sites already have a nexus and are roughly proportional to the impact.  This could be where Pacific Legal's cherry-picking and venue-shopping ways work against them -- sure, they found a case in which a takings case could be made, but it could be the exception proving the rule, highlighting that most permit conditions are well-connected to and proportionate to the impact.

As SCOTUSblog says:

The decision has the potential to significantly expand property-owners’ ability to challenge local land use regulations and fees, though it is not clear that this expansion will result in a significant number of successful challenges. Here, the Court expressly reserved judgment on whether Koontz’s claim is actually meritorious.

The court has given both permittees and regulators a lot to chew on, but declined to put clear sideboards on what would constitute a permissable condition.  In the absence of a clear directive, the status quo (dressed up in language referencing the majority opinion), might continue to hold.

Koontz drops: Heavy blows to common practices, but compensatory mitigation lives on.

Does wetland compensation even exist anymore?  The short answer is Yes, but it could be a rough ride.  And as a practice, it may be transformed.  (see update here).

It was definitely a major day at the Supreme Court -- while most of the country is reeling from the gutting of the Voting Rights Act, the Supremes also ruled for the first time on the issue of compensatory mitigation, in the case of Koontz v. St. John's River WMD.  Although the SC has ruled many times (Riverside Bayview, SWANCC, Rapanos...) on the issue of CWA jurisdiction and the "takings" issues around the assertion that wetlands are regulated, they have never considered the question of whether the government can condition a permit approval on the permittee doing some other thing, i.e., restoring, enhancing, creating or preserving aquatic resources to compensate for the permitted impact.  Is this requirement to compensate equivalent to the government extorting someone who is exercising a constitutional right to the use of their own resources?  That's the question.  Here's the opinion.

Let's go straight to the punchline.  A snappy 5-4 majority (Alito authoring majority opinion, Kagan the dissent) rules that the St. John's River WMD in Florida can NOT require a permittee to conduct certain kinds of compensatory mitigation as a condition of receiving the permit.  They don't find this because compensatory mitigation is inherently a takings -- far from it.  The majority goes out of their way to affirm the right of land-use management agencies to require fees and practices to ensure that landowners "internalize the negative externalities of their conduct," the damages they might cause through their development actions.  They do require, however, that any permit conditions follow the Nollan/Dolan precedents of having a "nexus" with, and being "roughly proportionate" to, the impact being sought by the permittee. [SJRWMD is the respondant here, not the Corps -- but SJRWMD is the permitting agency for the state's wetland protection program, and is doing exactly what the Corps does for the federal CWA, so the case is pretty much foursquare with and applicable to CWA permitting].  Here's the money quote:

"Under Nollan and Dolan the government may choose whether and how a permit applicant is required to mitigate the impacts of a proposed development, but it may not leverage its legitimate interest in mitigation to pursue governmental ends that lack an essential nexus and rough proportionality to those impacts."

Ok, so compensatory mitigation lives.  But certain kinds of common mitigation practices now appear to be highly endangered.  Let's think about what some of them might be -- and here we have to be very speculative because the majority's opinion ABRUPTLY ENDS at exactly the point where you expect them to say what it is about the SJRWMD's compensation requirements that do not meet the standards of nexus and rough proportionality.  All we know is what we can gather from their specific disapproval of the facts in the Koontz case: SJRWMD's compensation package appears to violate the Nollan/Dolan standard, and what seemed bother the majority was a) the required improvement was on state-owned land, which Alito none-too-subtly frames as a kind of corrupt rent-seeking on the part of the state agency; b) it was somewhat distant from the impact site (I'm reading in between the lines here -- I'm simply noting Alito's repeated observation that the compensation site was "several miles away", as if this is a problem) and; c) it involved much more acreage of compensation than the proposed impact: the WMD suggested 13.9 acres of preservation and 50 acres of enhancement as a condition for a 1-acre impact. 

These are the things that give Alito a sad.

So let me stress that this is all extremely speculative, because the opinion gives us very little to go on.  But a preliminary reading of Koontz is that compensation can be legal, but may violate the takings clause where it a) redounds to the direct benefit of the permitting agency or authority, b) is more than "several miles" from the impact site, and c) involves far more acres of compensation than impact.  Compensation of these kinds apparently have no "nexus" with the impact, and no "rough proportionality" with it.  In the language of a later takings case (Lingle), they apparently have "little or no relationship" with the impact.  This is all very revealing of the often-stark differences between what a government or court can recognize as "related" and what an ecologist or geomorphologist might recognize as "related".

 

First off, compensation on public lands appears to be sliding off the table.

Secondly, the question of "how far away is too far" might have a whole new set of answers, and compensation that is just within the 6-digit (or 3-field) HUC watershed could easily be considered "too far away" to have a nexus with the impact site. This might seriously endanger the business plans of thousands of stream and wetland mitigation banks, who rely on a large service area to provide them with clients seeking wetland and stream credits.  That's a huge deal.

Thirdly, the use of high mitigation ratios (for compensation that involves preservation, or impacts to difficult-to-restore resources) might be a problem now.  The majority frames the issue of proportionality as a problem of acreage, but with the increasing move to functions-based measurement of both impacts and compensation, their language seems obsolete.  Could the SJRWMD require a 10:1 acreage ratio if it turned out that the functions being replaced were "roughly proportionate"?  It's easy to imagine an agency arguing that a high acreage ratio is required to achieve "rough proportionality."  But will they dare, if a lawsuit might erupt?

The majority's reluctance to be specific about what constitutes a taking in this case is especially unfortunate, notes Kagan in dissent, because of the chilling effect it will have on all permitting discussions.  If no one is sure what might get them hauled to court on a takings charge, no state or federal official will risk suggesting compensation alternatives at all.  "Perhaps [the majority's opinion's] most striking feature is its refusal to say even a word about how to make the distinction that will now determine whether a given fee is subject to heightened scrutiny."  And this: "If a local government risked a lawsuit every time it made a suggestion to an applicant about how to meet permitting criteria, it would cease to do so."

At first glance, in-lieu fees look like they might be in trouble, since, following the general trend of the Court since the 1980s, Alito holds any loss in value, money, or net worth to be equivalent to a physical seizure of land (bringing to mind Scalia's favorable quotation in Lucas v. SCCC of the old principle "What is the land but the profits thereof?").  And you'd think that it would be hard to guarantee a nexus between some future ILF-funded compensation site and the impact at hand.  But actually I think ILFs dodge the bullet here: "...this case does not implicate the question of whether monetary exactions must be tied to a particular parcel of land in order to constitute a taking."

There's a final consequence that is most unexpected, and emerges with a unified voice from both the opinion and the dissent: permits should be denied.  Denying a permit because it impermissably damages protected resources is no problem, constitutionally -- this has been established since Riverside Bayview, and is reaffirmed today.  Agencies only get into problems when they start approving permits but requiring "extortionate" conditions.  Here's Alito:

"Where the permit is denied and the condition is never imposed, nothing has been taken."

Here's Kagan:

"Consider the matter from the standpoint of the [SJRWMD]'s lawyer.  The District, she learns, has found that Koontz's permit applications do not satisfy legal requirements.  It can deny the permits on that basis; or it can suggest ways for Koontz to bring his applications into compliance.  If every suggestion could become the subject of a lawsuit under Nollan and Dolan, the lawyer can give but one recommendation: deny the permits, without giving Koontz any advice -- even if he asks for guidance."

Well, give them all credit for recognizing that the CWA, as originally passed, never contemplated compensation as a remedy for impacts.  The 1972 Act is quite clear: in case of unacceptable adverse impacts to waters of the US, the Corps should deny the permit; in those rare cases where permits are issued which allow significant adverse impacts, the EPA should use its 404(c) power to veto the permit.

 

That'll happen.

Of course, what actually happens is that the Corps approves more than 99% of all permits that are not withdrawn, and the EPA has issued only about 15 vetos since the veto regulations were finalized in 1980.  The entire architecture of compensation policy built since 1977, and grounded in regulations from 1980 and 2008, lacks an explicit basis in the letter of the Act (although the general statutory and regulatory basis is plenty strong).  But the compensation option was an essential political compromise and an essential pressure valve for the CWA, allowing development to occur, permits to be issued, and environmental protection to be achieved.  And, like it or not, it's how the program now works.  Any major restriction of compensation as a regulatory practice could strongly and negatively impact the entire program.  The Supremes saying that permit denial is the best way to avoid takings problems is a big deal.


Ok -- but how did Alito and the boys arrive at this point?  I'm no lawyer, and you'd be better off reading SCOTUSblog's post, but here's what it looks like to me:

The majority's theory is based on the "unconstitutional conditions doctrine" which, applied in Nollan and Dolan, holds that the government cannot coerce people into giving up constitutionally-guaranteed (property) rights in the process of applying for land-use permits.  Here's a crux of the case: the majority believes that the government "pressur[ing] an owner into voluntarily giving up property," by attaching conditions to an approved permit, is the same as physically seizing property in its ability to trigger a 5th Amendment problem.  They're saying that substituting a permit condition for an outright seizure is simply an evasion.  Kagan, on the other hand, believes that giving a permittee several options in complying with Florida statute is not the same as a seizure of property unrelated to a defined statutory obligation. 

Kagan further points out that questions about how regulations change the cost profile for an action which is, itself, approved are best resolved under (at least) Due Process considerations of whether the government's action is arbitrary and capricious, or (at most) Penn Central considerations of whether or not the permittee's "investment-backed expectations" have been frustrated.  No need, she says, to get to a Nollan/Dolan analysis of nexuses and proportionality.  To my eyes, this is the strongest part of the dissent and something to which Alito has no real answer.


But here we are again: once again, as with Rapanos, Corps and EPA (and now, everyone else) are directed to devote untold resources and time to find and define the "nexus" between the impact and the regulatory action.  The difficulty/impossibility of doing so will not stop the elaboration of a legal theory that is profoundly at odds with the daily practicalities of environmental regulation and ecological science.