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Restoring Wetlands Through Wetlands Mitigation Banks

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Author Info
Linda Fernandez ()
Larry Karp ()

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Abstract

This paper offers the first economic analysis of wetlands mitigation banks. The banks are a new alternative for restoration of wetlands by developers before receiving regulatory approval for future development of wetlands in the same watershed. A stochastic optimal control model is developed which incorporates ecological uncertainty of wetlands restoration. The model helps in examining the decisions of how much to invest in a wetlands mitigation bank. The model is calibrated with data from California bioeconomic parameters. Numerical simulation of the model provides a sensitivity analysis of how model parameters of restoration costs, stochastic biological growth, interest rate, and the market value of credits affect the trajectory of investment and the optimal stopping state of wetlands quality when the investment ends. The analysis reveals that restoration of the whole site will occur when there is a reduction in restoration costs, an increase in biological uncertainty or an increase in the value of wetlands credits. Continued restoration is harder to justify with a higher interest rate. Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1008225021746
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Publisher Info
Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 12 (1998)
Issue (Month): 3 (October)
Pages: 323-344
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Handle: RePEc:kap:enreec:v:12:y:1998:i:3:p:323-344

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Web page: http://www.springerlink.com/link.asp?id=100263

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Related research
Keywords: option value; stochastic control; wetlands mitigation banks;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March. [Downloadable!] (restricted)
  2. G. Cornelis van Kooten, 1993. "Bioeconomic Evaluation of Government Agricultural Programs on Wetlands Conversion," Land Economics, University of Wisconsin Press, vol. 69(1), pages 27-38. [Downloadable!] (restricted)
  3. Parks P. J. & Kramer R. A., 1995. "A Policy Simulation of the Wetlands Reserve Program," Journal of Environmental Economics and Management, Elsevier, vol. 28(2), pages 223-240, March. [Downloadable!] (restricted)
  4. Stavins, Robert N., 1990. "Alternative renewable resource strategies: A simulation of optimal use," Journal of Environmental Economics and Management, Elsevier, vol. 19(2), pages 143-159, September. [Downloadable!] (restricted)
  5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  6. Randall A. Kramer & Leonard Shabman, 1993. "The Effects of Agricultural and Tax Policy Reform on the Economic Return to Wetland Drainage in the Mississippi Delta Region," Land Economics, University of Wisconsin Press, vol. 69(3), pages 249-262. [Downloadable!] (restricted)
  7. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April. [Downloadable!] (restricted)
  8. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  9. Stavins, Robert N & Jaffe, Adam B, 1990. "Unintended Impacts of Public Investments on Private Decisions: The Depletion of Forested Wetlands," American Economic Review, American Economic Association, vol. 80(3), pages 337-52, June.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul Hallwood, 2003. "Contractual Difficulties in Environmental Management and the Protection of Biodiversity: The Case of Conservation and Mitigation Banking," Working papers 2003-19, University of Connecticut, Department of Economics. [Downloadable!]
  2. Boyer, Tracy, 2003. "The Wetland Restoration Site Selection Problem Under Wetland Mitigation Banking (WMB) in Minnesota," 2003 Annual meeting, July 27-30, Montreal, Canada 22189, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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