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Restoring Wetlands Through Wetlands Mitigation Banks

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  • Linda Fernandez

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  • 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

Suggested Citation

  • Linda Fernandez & Larry Karp, 1998. "Restoring Wetlands Through Wetlands Mitigation Banks," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(3), pages 323-344, October.
  • Handle: RePEc:kap:enreec:v:12:y:1998:i:3:p:323-344
    DOI: 10.1023/A:1008225021746
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. 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.
    3. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    4. 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.
    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 637-654, May-June.
    6. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    7. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    8. 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.
    9. 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.
    10. 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 337-352, June.
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    Cited by:

    1. Doyle, Martin W. & Yates, Andrew J., 2010. "Stream ecosystem service markets under no-net-loss regulation," Ecological Economics, Elsevier, vol. 69(4), pages 820-827, February.
    2. Gutrich, John J. & Hitzhusen, Fred J., 2004. "Assessing the substitutability of mitigation wetlands for natural sites: estimating restoration lag costs of wetland mitigation," Ecological Economics, Elsevier, vol. 48(4), pages 409-424, April.
    3. 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.
    4. Hallwood, Paul, 2007. "Contractual difficulties in environmental management: The case of wetland mitigation banking," Ecological Economics, Elsevier, vol. 63(2-3), pages 446-451, August.
    5. Wirl, Franz, 2006. "Consequences of irreversibilities on optimal intertemporal CO2 emission policies under uncertainty," Resource and Energy Economics, Elsevier, vol. 28(2), pages 105-123, May.
    6. Katherine Simpson & Frans P de Vries & Paul Armsworth & Nick Hanley, 2017. "Designing markets for biodiversity offsets: lessons from tradable pollution permits," Discussion Papers in Environment and Development Economics 2017-04, University of St. Andrews, School of Geography and Sustainable Development.
    7. Boyer, Tracy A., 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).
    8. Patrick POINT (GREThA, CNRS, UMR 5113), 2012. "Valuation of wetland ecosystems services. Some methodological principles (In French)," Cahiers du GREThA 2012-19, Groupe de Recherche en Economie Théorique et Appliquée.

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