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On November 3, 2015, President Barack Obama signed a presidential memorandum that has the potential to tap into billions of dollars of private capital to invest in protecting our natural resources. The visionary memo directs federal agencies to avoid, minimize, and compensate for any environmental harm caused by an agency’s development activities. In the memo, the president said, “American ingenuity has provided the tools that we need to avoid damage to the most special places in our Nation and to find new ways to restore areas that have been degraded.”¹ For example, private investors worked to restore 23,000 acres of wetlands in northern Minnesota in exchange for credits that can be used to offset future wetland development in the state.² At its core, the memorandum lays out a vision in which government sanctioned development is not at the expense of our environment.

The memorandum builds on an often-overlooked area of policy—supported and advanced by Presidents George H.W. Bush, Bill Clinton, and George W. Bush—that guides how developers with federal permits provide compensation for the unavoidable environmental effects of their projects.³ This policy area is rooted in the longstanding concept of a mitigation hierarchy in which authorities that review proposals to affect priority resources on private and public lands should, as a first step, seek to avoid or minimize any negative environmental impacts. Where harm cannot be avoided, these programs require developers to invest in some form of “compensatory mitigation.”⁴ The rule of thumb applied in recent years is that developers should invest in a level of mitigation that ensures that their projects will result in no net loss—or net benefit—to ecosystems.

The development of sound and effective federal mitigation policies offers enticing environmental and economic benefits that can appeal to both conservatives and progressives. The notion that permits should require developers—whether they are oil companies or ski resorts—to avoid, minimize, and compensate for environmental impacts is a common-sense practice that slows the loss of natural areas and wildlife across the country. These types of permit requirements in turn enable the application of market-based tools, such as mitigation banks, that attract private-sector investment in conservation projects so that developers can more easily meet their mitigation obligations.

Although the roots of federal mitigation policy stretch back several decades, the rules and requirements vary considerably across and even within federal agencies.⁵ Only in the area of wetlands protection does the federal government administer a well-developed, comprehensive, clear, and effective environmental mitigation program. The passage of the Clean Water Act in 1972 spurred the private sector to invest in and create a market for wetlands restoration credits: It is now common for private sector investors, or mitigation bankers, to finance the restoration of wetlands so that they can sell the credits they earn to developers whose projects will damage wetlands elsewhere. According to one estimate, the compensatory mitigation requirements of the Clean Water Act stimulate $2.9 billion per year in private sector investment in the restoration and protection of wetlands.⁶

But how can the government apply compensatory mitigation requirements to other types of impacts beyond wetlands? And how can it do so in ways that drive the creation and expansion of similar market-based conservation solutions? What policies, for example, could spark more private sector investment in wildlife recovery, forest restoration, or abandoned mine cleanups?

This report reviews the prospect and status of a replicable, scalable mitigation policy that extends beyond wetlands to other unavoidable environmental harms. Notwithstanding the issuance of the November presidential memorandum and the subsequent steps land and wildlife agencies have taken, the implementation of clear and effective mitigation policy is being hampered by complex scientific, fiscal, and legal challenges. Mitigation policy at the federal level is largely in an experimentation phase, as policymakers and resource managers seek to develop and test effective mitigation programs.

To help scale up and test a consistent, effective, and broad-based mitigation policy, this report offers the following four policy recommendations:

• Establish a national goal of maintaining or increasing the quantity and health of wetlands, wildlife, and remaining natural areas in the United States.
• Make compensatory mitigation a part of any federal action or permit that will result in unavoidable loss to wetlands, at-risk wildlife, or natural areas.
• Support deployment of mitigation policies through science-based guidelines, transparency tools, and training for decisionmakers.
• Establish pilot programs to expand natural resource restoration markets and attract private sector financing for compensatory mitigation.

Developing clear, consistent guidelines for avoidance, minimization, and mitigation of environmental harms could open the door to significant private investments in America’s lands, waters, and wildlife.

“If you take away a wetland here, you have to restore a wetland there so we do not have any loss of wetlands.”  — Sen. Kit Bond (R-MO) ⁷

The most well-known and well-established mitigation policy in the United States has its roots in the Water Pollution Control Act Amendments of 1972, now known as the Clean Water Act. The law’s goal was to “restore and maintain the chemical, physical, and biological integrity of our nation’s waters” by prohibiting pollution from being dumped into waterways.⁸ The law also directed the U.S. Army Corps of Engineers, or ACOE, to administer a permit program to regulate development activities that could adversely affect wetlands, streams, and rivers. If the construction of a road, shopping mall, or copper mine will require the dredging, filling, or other impairment of wetlands, the project’s developer must obtain a Section 404 permit—named for the section of the Clean Water Act that established the program—from the ACOE.

Over the past four decades, Congress and federal agencies have updated and refined the Section 404 program to better meet environmental and economic objectives. Most notably, in 1989, President George H.W. Bush delivered on a campaign promise when the ACOE and the Environmental Protection Agency, or EPA, issued a Memorandum of Agreement establishing that the goal of the United States is to achieve “no net loss” of wetlands.⁹ Following this directive, the ACOE and the EPA began to explicitly require developers to conduct so-called compensatory mitigation. In other words, to obtain a 404 permit for a project, after avoiding and minimizing impacts, a developer must restore or create at least as many wetlands as the project would disrupt.

Initially, the ACOE and the EPA prioritized compensatory mitigation that occurred on the site of a project. However, following recognition from the agencies that on-site mitigation was not working effectively, as well as pushback from both development interests and environmental advocates, the program shifted to favor off-site mitigation.¹⁰ This opened the door to a market-based approach and sparked rapid growth in mitigation banks beginning in the early 1990s.

By 1995, the ACOE and the EPA had officially affirmed this market-based approach in guidance documents that outlined a review process for establishing and using wetlands banks.¹³ This approach was widely supported by federal agencies, academics, environmental groups, and development firms, and mitigation banks have proliferated as a highly effective market-based conservation tool.¹⁴ In 1990, there were fewer than 10 stream and wetland mitigation banks across the country. Today, the mitigation banking database shows 1,049 approved banks are selling credits.¹⁵ According to one study, the compensatory mitigation industry is achieving the restoration or enhancement of roughly 73 kilometers of streams and between 16,000 and 24,000 hectares of wetlands each year, which is about the size of 30,000 to 45,000 football fields.¹⁶ Overall, mitigation banks have helped protect and restore about 1 million acres of wetlands.¹⁷ These investments not only yield value through ecological services, such as clean drinking water and more abundant wildlife, but the restoration projects themselves create and support 220,000 jobs, including jobs in engineering, construction, and scientific fields.¹⁸ Overall, the restoration and management of wetlands, riparian areas, and marine areas account for more than one-third of all ecological restoration work done in the United States each year.¹⁹ Wetlands mitigation has become a pillar of what is now a $25 billion per year ecological restoration economy.²⁰

While compensatory mitigation rules provide important certainty for the industry, some experts have argued that, in the wetlands arena, there is too little emphasis on adherence to the mitigation hierarchy. The hierarchy, as noted above, emphasizes avoidance and minimization as mandatory steps that must be taken before addressing unavoidable environmental harms through compensatory mitigation mechanisms.²¹ Additionally, some studies have found that mitigation sites cannot replace the original ecological function of an affected ecosystem.²²

It is crucial that the trading market for mitigation credits ensure currency adequacy, in the form of science-based metrics, in order to ensure that the value of wetlands lost is compensated for in the value of wetlands restored.²³ Site location and the extent of compliance monitoring can also limit mitigation’s success. Accordingly, monitoring and enforcement mechanisms are important components of effective mitigation policy to ensure that ecosystem value is not lost over time.²⁴

Despite these criticisms, the Section 404 program has created a solid foundation on which to develop even stronger policies. As outlined above, wetlands mitigation has blossomed since the early 1990s and has seen many successes. These successes should be replicated, and they can also offer insight into how to avoid a lack of clarity and consistency, as discussed below.

Mitigation policy landscape

The expanded participation in mitigation policy that was developed in response to Section 404 of the Clean Water Act has spurred policymakers to explore the application of mitigation strategies to other areas of federal natural resource policy. Policymakers also have been influenced by complaints that mitigation obligations are not always applied effectively outside the wetlands arena, where the rules are well-known and applied in a consistent manner. Advocates, developers, and mitigation bankers are all dissatisfied with this state of affairs. Environmental advocates object to small-scale, site-specific, and/or patchwork mitigation obligations that produce limited environmental gains. And developers who would like to see their mitigation dollars being leveraged and generating visible environmental benefits are equally dissatisfied. Furthermore, mitigation bankers and private investors do not have the regulatory certainty and transparency they need to invest in restoration.

The U.S. Department of the Interior’s Bureau of Land Management, or BLM, has taken initial steps toward implementing a mitigation policy that emulates the Clean Water Act’s successful model. The BLM pioneered the concept of undertaking advanced regional mitigation planning exercises and identifying mitigation opportunities available in a region where projects are undergoing permitting. The BLM’s Record of Decision in its Western Solar Plan, for example, called on the agency to accompany the identification of solar energy zones—where renewable energy projects should be preferentially sited—with the identification of regional mitigation opportunities that could be matched with such projects. By identifying priority areas for avoidance and compensatory mitigation needs ahead of time, permitting can proceed in a more efficient and environmentally effective manner.²⁵

Interior Secretary Sally Jewell incorporated this concept into one of her secretarial orders.²⁶ This was followed by BLM manual revisions and a Planning 2.0 policy proposal—both of which seek to institutionalize similar mitigation reforms.²⁷

Other agencies have also launched fledgling compensatory mitigation programs. The BLM and the U.S. Fish and Wildlife Service, or FWS, have teamed up to identify compensatory mitigation strategies associated with their evaluation of sage grouse habitat needs across 11 western states. FWS is also administering a growing number of mitigation banks that aim to protect and restore habitat for threatened and endangered species. In addition, the agency has drafted an umbrella mitigation policy in response to President Obama’s recent memorandum that applies to all of the Service’s authorities. This policy requires them to recommend or require mitigation. The agency has also drafted an Endangered Species Act Compensatory Mitigation Policy, or CMP.²⁸

Despite these encouraging developments, a range of issues still limits consistent development and implementation of federal mitigation policy. In a March 2016 congressional hearing, Sen. Maria Cantwell (D-WA) observed that federal mitigation policy amounts to “a patchwork of ad hoc mitigation that neither matches cumulative effects of development nor provides any predictability. We can do better.”²⁹

The lack of a structured, rational, and transparent framework in federal mitigation policies has opened agencies up to criticism from all sides and impeded stakeholder satisfaction. When the Department of the Interior, for example, required ConocoPhillips to pay $8 million in compensation for the environmental and subsistence effects of its Greater Mooses Tooth oil project in the National Petroleum Reserve—Alaska, Sen. Lisa Murkowski (R-AK) argued that the fee amount was chosen arbitrarily, not unlike “throwing a dart at the board and seeing where it lands at this point in time.”³⁰ That same compensation payment agreement, however, also took fire from conservationists, who argued that the BLM was allowing the company to move ahead with a development plan that was more environmentally damaging than it needed to be. According to Cindy Shogan, the executive director of the Alaska Wilderness League, her organization “was very disappointed that BLM’s final decision fails to prioritize proceeding in the most environmentally sensitive way possible.”³¹

More generally, the mitigation banking industry complains that outside the Section 404 wetlands mitigation rules, there is too little regulatory certainty and predictability to enable the widespread deployment of mitigation banks in other areas.

Wetlands mitigation activity in the United States is growing in large measure because it is focused on solving a clearly articulated problem: halting and reversing the loss of wetlands across the country. The loss of U.S. wetlands, however, is only one of several national environmental challenges that would benefit from the creation or expansion of environmental restoration markets through mitigation policy.

U.S. wildlife populations, for example, are in perilous decline. According to a 2015 Center for American Progress review, one in five plant and animal species in the United States is at risk of extinction—nearly 1,300 total species. Among mammals—from the polar bear to the wolverine—more than two-thirds of all imperiled species have declining populations.³²

The decline in U.S. wildlife is due, in part, to the loss of adequate habitat across the country. The American West, for example, lost a football field worth of natural area every 2.5 minutes between 2001 and 2011. In other words, a Los Angeles-sized area of land in the West is being lost each year to new roads, sprawl, energy infrastructure, mining, logging, and other development. This rapid growth of the human footprint in the West and elsewhere fragments wildlife habitat and disrupts migration corridors.³³

It is also worth noting that despite the progress being made through wetlands mitigation policy, U.S. wetlands, streams, and rivers are still highly impaired. The most recent National Wetland Inventory in 2009 found continued declines in the overall area of wetlands nationally, with some of the steepest losses in the Mississippi River Delta and the Prairie Potholes area of the Upper Midwest. “In a five year period, we lost over 630,000 acres of forested wetlands, mostly in the Southeast—an area equal to half a million football fields each year,” said Fish and Wildlife Service Director Dan Ashe upon the report’s release.³⁴

These ongoing declines of U.S. wildlife, land, and water resources are troubling, but they can be reversed through wise stewardship practices and through the expansion and improvement of U.S. mitigation policy. This includes clear standards for avoiding and minimizing impacts to protect irreplaceable resources, as well as guidelines on compensatory mitigation to create enabling conditions for environmental restoration markets. Below are four recommendations for policymakers.

Establish a national goal of maintaining or increasing the quantity and health of wetlands, wildlife, and remaining natural areas in the United States

By setting a national goal of achieving “no net loss” of wetlands, President George H.W. Bush inspired and empowered subsequent administrations, mitigation bankers, developers, and agency professionals to build and improve upon the mitigation framework established under Section 404 of the Clean Water Act. President Bush’s use of his pen and podium has saved thousands of square miles of marshland, estuaries, and river systems in the past quarter century. President Obama took an important step toward advancing the mitigation concept with his presidential memorandum directing agencies to develop clear, consistent standards and guidelines to mitigate the harmful environmental effects of their actions. But more can be done to provide certainty for mitigation bank developers and private investors who have the power to grow the mitigation economy.

The next president should follow President Obama’s example by setting clear and ambitious goals that help restore the health and abundance of the United States’ natural resources. Specifically, the president should issue an executive order establishing a national goal of halting and reversing losses to wetlands, at-risk wildlife, and remaining natural areas in the United States. To achieve this goal, the president should simultaneously direct federal agencies to ensure that federal actions or decisions result in no net loss or a net gain to these resources. The executive order should also establish guidelines to ensure that “no net loss” does not just count acres but also preserves ecosystem values and habitat quality for the long term.

Make compensatory mitigation a part of any federal action or permit that will result in unavoidable loss to wetlands, at-risk wildlife, or remaining natural areas

The 404 program is effective because it is binding and conditional. Any developer whose project will unavoidably destroy or impair wetlands must offset those losses through compensatory mitigation as a condition of receiving approval for development activities. This regulatory requirement provides the certainty that the private sector needs to establish mitigation banks and a thriving wetlands restoration market.

Agencies that are seeking to safeguard at-risk resources through mitigation policy should establish clear, mandatory compensatory mitigation standards that are consistent with their statutory mandates. It is neither efficient nor fair to developers to set mitigation requirements on a project-by-project basis. All solar, oil, wind, and gas companies that wish to build projects on public lands, for example, should know that they will be required to engage in compensatory mitigation if impacts to sensitive resources cannot be avoided; national policy guidelines should provide the framework for how this compensatory mitigation would be completed and monitored. Policy guidelines should also ensure that strategies to avoid or minimize impacts are employed before mitigation is used.

Compensatory mitigation guidelines can and should be effectuated through strategies that are developed on a regional level. The BLM, for example, has begun to develop regional mitigation plans that identify the most sensitive resources in a particular area and that should therefore be avoided where possible and, if necessary, be subject to mitigation.³⁵ In certain western states, for example, a development project on BLM lands that has unavoidable impacts on sage grouse habitat would need to restore or protect similar sage grouse habitat nearby.³⁶

As natural resource agencies develop and deploy their mitigation policies, they will face a challenge in aligning and balancing national mitigation guidelines with regionally focused mitigation strategies that address the environmental challenges of particular landscapes. In addition, because large projects can trigger permitting and reviews by several resource agencies, agencies will need to work together to identify joint mitigation strategies, rather than proceeding in a piecemeal, agency-by-agency manner.

To strike this balance and ensure coordination of national and regional mitigation policies, as well as coordination across agencies, mitigation responsibilities should be addressed as an integral part of federal permitting and review processes. Building off of the Obama administration’s permitting reforms, Congress has established a new structure to facilitate cross-agency coordination of permitting processes.³⁷ Permit- and review-related mitigation requirements should be integrated into this new permitting coordination effort.

Special attention should also be devoted to attracting new private-sector investment to the protection and restoration of natural systems. Testifying before a Senate committee in March, Doug Lashley, the CEO of mitigation banking firm Greenvest, said that, “An increasing flow of private capital, incentivized by a consistent regulatory environment, means more, and increasingly large-scale projects.”³⁸

Support deployment of mitigation policies through science-based guidelines, transparency tools, and training for decisionmakers

Wetlands mitigation policy is more advanced than other types of mitigation because of the regulatory certainty that flows from the 404 program. However, wetlands characteristics are far from homogenous, and therefore, science is key to deploying adequate mitigation actions to counterbalance unavoidable harms. Heterogeneity of natural systems should not be an excuse for identifying an arbitrary and unprincipled level of mitigation compensation.

The recently established Natural Resource Investment Center at the Department of the Interior, which is charged with spurring public-private partnerships in the natural resources field, should convene a group of distinguished and experienced land managers and scientists, including representatives of the private conservation banking community, and charge them with developing guidelines that can be used to characterize and quantify the nature and scope of unavoidable impacts that proposed projects may have on natural areas. ³⁹ The exercise should focus on broad measures of landscape health that provide a basis for establishing rough equivalence between unavoidable harms and appropriate investments in protecting and/or