MITIGATING THE COST OF THIN MARKETS: WETLAND MITIGATION BANKING AND NORTH CAROLINA’S ECOSYSTEM ENHANCEMENT PROGRAM John Cary ENTRIX, Inc. Jonathan Yoder School of Economic Sciences Washington State University 1

Wetland Mitigation Banking  Goals:  “No-Net Loss”  Market incentive to protect wetlands  Credits generated through forms of compensatory mitigation  Process regulated by USACE  Credit market is relatively thin USACE Permittee WMB $$$$ Credit Permit Approval 2

WMB Mechanisms  Ecological timing/underinvestment  “Misses” in the market  More permittee-responsible mitigation  Long permitting process  Excess demand  Delay cost  Credit generation prior to impacts  Credit forecast  RFP process  Opportunity lost from funds invested early  Excess Supply  Early investment Conventional WMBNCEEP’s Credit Resale 3

Statistical Framework Production & allocation periods  Period one production  Period two mitigation sequencing = Excess demand of wetland credits = The quantity of credits demanded = The quantity of credits supplied 4

Coordination Cost Functions Conventional WMB: EEP: 5

 NC >0  Implies Conventional WMB less costly at providing mitigation  NC<0  Implies EEP less costly at providing mitigation 6

Results  Increases in the marginal cost of delay (i.e. excess demand)—EEP is less costly  Increases is the marginal cost of early investment (i.e. excess supply)—Conventional WMB is less costly  Increases in the marginal cost of credit production— EEP is less costly  Variance of credit supply influences net costs— depends on MC of delay and MC of early investment 7

Conclusion  Streamlined permit process are important in reducing coordination costs  Increases in credit approval costs increases attractiveness of EEP  Coordination costs associated with thin markets can be mitigated by choosing appropriate WMB mechanism based on market conditions  Still work to be done 8