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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
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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
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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
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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
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Coordination Cost Functions Conventional WMB: EEP: 5
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NC >0 Implies Conventional WMB less costly at providing mitigation NC<0 Implies EEP less costly at providing mitigation 6
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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
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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
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