Wetlands Mitigation Banking Systems:
A Means of Compensating for Wetlands Impacts

Paul C. Voigt and Leon E. Danielson,
Department of Agricultural and Resource Economics
North Carolina State University

Balancing economic development with the protection and conservation of the nation's wetland resources has become an important issue in natural resource policy. Section 404 of the Clean Water Act and Section 401 Water Quality Certification regulations in each state designate allowable uses of wetlands. The North Carolina General Assembly has passed legislation regarding wetlands mitigation banking systems. Additional legislation is possible. The North Carolina Environmental Management Commission, in furtherance of their regulations for protecting the state's water resources, passed new rules (effective September 1, 1996) regarding wetlands uses. Federal and state regulations also designate which wetland uses (impacts that alter wetlands) must be mitigated through the replacement of the functions and values lost due to wetland impacts. Mitigation is usually required to be of the same wetland type as the wetland that is harmed, and to be in close proximity to the wetland that is impacted. Regulations require a minimum compensation ratio of one-to-one, although the ratio is often higher. The compensation ratio is the number of wetland acres that must be replaced to the number of wetland acres that are impacted. Wetlands mitigation banking systems have arisen as a means to satisfy the mitigation requirements of federal and state regulations. Mitigation banks represent large areas of replacement wetlands which are assigned credits corresponding to the amount of wetland function and value created, enhanced, or restored through the bank's construction. Mitigation banks can offer benefits over on-site mitigation such as cost-effectiveness, greater ecological value, and the ability to provide mitigation in advance of impacts.

INTRODUCTION

In the last twenty years, a transition in federal and state policy concerning the regulation of our nation's wetlands has occurred. The national policy regarding wetlands and their use has moved from a position which promoted 'wetland conversion' (the alteration of wetlands for agricultural, development and other purposes) to a policy that seeks to balance economic development with the conservation and preservation of a natural resource deemed to be an important part of our nation's environment. This paper will provide an overview of wetlands and their regulation, as well as an introduction to the concept of wetland mitigation banking systems. Additionally, this paper will look at the state of wetland legislation and mitigation banking in North Carolina.

WHAT ARE WETLANDS?

The US Army Corps of Engineers and the North Carolina Environmental Management Commissio 's Wetlands and 401 Certification Procedures describe wetlands as areas that are covered or saturated by surface or ground water on a sufficiently frequent basis and for a sufficient length of time so as to support, and under normal conditions do support, a goodly amount of vegetation that is typically adapted for life in saturated soil conditions. Swamps, bogs, pocosins, hardwood bottomlands, Carolina Bays, and saltwater marshes are types of wetlands that one might encounter in North Carolina. Many wetlands function as a means of flood control, erosion control, water cleansing, and water storage, as well as serving to provide many recreational and commercial opportunities like fishing and hunting. In conjunction with plants that live in wet soil conditions, wetland supports various types of aquatic and land-based wildlife. For example, a saltwater marsh often supports fish, shellfish, and birds. In addition to plants and animals that live in the water, a swamp might provide habitat for deer, bear, and foxes.

WETLAND POLICY AND REGULATION

United States wetland policy has been evolving over about the last 140 years. From the mid 1800's until around the 1970's, wetland policy encouraged the conversion (draining/filling to remove wetland characteristics) of wetlands for a variety of purposes including agricultural production, bio culture and development. During this period, policy tools such as cost-sharing, tax incentives, and farm commodity programs were used to promote the conversion of wetlands.

From the 1940's through the 1970's, wetland policy was somewhat conflicting. The policy contained measures to promote the conversion of wetlands while at the same time some aspects of the policy began to promote the protection of wetland. A turn toward a more comprehensive policy of wetland protection began in the 1970's (Danielson and Leitch 1994).

There are basically two major categories of regulations that apply to wetlands: federal regulations and state regulations. Additionally, local units of government may have wetlands rules and regulations.

Federal Regulations

The main federal regulations concerning wetlands are contained in Section 404 provisions of the Clean Water Act of 1972. These Section 404 provisions establish a procedure for regulating the discharge of dredged or fill material into waters of the United States, including wetlands. These apply to activities undertaken to convert wetlands into land suitable for purposes such as development projects, dam construction, highway construction, and agriculture. Section 404 is designed to prevent impacts (alterations) to wetland when there is a practical alternative which is less damaging to the wetland or when an impact will seriously alter the ecological functions of the nations waters.

Anyone who wants to undertake an activity which will impact a wetland must determine if application for a permit to do so is needed. Whether a permit for impacting a wetland is needed is based upon such things as the nature of the development project and the number of wetland acres that will be affected by the project. The US Army Corps of Engineers has main oversight of Section 404 regulations and administers permitting. In the individual permitting process, the permit applicant must go through a sequence of steps. First, the applicant must try to avoid adversely impacting the wetland. Second, the applicant must show that they tried to minimize any adverse impacts to the wetland. And lastly, the applicant may be required to take steps to compensate for any unavoidable impacts to the wetland caused by their project. This third step, compensation, is where wetland mitigation banking comes into play. In essence, this sequencing process for individual permit applications means that if a permit applicant has shown the adverse wetland impacts caused by the proposed project are unavoidable and have been minimized, then the permit applicant may be required to take steps to 'replace' or mitigate the wetland function(s) and ecological values lost due to the adverse impacts of the permitted project. Wetland mitigation is discussed in more detail in the next section, 'Wetland Mitigation'.

Although most projects affecting wetlands must be permitted, there are exceptions. Some on-going activities such as farming, ranching, and forestry are in some cases exempted from these regulations. Additionally, some activities which have limited impacts to wetlands are considered to be covered under general permits (as opposed to individual permits). These general permits cover certain activities such as minor road crossing construction, and can be issued on a national, regional, or state wide basis. For example, a particular activity not deemed to require an individual permit (judged to have minimal impacts to wetlands), could be granted a general permit which allows the activity to take place anywhere in the country, anywhere within a specific region of the country, or anywhere within a particular state. The ‘Federal Guidance for the Establishment, Use and Operation of Mitigation Banks advises that the use of mitigation banks is preferred when compensatory mitigation is required for impacts to minor aquatic resources such as those authorized under general permits (US Army Corps of Engineers 1995).

Another type of general permit is the Nationwide 26 permit. This permit allows impacts to certain types of freshwater wetlands anywhere in the nation. It also authorizes impacts of less than one-third acre, has a maximum fill of three acres, and provides that impacts between one-third and one acre require notification of the Corps of Engineers. The Corps of Engineers then may allow the impacts to be covered by this general permit or require the project to apply for an individual permit.

In addition to the Corps of Engineers, the Environmental Protection Agency, US Fish and Wildlife Service and other federal agencies may be involved in the permitting process.

State Regulations

The Clean Water Act requires that any activity seeking a federal permit for discharges into waters (including wetland) must have certification from the state in which the impact will take place. This state certification falls under Section 401 Certification rules and requires that in order to be granted a federal Section 404 permit, an activity must have certification that it meets state water quality regulations. Each state develops its own water quality standards and regulations, in consultation with federal agencies such as the Environmental Protection Agency, which best suit the particular water quality issues within the state.

North Carolina 's Wetlands Rules and 401 Certification Procedures provide specific rules for management of the states water quality. For instance, these rules provide for three broad classifications of state waters, including wetlands (Table 1).

• The Freshwater Classifications are divided into eight classes which describe the uses for which the particular class of waters is protected. For example, Class C waters are freshwater protected for secondary recreation, fishing, aquatic life and wildlife; these are the minimum uses for which freshwater are protected. Freshwater wetlands have their own class, designated as Class WL.
  
• The Tidal Salt Water Classifications are sub-divided into four classifications which describe the uses for which the waters are protected. As in the Freshwater Classifications, wetlands in this group have their own classification designated as Class SWL.

• The Supplemental Classifications group contains six classifications made up of particularly sensitive waters. Wetlands in this group are designated as Unique Wetlands (UWL) and consist of wetlands of exceptional state or national ecological significance which call for special protection to preserve existing uses.

The North Carolina Environmental Management Commission's policy is to maintain, protect, and enhance water quality in the state. The Commission utilizes the Wetlands Rules and 401 Certification Procedures to determine the best use of the state's waters.

WETLANDS MITIGATION

Restoration, Creation, Enhancement

The third step in the Section 404 permitting process, the mitigation of wetland functions and ecological values, may be achieved through the restoration, enhancement or in some cases preservation of an existing wetland or creation of a new wetland. This process is designed to replace the functions and values of the wetland that was affected or altered by the permitted development project. Restoration typically refers to the process of restoring a former wetland back to its original wetland state. A good example would be prior converted crop land (a wetland that had been drained/filled to create farmland) which is taken out of agricultural production and restored to its wetland state. This is usually the easiest way to produce a wetland since it is less complicated to take land that has previously exhibited wetland characteristics (such as proper water flows and vegetation) and restore wetland function. Creation refers to taking upland, which has at no recent point in history been a wetland, and constructing the necessary water flows (hydrology), planting the proper vegetation and developing other wetland functions so that a new, self-sustaining wetland comes into existence. Enhancement involves taking an existing wetland and improving the functions already in place or developing additional wetland functions at the site. Preservation entails protecting the functions and ecological values of an existing wetland. Preservation is not usually allowed as compensation for adverse impacts to wetlands in the permitting process since it does not further the national goal of ‘No Net Loss of wetlands.' 'No Net Loss' refers to replacing impacted wetlands so that there is no net loss in national wetland acreage. As a mitigation tool, preservation only protects an existing wetland, and thus does not replace a destroyed or impacted wetland, thereby resulting in a net loss of wetland acreage.

In-kind, On-site Mitigation

Mitigation of impacts has historically been achieved through on-site mitigation. On-site mitigation refers to the restoration, creation, or enhancement activities undertaken by the permit holder on the same site where the permitted impact occurs. This is pursuant to federal policy, which prefers that mitigation be in-kind (i.e., replace the same type of wetland that is impacted) and in as close proximity to the impact as possible. This is designed to assure the mitigation is as close to a ‘replacement' of the impacted wetland as possible. For example, if a permit holder impacts a freshwater wetland in Falls Lake watershed, mitigating that impact by restoring a saltwater marsh in the Lower Cape Fear watershed would replace wetland acreage, but would not replace the particular functions and ecological value associated with the freshwater wetland in Falls Lake watershed.

In recent years, the concept of allowing mitigation to take place off-site, or in a different geographical location than the impact site, has begun to develop. This concept will be examined in the ‘Wetland Mitigation Banking' section.

Compensation Ratios

If the Section 404 permit requires compensation for adverse impacts caused by the permitted project, the type of mitigation undertaken to satisfy the compensation requirements of the permit can have an affect on the number of wetland acres required to be restored, created or enhanced. The number of acres restored, created or enhanced for each acre of wetlands impacted is known as the compensation ratio. For example, if the compensation ratio is 2:1, then two acres of wetlands must be restored, created or enhanced for every one acre of wetland that was impacted by the permitted development project. In general, the minimum ratio of restoration or creation acceptable by regulators is 1:1. However, this ratio is often higher, sometimes as high as 10:1. Since restoration is usually favored by regulators, the ratio of restored to impacted acres may be 2:1 for a restoration project. But if the permit applicant wanted to use enhancement for mitigation instead of restoration, the ratio may be increased to 3:1 or 4:1. As preservation is the least favored method of mitigation, ratios for this type of mitigation are sometimes 10:1 or higher.

Wetland Mitigation Rules in North Carolina

Table 2 shows the general rules for determining what type of Section 401 Water Quality Certification requirements a proposed impact to freshwater wetlands (Class WL) in North Carolina may need to meet.

The heading 'Distance From Surface Water' refers to how far the impacted wetland is from surface water. The remaining headings refer to the size of the wetland acreage that will be impacted. ‘Notification' means whether the North Carolina Division of Water Quality (Under the Department of Environment, Health, and Natural Resources) must be made aware of the proposed impact to a wetland. ‘Review' refers to whether the proposed impact must be reviewed by the Division of Water Quality and what possible sequencing action could be required on part of the person or entity undertaking the impacting activity. ‘Mitigation' refers to whether replacement will be required for the lost functions and values of the impacted wetlands.

(1) Ratio applies to restoration. The ratio for other types of mitigation is determined by multiplying these ratios by 1.5 for creation, 2 for enhancement, and 5 for preservation.

The NC 401 Certification Program will accept mitigation provided as part of a federal Section 404 permit unless the State finds that the Section 404 mitigation would not replace existing uses lost to the impact. Normally, a minimum of 1:1 restoration or creation is needed. The numbers in parentheses following ‘Mitigation' denote the compensation ratio required.

In general, the North Carolina Section 401 Water Quality Certification rules for wetland impacts call for varying degrees of avoidance, minimization and compensation depending on the size of the acreage impacted and the proximity of the impacts to surface water. To summarize, the closer a wetlands impact is to surface water and the larger the acreage of the impacted wetland, the greater the requirements for avoiding, minimizing, and compensating for such impacts.

WETLAND MITIGATION BANKING

Wetland mitigation banking is a system where permit holders who are required to complete compensatory mitigation for adverse impacts to wetlands can acquire credits from a mitigation 'bank' to satisfy their mitigation requirements. Permit holder refers to the person or entity undertaking a development project which will impact a wetland, requiring permitting and mitigation. Basically, a mitigation bank represents a large restored or created wetland. Enhancement and preservation of wetlands are allowed if the majority of the site consists of restoration and creation. This large ‘replacement' wetland is developed according to regulatory guidelines, and is assigned a certain number of credits. These credits correspond to the functions and ecological values that were restored or created above what may have already been in existence at the mitigation bank site before the creation, enhancement or restoration activities. Subject to regulatory approval, the number of credits necessary to satisfy the compensation ratio requirements of a permit holder's Section 404 (and Section 401 water quality certification) permit are debited against the mitigation bank (that is, credits are ‘subtracted' from the number of credits in the mitigation bank). These wetland mitigation bank credits usually are used as an alternative to the normal ‘on-site mitigation'.

The wetland impact permit requirements will specify whether mitigation bank credits may be used for compensation and what type (as in category of wetland) of wetland mitigation credits must be used. Wetlands mitigation banking has many potential benefits, including:

• Potentially more cost-effective compensatory mitigation
• Larger wetland sites better provide some wetland function and ecological value over smaller, isolated, on-site mitigation projects
• Mitigation in advance of impacts which helps assure mitigation is successful

• Larger mitigation sites means fewer on-site mitigation projects to be reviewed thereby reducing permit processing time and increasing effectiveness of regulatory agencies.

Overall, wetlands mitigation banking can be a useful tool for those who must fulfill regulatory requirements in order to proceed with construction or development projects located in wetlands (US Army Corps of Engineers 1995).

Types of Wetlands Mitigation Systems

The different types of wetland mitigation systems may be broadly divided into four classes: single-user banks, public commercial banks, private 'commercial' banks, and systems that combine aspects of different wetland mitigation methods (Table 3).

Single-User Banks

This type of wetlands mitigation bank is created for use by a single person or entity needing to compensate for wetland impacts. The most common example of this type of bank is a mitigation bank created by a state department of transportation (DOT). Since state DOTs are almost continually undertaking highway construction projects, they often impact wetlands in the course of these construction projects. In many cases, this means they must provide replacement wetlands for the wetlands they impact during the course of their highway projects. Therefore, many DOTs have found it helpful to create their own wetland mitigation banks. In doing so, the DOT creates an account of wetland credits that may be drawn upon as needed. In this way, the DOT may be able to withdraw credits from their own bank each time they undertake a highway project that requires them to replace wetlands. Use of credits from a single-user bank is subject to approval by the appropriate regulatory agencies such as the Corps of Engineers. The fact that many of the impacts created by a DOT are small and isolated makes the creation of a mitigation bank well suited for this type of mitigation requirement.

Public Commercial Banks

A public commercial mitigation bank is a bank created by a government, quasi-government, or not-for-profit organization that offers mitigation credits for sale to the public. The credits are usually sold to help offset the costs of the bank's construction and development. The credits are neither produced nor sold in order to make a profit, but rather to provide an alternative for those needing to compensate for wetland impacts.

Private or Entrepreneurial Mitigation Banks

While not as common as the previous types of mitigation programs, a private market for mitigation credits is developing. In a private mitigation credit market, entrepreneurs purchase suitable land and then complete a restoration or enhancement project to an existing wetland or produce a new wetland through creation. If this new wetland meets regulatory requirements regarding the mitigation bank's plan, organization, construction, and ecological function, the new wetland bank is assigned a certain number of credits available for mitigation purposes. The developer of the private bank may then offer the credits for sale to permit holders who may use them to satisfy the mitigation requirements of their permits. The use of private mitigation credits by a permit holder must be approved by the appropriate regulatory agencies.

Other Wetlands Mitigation Systems

In addition to the types of mitigation banks mentioned above, there are other systems in existence designed to provide alternatives to on-site mitigation for permit holders subject to compensatory mitigation requirements. These systems combine components of various mitigation systems in an effort to provide a means for permit holders to meet the mitigation requirements of their federal and state permits for impacts to wetlands.

• Fee-based System

While similar to a mitigation bank, the fee-based mitigation system is not actually a true mitigation bank in the sense that it does not produce mitigation credits for use by permit holders. This system takes monetary contributions from permit holders into a fund used to create, restore, enhance, or preserve wetlands. Instead of undertaking a mitigation project to replace wetlands they impact, the permit holder would make a contribution to this fund. This contribution serves to fulfill the compensatory mitigation requirements of the permit holder. The contribution amount is usually based on the projected cost of the mitigation necessary to fulfill the permit holder's mitigation requirements. A trust fund program is usually administered by the US Army Corps of Engineers (COE) and the money contributed by the permit holders is often held in trust by a not-for-profit conservation organization. The COE then uses the funds in the trust to undertake wetland projects to replace the wetlands impacted by the permit holders. One possible drawback of this system is that the replacement wetlands are not completed in advance of the impacts to wetlands.

• A Not-for-Profit Wetlands Mitigation Bank

The Delta Environmental Land Trust Association (DELTA) mitigation bank combines aspects of private for-profit banks with the trust fund system. DELTA was created to help restore bottomland hardwood wetlands to the Delta region of Mississippi. This system proposes to take donations from private landowners of land suitable for restoration purposes, restore the land to its wetland state and sell credits from these new wetlands to permit holders. The proceeds from the sale of credits will be used to cover wetland restoration costs, with a mandatory twenty-five percent of proceeds set aside to undertake additional restoration of wetlands in the region. The additional wetlands restored with proceeds from the sale of credits from the original mitigation bank will not be sold as credits or used for mitigation purposes. This program will also be similar to a public commercial bank, in that it offers wetland mitigation credits for sale, but is not intended as a for-profit enterprise (DELTA 1994).

• A State-Wide Wetlands Mitigation Bank

Minnesota has created a state-supervised wetland mitigation bank. This system covers all types of wetland mitigation in the state, be they private commercial banks, single-user banks, or public commercial banks. All wetland mitigation credits produced in the state are deposited in this state bank. In this way, state regulators can keep an accounting of wetland mitigation activities in the state. The state bank allows free sale and trade of mitigation credits, subject only to the normal federal and state regulatory oversight.

WETLAND MITIGATION BANKING IN NORTH CAROLINA

Existing North Carolina Wetland Mitigation Banks

Like many other state Departments of Transportation, the North Carolina Department of Transportation (NCDOT) has undertaken the development of wetland mitigation banks. These banks are used to meet the regulatory requirements associated with the wetland impacts that occur as part of the Department's highway projects.

The Company Swamp Mitigation Bank was created by the North Carolina Department of Transportation to compensate for unavoidable wetland impacts occurring from NCDOT highway projects near the Roanoke River. Company Swamp is a preservation bank and consists of 1031 acres located in Bertie County, North Carolina (Pfeifer 1995). The bank may be used to compensate for impacts outside the 'watershed' in which the bank is located. On average the impact sites that use this bank for compensation have been 100 miles from the bank site. The bank may only be used for in-kind replacement of bottomland hardwood habitat.

The North Carolina Department of Transportation Pridgen Flats Mitigation Site is a single-user bank created to compensate for unavoidable losses to pocosin-type wetland habitat occurring from highway construction projects. The bank is 127.3 acres of a 348.2 acre tract located in Sampson County, North Carolina (Pfeifer 1995). The size of the bank may be enlarged pending the determination of the extent of wetland acreage on the tract. Pridgen Flats may be used to compensate for losses to pocosin-type habitat occurring anywhere in the coastal plain of North Carolina. The bank was created through the restoration of prior converted crop land to pocosins. The use of this bank for compensation is required to be in-kind replacement of pocosins (ELI 1994).

At this time, there are no operational private wetland mitigation banks located in North Carolina. There are numerous private companies in North Carolina that provide mitigation services such as environmental impact surveys, wetland delineation, as well as wetland creation, restoration, and enhancement on a project-specific basis. But there are no banks that have been created expressly to produce and sell wetland mitigation credits on a for-profit basis. However, with the advent of proposed legislation outlining rules and regulations for promoting wetlands mitigation banking in North Carolina, the private sector is showing interest in the potential market for wetland mitigation banking in North Carolina.

Wetlands Mitigation Legislation: North Carolina

In 1995, North Carolina House Bill 886 was introduced to establish a state wide program for the acquisition, restoration, enhancement and creation of wetland and riparian resources. The purpose of the program is to restore wetland functions and values across the state, to replace critical functions lost through wetland conversion and through current and future permitted impacts. This program will be implemented within the context of basin wide planning initiatives, which seek to protect and enhance water quality, flood prevention, fisheries, wildlife habitat, and recreation. Under the state wide program, a Wetlands Mitigation Bank is to be created to provide a repository for monetary contributions. These funds are to be used to promote projects for the restoration, enhancement, preservation or creation of wetlands in North Carolina (General Assembly of North Carolina 1995).

As a result of federal and state policies and regulations, wetland mitigation banking systems are emerging as mechanisms to facilitate the fulfillment of federal and state regulations regarding wetland mitigation and the development of our nation's wetlands. The various types of mitigation systems as described here are designed to provide an alternative to traditional on-site wetland mitigation. These methods of satisfying wetlands impact permits have the potential to balance economic development goals with federal and state environmental policies.

REFERENCES

Acknowledgements

Comments on an earlier draft by Robert Evans and Fred Cubbage, North Carolina State University; John Dorney, NC DEHNR (DWQ); and Jay A. Leitch, North Dakota State University are appreciated.

AREP96-2 November 1996

3/19/97 Judy Bridges