In 1990, a northern subspecies of the spotted owl was listed as threatened under the Endangered Species Act (ESA), restricting the modification of its habitat across large swathes of the northwestern United States. For the area’s logging communities the results were devastating. In just a few years, perhaps 30,000 logging jobs were lost as a direct result, with whole communities abandoned, mills shuttered, and a way of life gone extinct.

The decision caused a lot of pain and suffering for how much good it did, which turned out to be none at all. The northern spotted owl’s population continued dwindling because, as it turned out, the principal threat to its survival was apparently not habitat loss, but the spread of an invasive species: its cousin, the larger eastern barred owl. The U.S. Fish & Wildlife Service (USFWS) is now considering a plan to start killing the invader in order to protect the northern spotted owl from natural selection. Given the ESA’s own spotty history, one has to wonder whether the pain about to be inflicted on the barred owl is really such a good idea.

The Federal government’s scheme for protecting endangered species suffers from a fatal deficit of good science. The ESA requires USFWS to use the “best available” science, not the best possible science—and the meager USFWS budget does not allow it to pursue qualitatively better science in the areas over which it has jurisdiction. As is the case with most U.S. Executive Branch agencies and departments, Congress and courts together have hamstrung the USFWS with incoherent and sometimes contradictory mandates, and generally have failed to provide the funds necessary to accomplish those missions. As a result of USFWS’s science deficit, the ESA’s sweeping “takings” of private property without just compensation produce few conservation benefits. Of the 2,000 or so species that have been listed as threatened or endangered over the past forty years, only 28 have been taken off the list as a result of “recovery”, and many of those 28 weren’t really endangered to begin with. The law also creates perverse incentives for landowners and other private parties to destroy a high-quality habitat lest one of its species be listed as endangered or threatened and hence constrain uses of the land or cause it to be sequestered by the government. Thus, as in so many other areas, heavy-handed Federal regulation often achieves the very opposite of its intended purpose.¹

Among the ESA’s many stakeholders, a consensus is developing that the law cannot accomplish its goals of species conservation and economic development without greater reliance on markets. In Texas, a succession of three major species conservation plans over the past decade has shown the potential that a market-based approach could have for species conservation. The foundation of each of these conservation plans is a habitat “exchange” in which the impact to a listed species’ habitat is offset by mitigation measures in another part of its habitat. The logic is similar to that of emissions “credits”, such as the 1990s-era sulfur dioxide trading scheme, or to arrangements in which vertical space for urban construction is traded off among sites (though in the habitat exchange model there is not necessarily a “cap”). The correlation of impact and mitigation is accomplished through a “crediting” system based on a fuller scientific understanding of species requirements than is normally available to USFWS in its determinations, made possible because of greater investment in research by private participants.

For environmental stakeholders, the new approach helps solve several major problems of the current ESA. It removes the unfortunate incentive to hedge against ESA obligations that might arise in the future. It allows for unified conservation management at ecosystem-scale, rather than scattered across patches of habitat, thus increasing the possible conservation benefits. By giving the market a key role in gathering information about endangered species, it creates the prospect of listings and recovery/conservation plans based on much better science than is currently the case. And with “adaptive management” the science continues to improve during the conservation effort. For these reasons, the new approach has been supported by important environmental stakeholders, such as the Environmental Defense Fund.

For economic stakeholders, the new approach also solves major problems. For landowners, it helps turn a potentiality devastating liability into a source of profit that advances conservation goals. If offers the prospect of increased economic opportunities and greater protection for property rights within a more predictable regulatory framework. It allows mitigation efforts to be dynamically tailored to the impact they are designed to offset, across a range of mitigation options, thereby laying the foundation for an economically rational balancing of costs and benefits.

Some of the ESA’s flaws—such as its heavy-handed impact on property rights—can only be addressed through legislation, and through a much-needed revision in the Supreme Court’s jurisprudence on regulatory takings. And given the complexity of factors that can threaten a species, it may be doubted in many cases whether any conservation scheme would have much benign effect. For these reasons and others, the ESA needs revision. But in the meantime, habitat crediting exchanges offer a market-based approach that could significantly improve species conservation and economic development within the framework of the existing ESA—provided regulators can resist the temptation to manipulate the system and distort its delicate economics.

The ESA and its Problems

The purpose of the ESA is to “provide a means whereby the ecosystems upon which endangered species and threatened species depend may be conserved, [and] to provide a program for the conservation of such endangered species and threatened species.” The ESA imposes obligations on the Federal government, under Section 7, and on everyone else (“non-Federal” parties, which includes private parties as well as state and local government), under Section 9. The main difference between the two provisions is that Section 9 only imposes prohibitions, and creates no incentive for proactive species conservation. That is a major problem because the vast majority of endangered species habitat is on private land.

Section 9 prohibits the “take” of any endangered or threatened species, which includes any “harm” to them. Regulations expanding the definition of “harm” to include habitat modification, which have dramatically expanded the law’s reach, were upheld by the Supreme Court in Babbitt v. Sweet Home Chapter of Communities for a Greater Oregon (1995). Most litigation and enforcement under the ESA now concerns habitat modification, leading to sweeping land-use restrictions that often deprive landowners of virtually all productive use of their land, without compensation of any kind. As a result, the ESA creates incentives for private landowners to escape ESA jurisdiction by whatever means necessary, including preemptively clearing land of any potential habitat for species that are being considered for listing. This practice is often referred to as “shoot, shovel, and shut up.”

The red-cockaded woodpecker prefers to drill nests high in old pine trees, typically more than 80 years old. When USFWS announced that the species was a candidate for listing in the near future, many landowners decided to clear their land of all old-growth forest before a listing decision could affect them. Thus it turned out that among the greatest threats facing the red-cockaded woodpecker was the ESA itself. That was particularly unfortunate because the red-cockaded woodpecker is a “keystone species”, one upon which an entire ecosystem depends; hundreds of species make use of the nests that it drills into old pines.

That unintended consequence revealed an urgent need to blunt the ESA’s disincentives to conservation. USFWS responded by making much greater use of its authority to issue “incidental take” permits in connection with an approved Habitat Conservation Plan (HCP) under Section 10 of the ESA. The idea is that if a landowner wants to develop endangered species habitat without incurring onerous penalties under the ESA, he must secure approval of an incidental take permit, including an HCP, in a rulemaking subject to public notice and comment. The HCP typically commits the permittee to conservation measures meant to mitigate the impact of any habitat modification. Such measures start with habitat preservation, but often include habitat enhancement and restoration, and even the creation of new habitat.

Regulators have approved several ways for non-Federal parties to meet their HCP obligations. One is for the permittee to “self-mitigate.” Another is for the permittee to pay the HCP administrator or related entity a fee in lieu of self-mitigation, or “in lieu fee”, perhaps the most common option. In some circumstances, the permittee can buy credits from a “conservation bank”, which typically consists of large tracts of land set aside under permanent conservation easements with non-wasting endowments to sustain the required conservation measures indefinitely. (Conservation banks are most common in California.)

Self-mitigation is often unattractive because permittees are typically state transportation agencies, real estate developers, or other commercial concerns with no core competency in habitat conservation. “In lieu fee” arrangements are problematic because the fees are usually quite arbitrary, and are rarely spent by the HCP administrator on effective species conservation measures. Conservation banks (including wetland mitigation banks) are unattractive to most landowners because of the requirement that they grant irrevocable permanent conservation easements. Conservation banks are also limited in their conservation value because, since temporary easements are not allowed, conservation banks can’t offset temporary modifications of habitat. Moreover, all these methods suffer from the defect of being highly geographically fragmented, as a result of the regulatory process through which they are developed, which prevents strategic coordination of conservation efforts across the species’ whole range. In short, the ESA is far more effective at creating economic losses than it is at species conservation, which cannot be good for the law’s long-term prospects.

Innovation in Texas

Over the past decade, a succession of three conservation plans in Texas has helped to clarify the possibility that a market-based mitigation credit exchange system might improve how the ESA operates. Each of these initiatives has further refined and expanded the model of mitigation banking as an alternative for economic development and endangered species conservation.

As noted, the ESA operates in two domains: the land owned by the Federal government, which is subject to Section 7, and the land owned by private and state parties, which is subject to Section 9. For most of the ESA’s history, species conservation efforts proceeded in each domain under totally different regulatory regimes. Both approaches have been marked by woefully insufficient science and heavy-handed regulatory impositions, and as a result neither approach has fully satisfied the goals of species conservation or economic development.

The approach being developed in Texas combines elements of both approaches, in keeping with an increased tendency among regulators, led by USFWS, toward a more unified approach. The linchpins have been the greater science generated by the habitat crediting system, and the better correlation it can achieve between mitigation measures and known species requirements.

The emergence of this  new model of mitigation banking began in earnest with a plan to mitigate for military training activities at Fort Hood in Texas. Fort Hood contained the largest known population of the endangered golden-cheeked warbler within its central Texas breeding range. The increased tempo of training activities at Ft. Hood due to the wars in Afghanistan and Iraq impelled an interagency effort to find mitigation options elsewhere on the warbler’s breeding range, which covers large tracts of mostly private ranchland and farmland.

Under Section 7 of the ESA, Federal agencies must prioritize conservation and recovery measures for any impact their activities may have on endangered species and habitat. The Department of Defense needed a cost-effective way to offset the habitat impacts attributable to training  activities. Unlike the typical transportation project or residential property development, the impact to habitat at Fort Hood was expected to be temporary, and the Department expected to restore that habitat to its previous condition after the tempo of training activities returned to peacetime levels.

Working with Federal stakeholders and regulators, private parties helped design the Recovery Crediting System for the warbler. Under the pilot program approved by USFWS, the Department of Defense paid private landowners surrounding Fort Hood for conservation management on warbler habitat. Ft. Hood thereby earned “credits” with which it could offset impacts to habitat on the base. Landowners competed to sell credits to Ft. Hood in reverse auction.

Because the Recovery Crediting System was a pilot program under Section 7 of the ESA, rather than Section 9, it enjoyed a good deal of flexibility. One major advantage was that the Recovery Crediting System permitted temporary impacts to be matched by temporary mitigation. That had not previously been possible with conservation banks under Section 9, as USFWS has invariably required permanent easements for any land set aside for an HCP. Under the warbler Recovery Crediting System, however, landowners could offer habitat conservation credits for 10–25 year terms.

A private program administrator was responsible for overseeing the exchange of credits. That allowed the program administrator to enter into confidentiality agreements with the private landowners and gain access to their lands to gather critical information and identify habitat that could be expanded and enhanced without increasing the landowners’ regulatory risk. This was crucial, because Section 9 of the ESA, which applies to private “takes” of endangered species, does not empower USFWS to enter private land to investigate suspected habitat. Considerations of privacy and liability exposure make landowners averse to letting Federal officials crawl all over their land. Without confidentiality agreements, many would not have participated in the program. The confidentiality agreements thus allowed large amounts of privately owned land to become part of conservation efforts across the warbler’s whole range.

Work started on the next major conservation plan in Texas when USFWS agreed to consider listing the dune-sage brush lizard (DSL) as threatened or endangered, pursuant to the terms of the 2011 Center for Biological Diversity / Wild Earth Guardians settlement. The DSL’s primary habitat is shinnery oak dunes in New Mexico and west Texas. On the Texas side of the border, the habitat falls on the Permian Basin, now the most active oil production center in the nation, according to the Energy Information Administration. Given the potential consequences of the listing, which included an estimated $8 billion in lost annual investments, the government of Texas began working toward a “candidate conservation plan” in the hopes—successfully, as it turned out—of forestalling the listing of the DSL.

The Texas Comptroller of Public Accounts led the development of the Texas Conservation Plan for the DSL. The plan included both a pre-listing component (a candidate conservation plan) and a post-listing component (a Section 10 habitat conservation plan). The post-listing plan ensured that if the DSL were listed, industry would be able to continue operating by enrolling in the plan, covered under the state-held incidental take permit under Section 10 of the ESA. The pre-listing plan was designed to stave off the listing.

The plan presented a large amount of new information about the DSL and its habitat, information tending to show that the DSL population was larger and more resilient than originally thought. In June 2012, USFWS decided not to list the DSL. It noted that the data and conservation measures provided in the Texas plan had allayed its fears of DSL endangerment. The plan has garnered significant support among the conservation community, including the Environmental Defense Fund.

One advantage of the emerging model is its degree of coordination among stakeholders: conservationists, regulators, state and local officials, landowners, and industry. That coordination has also informed efforts to develop a conservation plan for another potentially endangered species, whose territory expands across five states: the lesser prairie chicken (LEPC).

This third major conservation planning effort followed the December 2012 announcement by USFWS that it intended to list the LEPC as threatened under the ESA. The LEPC is a species of North American prairie grouse endemic to the southern high plains of the United States. It dwells on the ground in grassland, and mates by “lekking”, an elaborate courtship ritual of male display and female selection.

Some authorities speculate that the species may have numbered as many as two million prior to 1900. The species is now greatly reduced and may be dwindling rapidly. Its population was estimated to be fewer than 45,000 in 2011, and 37,000 in 2012; the 2013 figure is expected to be still lower. The species is widely dispersed over an estimated 25,000 square mile range, perhaps an 80 percent reduction from the likely historical extent. Distribution has declined sharply except in Kansas. The species is now generally restricted to highly fragmented parcels of untilled rangeland. About two-thirds of the LEPC’s current range occurs on private land in Texas.

According to USFWS, the primary factor responsible for the decline in the LEPC’s range is habitat fragmentation. The LEPC seems to require large parcels of unfragmented, intact native grassland and shrubland to maintain self-sustaining populations. The LEPC’s lekking courtship system, particularly its avoidance of tall structures, makes it especially sensitive to ongoing impacts on the landscape. The USFWS concluded that, due to its reduced population size and ongoing habitat loss and habitat fragmentation, the species lacks sufficient population to ensure its persistence over the near term, and proposed listing the LEPC as threatened.

As the prospect of LEPC listing draws nearer, focus has shifted to a broad-based Regional Habitat Conservation Plan for the LEPC (Regional HCP). The plan was submitted to USFWS in the form of a prospective application for an incidental take permit under Section 10 of the ESA. If the plan is approved, the permit would go into effect once the LEPC is listed as threatened. The permit application was submitted for USFWS approval in June 2013 by a coalition of farming, ranching, oil & gas and conservation groups after several years of development.

To develop the plan, the Regional HCP coalition formed a policy committee and a science committee. The policy committee developed the overall plan. The science committee developed the metrics (Habitat Quantification Tool) for mitigation credits. As with the two prior cases, the Regional HCP is based on a habitat crediting exchange.

Crediting metrics are the heart of any mitigation banking exchange. According to the LEPC permit application, the process involves identifying the key LEPC habitat requirements; developing models for how various habitat attributes contribute to the LEPC’s vital lekking, nesting and brooding needs; and developing scoring curves to quantify habitat performance. The science committee is also developing the management and monitoring guidelines necessary for USFWS to have confidence in the plan moving forward.

A nonprofit exchange administrator will oversee the certification of credits and all credit transactions. A separate permit administrator will hold the incidental take permit under Section 10 of the ESA, and will issue certificates of participation to the buyers and sellers of mitigation credits under the plan. The certificates of participation will allow the buyers and sellers of mitigation credits to operate under the umbrella of the incidental take permit.

The Habitat Quantification Tool (HQT) provides the crediting metrics for the Regional HCP. Wildlife habitat science has shown that species survival depends on conditions and processes at multiple habitat “scales”, from site-specific to regional scale. The HQT is a set of metrics that quantifies habitat quantity and quality at four “scales” ranging from local conditions within a “patch” of habitat, to conditions surrounding a patch, to the system of patches and corridors making up the broader habitat landscape, to regional conditions across the LEPC range. The metric is used to produce a “functional acre” of habitat that gives a range of mitigation options for virtually any impact on LEPC habitat.

The Regional HCP includes impact avoidance, minimization, and mitigation measures in accordance with the standard regulatory requirements for an HCP. One significant innovation is that permanent credits may be generated by both static, permanent conservation easements—as with the conservation banks common in California—as well as term-limited easements that allow permit credits to be aggregated across various areas.

Critics argue, not without some justification, that term-limited easements are of dubious long-term conservation value. But this criticism itself is open to criticism. First, virtually all conservation measures under the ESA are of dubious long-term conservation value, including permanent easements, for the simple reason that our understanding of the survival requirements of an endangered species is generally quite incomplete. Second, wildlife habitat science consistently calls for a belt-and-suspenders approach that mixes permanent and temporary measures of various kinds across multiple scales. Third, in many situations the alternative to temporary easements is not permanent easements, but rather no easements at all.

The whole point of “dynamic permanent credits”, including temporary easements, is to expand the total land area committed to conservation efforts by bringing in land that would not be available for permanent set-asides. Another advantage of a flexible approach is that it allows crediting to shift as the LEPC’s habitat shifts. Credits generated with the HQT will be available through the Exchange along with other mitigation options. The Regional HCP also includes adaptive management, so that the crediting metrics can be adapted as scientific understanding increases and conditions change.

The key challenge for the habitat exchange model is getting the metrics right. If the metrics are right, and the regulatory framework creates a level playing field among the various mitigation options open to a permittee, the model can enhance both the conservation goals of the ESA and the broader goals of economic development.

USFWS is also working on guidance that will combine lessons learned both from the HCP permanent easement models and the temporary and dynamic credits of the Fort Hood Recovery Crediting System. It is gathering various lines of effort together to build a unified regulatory framework that could lay the groundwork for decades of habit conservation and economic development. The experience of these three habitat exchange efforts in Texas suggests the potential of a flexible market-based habitat crediting exchange—especially if USFWS provides the framework for market investments and market innovation to define mitigation measures according to uniform species-specific crediting.

That remains a big “if”, however. Given the vast regulatory latitude that USFWS has over conservation plans under the ESA, habitat exchanges will be highly vulnerable to regulatory interference and manipulation that could distort the rational economics of the exchanges. In order for the exchanges to have a stable regulatory foundation, USFWS needs to adopt regulations and guidance designed to circumscribe its own latitude, especially once each exchange is approved and launched. An early test will be whether USFWS abandons its rigid insistence that any land set aside for mitigation under an HCP be permanently set aside under irrevocable easements.

The “Best Available” Science

Section 4 of the ESA requires that listings and designations of critical habitat be based on the “best scientific data available.” In many cases, however, the “best scientific data available” is hardly enough to support a speculative inference, let alone a confident conclusion, in which case the ESA “gives the benefit of the doubt to the species.” What that really means, given the science deficit, is that the law’s considerable social costs are wasted in terms of species conservation, and err massively on the side of unnecessarily onerous land-use restrictions. Remember the spotted owl.

Enhancing the law’s conservation benefits, and ensuring that they bear some rational relation to the costs involved, requires above all else a lot more good science, which only private parties can realistically provide. Combined with candidate conservation plans, the habitat crediting exchange model can help fill the science gap.

When USFWS considers listing a species, it routinely faces a lack of adequate science, but in those situations it has neither the legal obligation nor the resources to make up for it with research of its own. And what’s even worse, from a conservation point of view, is that the recovery plans that USFWS must develop for each listed species under Section 4(f) are subject to no scientific sufficiency standards at all. Nor are its Section 10 approvals of the scores of HCPs that can attend upon a single listing. That limits its understanding of what real threats the species are facing, and what conservation measures could help them to survive, which in turn limits its ability to design and conduct the landscape-scale conservation measures most likely to fulfill its mission.

The grim tale told in ESA performance statistics thus comes as no surprise. According to USFWS, 1,482 species (which includes sub-species and distinct population segments) are currently listed as endangered or threatened. About 1,145 of these are covered by at least one Section 4(f) recovery plan, constituting 594 active (draft and final) recovery plans. Not one of those plans is held to any standard of scientific sufficiency. Is it any wonder that in the history of the ESA only 28 species have been delisted?

Whereas USFWS is merely a passive collector of the “best available scientific data”, the private market can actually generate new data, both by bringing to bear vastly greater research resources, and by negotiating access to private lands, where most of the relevant information lies. When the volume of data improves, the scientists’ understanding of what the species needs to survive improves significantly—or else it becomes clear that a solid understanding is beyond immediate reach. Voluntary access to private lands contribute data on the front end, and conservation management measures to do so on the back end, allowing USFWS achieve landscape-scale conservation across the whole range of a listed species.

The mitigation crediting metrics—the means by which habitat exchanges equate impact and mitigation in terms of “functional acres” and other credits—are usually far more scientifically rigorous than the typical Section 4(f) “recovery plan” or the associated HCPs and in-lieu fee programs. The exercise of developing mitigation credit metrics is a much better way to devise recovery plans and conservation plans of all kinds than the more traditional methods—particularly when combined with adaptive management, which allows the metrics to continue to be fine-tuned moving forward.

The traditional methods for devising recovery and conservation plans are often based not just on the best readily “available” data, but also on the best conjecture possible with limited staff resources. On the other hand, the exercise of developing mitigation credits can often involve many scientists representing multiple stakeholders in a lengthy, iterative process. In such a process, connecting the dots among biological, evolutionary and ecological factors well enough to achieve consensus requires more data, more analysis and a deeper understanding of species needs.

One study examined the scientific basis of recovery plans under ESA § 4(f).² It found that academic scientists (those affiliated with academic institutions) were involved in determinations of recovery criteria in only about one third of recovery plans. Most of the rest were produced by agency experts, who (unlike academic scientists) don’t and generally can’t keep up with the latest scientific ideas and techniques, and are forced by the law itself to rely on self-appointed experts and activists with a strong bias against any sort of land use. The study showed that recovery plans in which academic scientists were involved produced vastly superior results. The authors concluded that “groups of authors with diverse affiliations are likely to strengthen the recovery planning process, the recovery plans lacking nonfederal affiliations suffer from inadequate attention to species biology, and academic affiliation was strongly associated with use of biology in recovery plans.”

The mitigation crediting metrics offer another crucial advantage to the conservationist and regulator: interoperability and universality within the species’ whole habitat. Under the traditional system, the listing of a species may entail 100 different HCPs, each submitted in connection with a separate incidental take permit. Each USFWS approval of an HCPs and its related permit is treated essentially like a rulemaking, complete with a notice and comment period. The problem with this system is not just that it drowns agency staff in massively redundant paperwork. Much worse, from a conservation point of view, is that the various HCPs for a single species are only loosely connected to each other, covering a multitude of separate patches of habitat.

The science of endangered species conservation has tended increasingly to focus on the study of whole habitats. One of the cardinal insights of this science is that habitat fragmentation usually makes any amount of habitat loss much worse for the species. Reducing fragmentation, and ensuring that fragmented habitat retains a high degree of connectivity, are thus often crucial to recovery of the species. Thus, an acre of “connective” habitat (habitat that connects two or more isolated patches) can have more conservation value than an acre of even the highest quality habitat, because it increases the conservation value of all acres in the newly connected patches.  Other landscape-scale conservation measures, such as controlling for invasive species and managing disturbance regimes such as periodic fire, are increasingly viewed as indispensable.

Such landscape-scale conservation management is difficult to achieve under the current piecemeal, HCP approach. But it flows naturally from the habitat conservation exchange model. The exchange model helps ensure that conservation measures for a given species will be integrated across the species’ whole range, and that landowners will have the incentive to participate in it.

As for the original listing considerations, the science deficit creates other problems. To be sure, it often doesn’t take much “science” to see that a species is in danger of extinction. But having better scientific data available on species biology and habitat requirements would give regulators a better sense of how different endangered species interact with each other and with the environment, allowing them to prioritize species according to their ecological importance. For example, conservation efforts should prioritize “keystone species”, on which entire ecosystems depend, and not waste effort and resources on inherently fleeting subspecies or distinct population segments of otherwise durable species.

For example, for millions of years the spiny ocean stickleback has invaded freshwater habitats, where characteristic predation leads to a “new species” with smaller spines. The new habitats are often ephemeral, and so are the specialized fish, but the same process has occurred countless times, and so has the specialized species The rarity of such species is as much a product of biodiversity as a condition of biodiversity; when there are lots of different species, there will be a lot of rare species. Better science will lead to a much better understanding of the genetic phylogenies that are particularly vital to maintaining our environment and its biodiversity. The ESA should focus on those, rather than fight utterly unwinnable battles against natural selection, as it so often does nowadays at such frightful cost.

Of more immediate concern to ESA implementation, access to private land by private-party experts is crucial for getting the original listing decisions right. By December 2010, when USFWS proposed listing the dunes sagebrush lizard as endangered, the lizard had been spotted at only three locations in its four-county rage. But a team from Texas A&M gained access to thousands of acres of private land for scientific research by providing confidentiality agreements that protected landowners and the precise locations of studied sites. In less than four weeks they were able to uncover 28 more locations where the species occurs, more than USFWS had collected in 39 years.³ The surveys were funded by members of the Texas Oil and Gas Association, in order to provide scientific information for Texas Conservation Plan for the dune sagebrush lizard. The information gathered to support that habitat mitigation exchange played a crucial role in convincing USFWS not to list the species.

Such market-based habitat mitigation exchanges offer a way to get from the best available science toward the best possible science. In so doing, they could help ESA be smarter in its listing decisions, and more effective in its recovery and conservation planning. The key value-added component is the process of devising metrics for mitigation crediting, and the much greater degree of scientific rigor that the process enables.

Getting the Economics and the Regulations Right

Mitigation under the ESA today is inherently coercive because it begins with the coercive application of regulatory power without any attempt at just compensation, though it often results in the deprivation of substantially all the value of a landowner’s property. That is a problem that only legislation and a change in the Supreme Court’s jurisprudence on regulatory takings can fix.

But within the current framework of the ESA, there is an additional source of needless economic loss, namely that required mitigation measures are often arbitrary and not rationally related to species conservation. HCP administrators often prefer to just take the money from an in lieu fee, even though other mitigation measures of equal or lesser cost may be far more beneficial in terms of species conservation.

Because it is based on a scientifically rigorous study of species needs and habitat impacts, the habitat crediting exchange, and in particular its habitat quantification tools, creates a way for alternative mitigation measures to “compete.” The various mitigation measures are “equalized” in terms of performance, in accordance with the judgment of regulators. Permittees can then elect the least costly combination of satisfactory mitigation measures.

A successful habitat crediting exchange depends on several conditions. First, regulators must allow the private market to compete for innovative and cost-efficient ways of achieving mitigation and conservation goals. Second, they must respect the credits generated through conservation banking as private property, subject to the rule against takings without just compensation. And third, they must allow the metrics for mitigation crediting to create a true equivalence.

Habitat crediting exchange depends upon the correlation of supply and demand for a functional unit of impact-mitigation. Correlating that supply and demand must be done properly, in a way that is predictable and uniform for each species or group of species. A scientifically rigorous system of developing crediting metrics is therefore indispensable to the success of mitigation banking.

Such a system also provides the rational basis on which the costs and benefits of mitigation can be predicted with enough certainty for a properly functioning market. That is true not just for mitigation banking, but for all the mitigation options open to a permittee under the ESA. When forced to choose, a permittee should have economically equivalent alternatives between (a) permittee-responsible mitigation, (b) in-lieu fee mitigation, (c) other HCP mitigation, or (d) a competitive mitigation exchange.

The only way for those alternatives to be economically equivalent is if they start with the same crediting metrics. Otherwise, when USFWS or the HCP sponsors make their determinations, they are operating on the basis of guesswork, and the temptation to replace market valuation with the arbitrary writ of politically motivated regulators becomes irresistible.

After the Sweet Home decision expanded the scope of Section 9 of the ESA to prohibit “modification” of endangered species habitat occurring on private property, the ESA’s scheme of takings without just compensation expanded correspondingly, further distorting the law’s economic fundamentals and impact on the stability of private property rights. USFWS is now struggling  to comply with the 2011 Center for Biological Diversity/Wild Earth Guardians settlement. The settlement requires Federal authorities to have taken preliminary action on more than 250 candidate species by the end of 2012, and final action on them by the end of 2016. As a result, the list of endangered species is set to expand dramatically.

As the case of the spotted owl shows, the economic consequences of a single new listing can be devastating for entire regions of the country. The potential cost of listing scores of new species is incalculable, particularly if those listings, and their attendant recovery plans, continue to be marred by insufficient science.

The story of the U.S. sulfur dioxide trading scheme in the 1990s bears important lessons for habitat conservation exchange policy. As long as costs and benefits were defined and predictable, the system allowed for stable market exchange. But heavy-handed regulatory interventions essentially wiped out the value of more than 12 million previously banked allowances—another “regulatory taking” of private property without just compensation—and the system ground to a halt. Similar regulatory excesses plagued the European Union’s carbon trading scheme. And, quite apart from the debate over global warming, a cap-and-trade scheme in the United States would have likely have failed for the same reasons, given the Obama Administration’s announced intention to turn the “sale” of credits into a revenue-generator, and its intention to pick winners and losers among energy sources, all of which would have distorted the fragile economics that attend any exchange created by regulation.

It remains an open question whether regulators will be able to resist the temptation to interfere with habitat crediting exchanges once they are created. The experience of conservation banks in California is not encouraging. The Texas model of habitat exchange is vulnerable to regulatory interference, and will likely remain so until the regulators are themselves appropriately regulated. But if regulators and legislators can learn from the flaws and failures of the ESA, and put their faith in properly functioning markets, both our wildlife and our economy stand to gain in the years ahead.