Designing an Environmental Mitigation Banking Institution for Linking the Size of Economic Activity to Environmental Capacity

By Saeed, Khalid | Journal of Economic Issues, December 2004 | Go to article overview

Designing an Environmental Mitigation Banking Institution for Linking the Size of Economic Activity to Environmental Capacity


Saeed, Khalid, Journal of Economic Issues


While heterodox economics streams have widely recognized the role of institutions in influencing the behavior of an economy, a large part of the writings in institutional economics is devoted to interpreting classical thought on institutions rather than making use of this powerful instrument in designing a policy implementation framework (Neale 1987; Bush 1987). In particular, environmental policy, which should be aimed at creating environmental responsibility institutions that influence the everyday conduct of business, continues to be implemented through command and control and rather arbitrary fiscal instruments, although a few market-based instruments such as tradable pollution permits have been proposed (Cropper and Oates 1992).

Environmental mitigation banking, also sometimes called conservation banking, has recently been suggested as an institutional innovation that allows banking of environmental restorations to offset environmental damage caused by development projects so net change in environmental resources remains zero and strong sustainability criteria are met. (1) Typically, a conservation or mitigation bank is privately or publicly owned land restored for its natural resource values. In exchange for restoring the land, the bank operator is allowed to sell credits to developers who need to satisfy legal requirements for compensating environmental impacts of development projects (California Department of Fish and Game 1995).

Many opinions exist about how the mitigation banking industry should be instituted and regulated, but few of them are based on a clear understanding of how the proposed institutional arrangements and regulatory policies would affect its performance in terms of supporting economic activity, preserving the environment, and minimizing organizational costs and social conflicts. Pricing of environmental credits is an important aspect of the mitigation banking system, and complex engineering methods connecting price to cost have been proposed as pricing criteria. Also, environmental groups have often advocated subsidization of the environmental mitigation activity by the government or other outside agents, without clearly understanding the implications of such subsidies (Marsh et al. 1996). Evidently, there is a need for perfecting design of this new institution before confidence can be placed in its ability to successfully meet the dual goals of maintaining environment and supporting economic activity without a cumbersome and expensive command and control system in place, so it can be applied to a wide range of conservation agendas.

Integrating concepts from economics and system dynamics, I have attempted in this paper to model the role of a mitigation bank operating with a variety of regulatory policies and interventions imposed by an authority. (2) Computer simulation is used to reveal the dynamic behavior of the relationships included in the model. Experiments with my model suggest that a mitigation banking institution established in the market is able to yield both an optimal price for the environmental credits and an appropriate scale for the regulated economic activity without use of engineering methods connecting price to cost of mitigation. These experiments also show that the delays associated with engineering calculations, when they are used to influence price of credits, would restrain economic growth by stifling its multiplier effects, even though they would achieve a balance between the scale of the economic activity and the corresponding environmental resources it affects. Subsidies would indirectly support the economic activity by reducing the price of credits, but for the same budget, direct subsidies support the economic activity more than the market-based subsidies. Connecting credit requirements to environmental conditions introduces instability in all cases in view of the delays and subsequent overcorrection involved in the process but helps to connect the scale of the economic activity to the corresponding environmental capacity when market or cost-based mechanisms for pricing credits are absent. …

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Designing an Environmental Mitigation Banking Institution for Linking the Size of Economic Activity to Environmental Capacity
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