Tietenberg Tom, Lewis Lynne. Environmental & Natural Resource Economics
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251Innovative Market-Based Policy Remedies
increased, the economic benefits from developing wetlands (and political pressures
on obstacles to development) have significantly increased as well.
One policy instrument for attempting to preserve wetlands in the face of this
pressure is known as Wetlands Mitigation Banking and involves providing
incentives for creating off-site “equivalent” wetlands services when adverse impacts
are unavoidable and when on-site compensation is either not practical or use of a
mitigation bank is environmentally preferable to on-site compensation. According
to the U.S. EPA, “The objective of a mitigation bank is to provide for the replace-
ment of the chemical, physical, and biological functions of wetlands and other
aquatic resources which are lost as a result of authorized impacts.”
Mitigation banks involve wetlands, streams, or other aquatic resource areas that
have been restored, established, enhanced, or (in certain circumstances) specifically
preserved for the purpose of providing compensation for unavoidable impacts to
aquatic resources. Mitigation banks involve a form of “third-party” compensatory
mitigation in which the responsibility for compensatory mitigation implementa-
tion and success is assumed by someone other than the party who, by causing an
adverse impact to a wetland, is required by law to provide mitigation.
A mitigation bank may be created when a government agency, corporation,
nonprofit organization, or other entity undertakes mitigation activities under a
formal agreement with a regulatory agency. The value of those activities is defined
in “compensatory mitigation credits.” In principle, the number of credits available
for sale is based upon the use of ecological assessment techniques to certify that the
credited areas provide the specified ecological functions.
How has the program performed? As one recent review (Saltzman and Ruhl,
2006) concludes,
Despite policies mandating that habitat trading ensure equivalent value and function,
the experience is that most programs are not administered this way. In practice, most
habitat trades to date in wetlands programs have been approved on the basis of acres, in
many instances ensuring equivalence in neither value nor function.
This experience is instructive. Merely assuring that the compensation involves a
similar number of acres falls short of true equivalence unless the replacement
ecological functions supplied by those acres are also the same.
Conservation Banking
Conservation banking introduces the concept of transferable credits into endan-
gered and threatened species conservation, albeit with a few slight differences.
While in wetland mitigation banking the goal is to replace the exact function
and values of the specific wetland habitats that would be adversely affected by a
proposed project, in conservation banking the goal is to offset adverse impacts of
habitat loss to a specific species.
A conservation bank is a parcel of land containing natural-resource values that
are conserved and managed, in perpetuity, through a conservation easement
(described below) held by an entity responsible for enforcing the terms of the
easement. Banks are established for specified listed species (under the Endangered
Species Act) and used to offset impacts to the species occurring on nonbank lands.
The values of the natural resources are translated into quantified “credits.” Project
proponents are, therefore, able to complete their conservation needs through a
one-time purchase of credits from the conservation bank (see Example 10.2).
Safe Harbor Agreements
10
Safe Harbor agreements are a new means of conserving endangered and threatened
species on privately owned land. They overcome the disincentives that inhibit
many landowners from implementing practices likely to benefit endangered species
that flow from the Endangered Species Act. Under the approach taken by the
Endangered Species Act, the presence of an endangered species on a property may
252 Chapter 10 A Locationally Fixed, Multipurpose Resource: Land
10
This section benefited from the information in Environmental Defense’s Center for Conservation
Incentives. For more information on safe harbor agreements, see their Web site at http://www.
environmentaldefense.org/article.cfm?ContentID=399.
Conservation Banking: The Gopher Tortoise
Conservation Bank
In rapidly growing Mobile County, Alabama, the gopher tortoise faced survival
problems due to the disappearance of its habitat. Since the tortoise is federally
listed as a threatened species under the Endangered Species Act (ESA), small
landowners were forced to observe some rather severe restrictions on their use
of the land. Because these restrictions were quite burdensome for the landown-
ers and the resulting fragmented, patchy habitat proved ineffective in protecting
the tortoise, these restrictions created quite a conflict in the community.
A conservation bank established by the Mobile Area Water and Sewer System
(MAWSS) in 2001 reduced the conflict, allowing development to continue on
other areas while restoring and permanently protecting a much more suitable
large tract of the long-leaf pine habitat that the tortoise prefers.
MAWSS owns a 7,000-acre forest that buffers and protects the county’s water
supply. Under the terms of its conservation bank, MAWSS has agreed to set aside
222 acres, forgo any development on that land, and manage it in perpetuity for the
benefit of gopher tortoises. Landowners who want to build on tortoise habitat
elsewhere in Mobile County can purchase “credits” from the bank, and thereby
be relieved of their ESA responsibilities to set aside a small patch of their land. The
tortoises benefit because the large tract of contiguous, suitable habitat is vastly
superior to a network of small, unconnected patches of land, while the landown-
ers can now develop their land by helping to fund (through the purchase of
credits) this tortoise habitat.
Source
: Environmental Defense’s Center for Conservation Incentives, “Gopher Tortoise Conservation
Bank: Mobile Area Landowners and Wildlife Get Help,” February 24, 2003, accessed at http://www.
environmentaldefense.org.
EXAMPLE
10.2
result in legally imposed restrictions on any activities deemed harmful to that
species. Thus, if landowners were simply to restore wildlife habitats on their prop-
erty, and those habitats attracted endangered animals, they might find themselves
faced with many new restrictions on their use of the land. As a result, some
landowners are not only unwilling to take such risks, but they may actually actively
manage property to prevent endangered species from occupying their land.
Safe Harbor agreements overcome these perverse incentive problems. Any
landowner who agrees to carry out activities expected to benefit an endangered
species is guaranteed that no added Endangered Species Act restrictions will be
imposed as a result. A landowner’s Endangered Species Act responsibilities are
effectively frozen at their current levels for a particular species if he or she agrees to
restore, enhance, or create habitat for that species. Safe Harbor agreements do not,
however, confer a right to harm any endangered species already present when
the agreement is entered into (established by the landowner’s “baseline” responsi-
bilities). Those responsibilities are unaffected by a safe harbor agreement.
Grazing Rights
Farmers have been allowed to graze their livestock on public lands since the
early 1900s. The Taylor Grazing Act of 1934 attempted to prevent overgrazing
by assuring that the amount of grazing was consistent with the carrying capacity
of the land.
The law set up a system that involved the issuance of grazing permits to farmers.
Each permit authorized a certain amount of livestock to be grazed on a specific
piece of land for a specified period of time. The permits are denominated in animal
unit months (AUM). An AUM is the amount of feed or forage required to maintain
one animal unit (e.g., a 1,000 lb cow and calf) for one month. The number of issued
permits is based upon the carrying capacity of the land (in terms of available
forage). A grazing fee is charged for each AUM.
Conservation Easements
One approach to preserving land which is increasingly being used around the
world is known as a conservation easement. A conservation easement is a legal
agreement between a landowner and private or public agency that limits uses of the
land (in many cases in perpetuity) in order to protect its conservation values.
Once created, conservation easements can be either sold or donated. If the
donation benefits the public by permanently preserving important resources and
meets other federal tax code requirements, it can qualify as a charitable tax
deduction. The tax deductible amount is the difference between the land’s value
with or without the easement.
From an economic point of view, a conservation easement allows the bundle of
rights associated with land ownership to be treated as separable transferable units.
Separating out the development rights and allowing them to flow to the highest-
valued use (conservation in this case) may allow the value of the entire bundle of
rights the land to be increased, while simultaneously preserving the land. The value
253Innovative Market-Based Policy Remedies
of the bundle of unseparated entitlements would only be maximized if the owner of
the property happened to be the one who placed the highest value on each and
every entitlement—an unlikely possibility.
Suppose, for example, a landowner wants to continue to harvest timber from her
land, but not to convert it to housing. In the absence of a conservation easement,
the owner is likely to face property taxes on the land that are based on highest-
valued use (development) rather than its current use (timber harvest). If, however,
the owner executes an agreement with a public or private entity that can legally
administer a conservation easement on the land, property taxes will fall (since the
assessed value is now lower), and he or she will either get a substantial income tax
break (in the case of a charitable donation of the easement) or the revenue (in the
case of a sale of the easement). Meanwhile the land is protected in perpetuity from
development, and the current owner can use the land for all purposes except those
explicitly precluded by the easement agreement.
Conservation easements have much to recommend them. Since they are
voluntary transactions, no one is forced to part with the development rights;
consent is required for any transfer. This approach also allows land trusts to
preserve land from development much more cheaply than would be possible if
the only option were to purchase the land itself, rather than just specific rights
contained in the easement.
Easements, however, can also introduce problems. Land uses affected by the
conservation easement must be monitored to ensure that the terms of the
agreement continue to be upheld and, if they are not, to bear the costs of a legal
action to enforce compliance with the agreement. These legal actions are not
cheap. In addition, the perpetual nature of conservation easements could become
a problem if and when, in the far distant future, development became the
universally preferred use.
Land Trusts
What kinds of entities can take on the monitoring and enforcement burdens
associated with assuring compliance with the easement agreement, keeping in mind
that these duties may last forever? In some cases government performs this role,
but increasingly, legal entities, known as conservation land trusts, have been created
for this purpose. A conservation land trust is a nonprofit organization that, as all or
part of its mission, actively works to conserve land using a variety of means. It can
purchase land for permanent protection or accept donations or bequests of either
land or easements. Because they are organized as charitable organizations under
federal tax laws, donations of easements or land to a land trust can entitle the donor
to a charitable deduction from their income tax.
A conservation land trust is actually only one of the two common forms of land
trusts. The other, the community land trust, tends to focus on using land for housing
and community service, rather than land conservation. Community land trusts
typically acquire and hold land, but sell off any residential or commercial buildings
that are on the land. They then extend long-term leases to eligible tenants
(see Example 10.3).
254 Chapter 10 A Locationally Fixed, Multipurpose Resource: Land
The land leases, in addition to being long-term (typically 99 years) and renewable,
are also assignable to the heirs of the leaseholder. Most, if not all, community land
trusts have in place “limited equity” policies and formulas that restrict the resale price
of the housing in order to maintain its long-term affordability. These features of the
community land trust model provide homeownership opportunities to people who
might otherwise be left out of the market and protect land in such land intensive
activities as farming that would otherwise be converted.
Valuing Ecosystem Goods and Services. Since one of the reasons that preserved
land has difficulty competing with other land uses is the fact that many of the
255Innovative Market-Based Policy Remedies
Using a Community Land Trust to Protect
Farmland
A farm couple had run a community-supported agriculture program on leased land
at Indian Line Farm in western Massachusetts for two years, growing organic
vegetables to sell at the nearby Great Barrington Farmers’ Market. During those
two years they had built up a core group of shareholders who came each week to
the farm for their share of the harvest.
When the farm came up for sale, the two could not afford to purchase both the
high-priced Berkshire land and the buildings. If the farm were to stay in active
vegetable production, something had to be done.
The owner agreed to sell the land for its $155,000 appraised value. In June of
1999 the Community Land Trust in the Southern Berkshires purchased Indian Line
Farm, simultaneously selling the buildings to the couple and the conservation
restrictions to The Nature Conservancy.
As a result of the purchase, the Community Land Trust holds title to the land
and leases it to the couple on a 99-year basis, providing security of tenure. The
lease guarantees the lessees ownership of the house, barn, other outbuildings,
and farm improvements, enabling the farmers to build equity as they continue to
work the farm.
The lease not only requires that the buildings remain owner-occupied and not
become rental property or vacation homes, but it also stipulates that the land be
farmed, requiring minimum yearly commercial crop production over and above
household self-sufficiency levels. The choice of crops is left to the farmers, based
on their evaluation of local markets.
The lease also seeks to ensure that the buildings remain affordable when sold
to the next farmer. The Community Land Trust retains an option to purchase the
buildings and improvements at no more than their replacement cost and to resell
them at the same price to another farmer. This provision is designed to ensure
that the value of the land, purchased with community donations, is not included in
any sale price for the buildings and improvements.
Source
: E. F. Schumacher Society Web page at http://www.smallisbeautiful.org/publications/essay_group_
effort.htm
EXAMPLE
10.3
256 Chapter 10 A Locationally Fixed, Multipurpose Resource: Land
benefits from ecosystem goods and services involve externalities, it stands to reason
that one possible remedy involves trying to internalize those benefits. One
prominent example of this approach is ecotourism. According to the Nature
Conservancy and the World Conservation Union, ecotourism is defined as:
Environmentally responsible travel to natural areas, in order to enjoy and appreciate
nature (and accompanying cultural features, both past and present) that promotes
conservation, has a low visitor impact and provides for beneficially active socio-economic
involvement of local peoples.
The theory behind ecotourism is that it rectifies some of the bias against
preserved land by providing an income stream from that land. In essence, it shifts
out the private preservation bid rent function, thereby bringing it closer to the
social preservation bid rent function.
Not all ecotourism projects turn out to be consistent with this definition.
Increasing the number of visitors to sensitive natural areas in the absence of
appropriate oversight and control can threaten the integrity of both ecosystems and
local cultures (see Debate 10.3). Additionally, the possible instabilities in this
revenue source posed by climate fluctuations, volatile exchange rates, and political
and social upheaval can make an excessive reliance upon tourism a risky business.
Another innovative approach to recognizing and valuing ecosystem services in-
volves setting up procedures to allow these services to actually receive payment
from recipients (see Example 10.4).
Development Impact Fees
Development impact fees are charges imposed on a developer to offset the additional
public-service costs of new development. Normally applied at the time a developer
receives a building permit, the revenues are dedicated to funding the additional ser-
vices, such as water and sewer systems, roads, schools, libraries, and parks and
recreation facilities, made necessary by the presence of new residents in the devel-
opment. Since those fees are presumably passed on to those buying houses in the
development, in principle they protect against the public infrastructure problem by
internalizing the costs of extending services. Internalizing that externality restores
the incentives associated with choosing the location of residential development and
reduces one distortion that promotes inefficient leapfrogging and sprawl.
Property Tax Adjustments
Several states offer programs to discount property taxes as a means to protect a
socially desired current use, particularly when undiscounted taxes are seen as an
inefficient bias against that use. When property taxes are based upon market value,
rather than current use, the tax structure can put pressure on the owner to convert
the land. This would be particularly true if the current activities are land intensive
(farming or a preserved forest, for example) and the land could be sold for a new
residential development. This pressure can be inefficient to the extent that it
ignores all the positive externalities of the current use.
257Innovative Market-Based Policy Remedies
DEBATE
10.3
Does Ecotourism Provide a Pathway to
Sustainability?
One of the ways ecotourism can promote conservation is by providing the necessary
funds to implement an effective conservation program. Take the example of Bolivia’s
Eduardo Avaroa Reserve. This diverse landscape includes hot springs and geysers
surrounded by volcanoes and majestic mountains. Its freshwater and saltwater lakes
provide habitat for year-round flocks of pink flamingos and other birds, while nearby
23 types of mammals and almost 200 species of plants flourish in the desert-like
environment. With over 40,000 visitors per year, the park is Bolivia’s most visited.
When a conservation planning initiative determined that tourism was a major
threat to the reserve, The Nature Conservancy worked with the Bolivian National Park
System to develop a visitor fee system. The program, which reportedly generated
over half a million dollars in new funds, allows the reserve to fund efforts to mitigate
these tourism-related threats. The visitor fee approach is now being extended across
the Bolivian Park System. It is estimated that the national protected areas system
could generate more than $3 million per year in new income for conservation.
Quite a different take on ecotourism is provided by a British academic,
Rosaleen Duffy. Speaking about the former British colony of Belize—a popular
ecotourist destination in Central America—Duffy relates stories of how scuba
diving and snorkeling visitors have spoiled fragile corals and otherwise-harassed
marine wildlife.
“In their pursuit of reefs, rainforests, and ruins,” writes Duffy, “they did not
reflect on the environmental impact of the construction of hotels, the use of
airlines, the manufacture of diving equipment, the consumption of imported
goods or even something as visible as taking a motorboat out to the reef, which
polluted the water.” As a
Time
article on her book notes: “To Duffy, it seems, the
only good tourist is the one who stays home.”
Sources
: Rosaleen Duffy, A TRIP TOO FAR—ECOTOURISM, POLITICS & EXPLOITATION (Island Press,
2002); Mary Ann Bird, “Ecotourism or Egotourism.” TIME online, 2002 (accessed May 24, 2007); and The
Nature Conservancy, Ecotourism and Conservation Finance http://www.nature.org/aboutus/travel/
ecotourism/about/art14824.html (accessed May 24, 2007).
Under schemes to try to counteract this tax bias, eligible property owners seen
as conferring uncompensated external benefits on the community are offered
specified reductions in their assessed value. Programs are typically available to the
property owner through an application process run by the local municipality.
Certain criteria must be met for each program in order for a parcel of land to be
eligible and any future changes in the eligibility of the land enrolled in this tax
relief programs are subject to disqualification and a penalty
11
(see Example 10.5).
11
In the farmland program, for example, if the property no longer qualifies as a farmland tract, then the
assessed penalty would be an amount equal to the taxes that would have been paid in the last five years if it
had not been in the farmland, less the taxes that were originally assessed, plus any interest on that balance.
258 Chapter 10 A Locationally Fixed, Multipurpose Resource: Land
Summary
Land is an important environmental resource not only in its own right, but also as
a complement to many related ecosystems. By providing habitat for wildlife,
recharge areas for aquifers, and the foundation for such land-intensive activities as
forestry and agriculture, the allocation of land lies at the core of a harmonious
relationship between humans and the environment.
In principle, the market allocates land to its highest and best use. In practice,
several attributes of land and the allocation process can result in inefficient,
unsustainable, and/or unjust outcomes. Sources of these problems include poorly
specified property rights, market power, and externalities, as well as inefficient tax
Trading Water for Beehives and Barbed Wire
in Bolivia
Amboro National Park in Bolivia is one of the most biologically diverse places in
the world. The Park and surrounding areas are under intense pressure from illegal
land incursions. Migrants from the surrounding highlands, with encouragement
from local political leaders, extract timber from the park and clear areas for agricul-
ture. Lack of well-defined property rights for local communities leaves few alterna-
tive options. Due to increased timber harvesting and increased agriculture, the
Los Neros River dries up earlier than it did in the past, causing suffering among
the local communities that depend on the river for irrigation.
Asquit (2006) describes a unique solution to this property rights problem
involving payments for environmental services. Natura Bolivia, an environmental
group, helped negotiate an agreement through which downstream water users
would pay for the protection of native vegetation in the watershed. Instead of
money as compensation though, payment would be in the form of one beehive
and training in honey production per ten hectares of cloud forest protected.
In 2003, 60 beehives were provided to farmers in exchange for 600 hectares of
cloud forest conservation. In 2004, the municipal government provided another
11 hives to farmers. By 2006, 2,100 hectares had been protected.
The Los Negros scheme is slowly building a market for environmental services
and helping to define property rights in the region. In 2006, when contracts were
renewed, some farmers requested barbed wire, instead of beehives, in order to
help them strengthen their land claims. Combining a market mechanism (payment
for environmental services) with developing a local enforcement mechanism and
strengthening local property rights has proven to be a successful scheme so far.
Source:
Nigel Asquith. “Bees and Barbed Wire for Water on the Bolivian Frontier,”
PERC
24,
December 2006.
EXAMPLE
10.4
259Summary
Tax Strategies to Reduce Inefficient Land
Conversion: Maine’s Open Space Program
Recognizing that property taxes can cause inefficient conversion away from
desirable land-intensive activities, many states have adjusted their property tax
systems to reduce or eliminate these biases. One such system is the Maine’s
Open Space program.
To qualify for the program, land must be either preserved or restricted in use so
as to provide a public benefit. Benefits specifically recognized for eligibility include
public recreation, scenic resources, game management, and wildlife habitat. The
valuation (against which the tax is levied) placed on land qualifying for the open
space designation is typically accomplished by first determining how many of the
four categories of public benefits the land qualifies for. The percentage reductions
associated with each of the applicable categories are then cumulated and the fair
market value is reduced by this cumulative percentage. Those categories and their
associated percentage reductions are:
●
Ordinary open space—20 percent reduction
●
Permanently protected—30 percent reduction
●
Forever wild—20 percent reduction
●
Public access—25 percent reduction
The owner of any property satisfying all four of these benefit conditions
(through selling or donating a conservation easement, for example) could, there-
fore, receive a cumulative reduction of up to 95 percent on the property taxes
associated with the eligible land.
EXAMPLE
10.5
and user fee structures. Furthermore, by constraining choices poverty can also lead
to both inefficient and unfair allocations of land.
A number of policy instruments, some quite novel, are available to counteract
some of these socially undesirable outcomes. They include the formalization of
property rights to protect users from intrusion, ecotourism to provide a source
of revenue for preserved land, transferable development rights, wetland and
conservation banking to provide more flexibility in meeting environmental goals,
conservation easements and land trusts to both reduce the cost and increase the
likelihood that efficient preservation can take place, and changes in property
and inheritance tax structures as well as development impact fees to eliminate
inefficient incentives and promote efficient land-use decisions. While this collec-
tion of policy options can correct some of the imbalances in the land-allocation
system, most represent, at best, a movement in the right direction, not the full
restoration of efficiency or sustainability.
260 Chapter 10 A Locationally Fixed, Multipurpose Resource: Land
Discussion Questions
1. In the United States, a principal responsibility for preserving endangered
species (e.g., a pair of endangered birds that chooses to nest on private land)
and the costs of exercising that responsibility fall on private landowners,
while in much of Europe the costs are borne by taxpayers. Which do you
think is the better approach? Why?
2. Air pollution officials in California’s Central Valley have opened a new front in
the war against urban sprawl, and regulators and environmental advocates
throughout the state are watching closely. Starting in March 2006, the San
Joaquin Valley Air Pollution Control District in California plans to become the
first regulatory body in the country to impose fees on new residential and com-
mercial development specifically focused on reducing air pollution. Critics argue
that this is an ineffective way to control pollution and will mainly drive up hous-
ing prices, making housing less affordable for the poor. Is this policy a good idea?
Self-Test Exercises
1. Suppose a city finds that its express highways into the city are congested and
it is considering two remedies: (1) imposing a congestion charge on all users
of its expressways during the peak periods and (2) adding a couple of lanes to
the existing expressways. Would these be expected to have the same effects on
residential land use? Why or why not?
2. With respect to strategies used by land conservation groups to preserve land,
conservation easements seem to be expanding more rapidly than buying land
for preservation. In what respect might conservation easements be relatively
more attractive to land conservation groups than acquiring land outright?
What might be the attraction to landowners who might donate land or
conservation easements to the conservation organizations?
3. Suppose a state was trying to decide whether to fund primary and secondary
education with a property tax or an income tax. What implications might this
choice have for land use in the state?
4. Changing preferences can also affect changes in land use. In the United
States, the proportion of the population in the 65-and-older age bracket is
growing. What effects might this have on the location and the nature of the
residential housing stock?
5. In the United States, the production of ethanol fuel from corn is subsidized.
Use bid rent function analysis to suggest what effects this subsidy might be
expected to have on land use.
6. Increasingly sophisticated communications technology is allowing more
people to work at home. What effect do you think this might have on
land-use patterns, specifically the density of residential development?