Developing Defensible Wetland Mitigation Ratios

> Standard tools for "scoring" wetland creation, restoration,
> enhancement, and conservation

**PREPARED BY**

###### Dennis M. King, Ph.D. 

###### and 

###### Elizabeth W. Price, M.S.

**University of Maryland**

**Center for Environmental Science**

**P.O. Box 38, Solomons, MD 20688**

**PREPARED FOR**

**Kathi Rodrigues**

**National Oceanic and Atmospheric Administration**

**Office of Habitat Protection**

**Silver Spring, MD**

**August 15, 2006**

**Developing Defensible Wetland Mitigation Ratios**

# Table of Contents

[Table of Contents 2](#table-of-contents)

[Abstract 3](#abstract)

[1. Introduction 4](#introduction)

[1.1 Statement of the Problem 4](#statement-of-the-problem)

[1.2 Proposed Solution 5](#proposed-solution)

[1.3 Format of the Paper 5](#format-of-the-paper)

[2. Background 7](#background)

[2.1 Policy Context 7](#policy-context)

[2.2 Measuring Mitigation Success 8](#measuring-mitigation-success)

[2.3 Usefulness of Economic Approach to Mitigation Ratios
9](#usefulness-of-economic-approach-to-mitigation-ratios)

[3. Proposed Framework 11](#proposed-framework)

[3.1 Overview 11](#overview)

[3.2 MRC Version 1: Creation/Restoration as Mitigation
12](#mrc-version-1-creationrestoration-as-mitigation)

[3.3 MRC Version 2: Conservation as Mitigation
17](#mrc-version-2-conservation-as-mitigation)

[3.4 MRC Version 3: Combined Creation/Restoration & Conservation
22](#mrc-version-3-combined-creationrestoration-conservation)

[4. Recommended Application Methods
24](#recommended-application-methods)

[4.1 Selecting the Equation 24](#selecting-the-equation)

[4.2 Estimating Parameters 24](#estimating-parameters)

[4.3 Interpreting and Using Results 25](#interpreting-and-using-results)

[4.4 Conclusions and Recommendations
25](#conclusions-and-recommendations)

[References 26](#references)

[Appendix A Wetland mitigation ratio calculator
27](#appendix-a-wetland-mitigation-ratio-calculator)

[Appendix B Potential Wetland Assessment Methods
32](#appendix-b-potential-wetland-assessment-methods)

[Appendix C Effects of Discounting on Mitigation Ratios
46](#appendix-c-effects-of-discounting-on-mitigation-ratios)

[Appendix D Accounting for Differences in Wetland Location
47](#appendix-d-accounting-for-differences-in-wetland-location)

[Appendix E Self-mitigation as a Special Case
50](#appendix-e-self-mitigation-as-a-special-case)

# Abstract

NOAA is asked frequently to make recommendations regarding permit
applications for development projects that will adversely affect coastal
wetlands. Because coastal wetlands are scarce and important to fisheries
and other marine resources, and are at risk from unavoidable hazards
such as sea level rise and shifting weather patterns NOAA usually
recommends that these permits be denied. However, if worthwhile economic
development projects cannot avoid wetland impacts many of them are
permitted as long as permit seekers agree to mitigate adverse wetland
impacts. In these cases, NOAA is asked to make recommendations regarding
the quantity and quality of wetland mitigation that will offset
\"unavoidable\" wetland impacts and result in "no net loss" of wetland
functions and values.

The mitigation offered by permit seekers usually involves undertaking
wetland creation, restoration, or enhancement projects, purchasing
mitigation credits from an approved wetland mitigation bank, or paying
into a state or county managed \"in lieu fee\" wetland mitigation
program. Where these options are not available mitigation may also take
the form of wetland conservation. Mitigation costs are paid by permit
seekers and high mitigation costs can have significant adverse effects
on the economic payoff from development investments. As a result permit
seekers take whatever measures are necessary to keep mitigation costs as
low as possible, and often challenge NOAA's recommendations regarding
the quality and quantity of mitigation they must provide. Without a
sound science-based framework for justifying the amount of wetland
mitigation NOAA recommends, these recommendations will be challenged
more frequently and those challenges will succeed more often.

This paper describes a set of analytical tools that can be used to
develop wetland mitigation ratios that are technically and legally
defensible, and are based on achieving "full" replacement of lost
wetland services. The tools can be applied to all types of proposed
mitigation, and can be used to establish appropriate ratios for
individual wetland permitting decisions, or to "score" wetland
mitigation trades, or to assign "credits" to acres of wetlands at
mitigation banks or offered as part of mitigation "in lieu fee"
programs. The tools are essentially an abbreviated approach to
performing Habitat Equivalency Analysis (HEA) which is necessary in the
case of wetland mitigation because the large number of permit
applications and mitigation proposals that NOAA must consider make it
impractical to apply a full-scale HEA in each case.

Three versions of the analytical tool are developed and presented here.
The first is suitable in situations where mitigation involves wetland
creation, restoration or enhancement. The second is suitable in
situations where mitigation involves wetland conservation. The third
version is a combination of these, and is suitable when a mitigation
proposal includes both conservation and restoration.

The description of the analytical tools presented here provides
essential background for using the \"Mitigation Ratio Calculator\" (MRC)
which is an Excel spreadsheet for applying the tools developed here. An
illustration of the MRC is presented as Appendix A.

# 1. Introduction

## 1.1 Statement of the Problem

NOAA is frequently asked to make recommendations regarding permit
applications for development projects that will adversely affect coastal
wetlands. If there is an alternative development site that does not
involve wetland impacts, NOAA usually recommends that these permits be
denied because coastal wetlands are scarce and important to fisheries
and other marine resources and are at risk from unavoidable hazards such
as sea level rise and shifting weather patterns. However, undeveloped
coastal lands in most areas are so scarce that developers who apply for
wetland permits often have exhausted their options to avoid and minimize
wetland impacts, and can prove it. In these cases, their projects are
usually permitted as long as they agree to mitigate remaining wetland
impacts.

The mitigation offered by permit seekers usually involves undertaking
wetland creation, restoration, or enhancement projects, purchasing
mitigation credits from an approved wetland mitigation bank, or paying
into a state or county managed \"in lieu fee\" wetland mitigation
program. Where these options are not possible, for example in areas
where there are no degraded wetlands available to restore, mitigation
may take the form of wetland conservation whereby the permit seeker
agrees to take action to protect existing wetland areas that would
otherwise be lost, eventually, to development.

In all of these cases, NOAA is responsible for assuring that the quality
and quantity of wetland mitigation that is accepted by permitting
agencies is adequate to offset these "unavoidable" wetland impacts.
Since high mitigation costs can have significant adverse effects on the
economic payoff from development investments, permit seekers do whatever
is possible to keep mitigation costs as low as possible, and often
challenge NOAA recommendations regarding the quality and quantity of
mitigation they should provide. Without a sound science-based framework
for justifying the amount of wetland mitigation NOAA recommends, these
recommendations will be challenged more frequently and those challenges
will succeed more often.

In general, the cost of providing wetland mitigation increases with the
**quality** of mitigation that is required, which is reflected in
spending per acre; and with the **quantity** of mitigation required,
which is reflected in the number of acres of mitigation required per
acre of wetland impact. Design and construction standards for
restoration work have evolved to the point where the **quality** of
mitigation and associated costs per acre are often non-negotiable. This
has provided stronger economic incentives for permit seekers to try to
control mitigation costs by holding down the **quantity** of mitigation
required. NOAA's role is to ensure that the economic incentives that
permit seekers and mitigation providers have to lower mitigation costs
by reducing the quantity of mitigation that is required to obtain a
wetland development permit do not result in mitigation that fails to
replace lost wetland functions and services. What NOAA needs, therefore,
is a standard approach for estimating wetland mitigation ratios that can
be applied in a wide range of situations and can be expected to
withstand technical and legal challenges. Such an approach must be
capable of quantifying and comparing the **quality** of functions and
values at wetland impact and wetland mitigation sites on a per acre
basis, and then using differences in wetland **quality** to establish
the ratio of mitigation acres to impact acres that will result in \"no
net loss\" of wetland functions and values.

## 1.2 Proposed Solution

Debates over wetland values and the "equivalency" of wetland gains and
losses from mitigation are usually reduced to establishing a
"compensation ratio", a number that establishes the number of mitigation
acres required per acre of wetland impacts. The implicit
quality/quantity tradeoff inherent in the use of compensation ratios
strikes some as illogical (e.g., how many acres of created mudflats are
equivalent to an acre of mature mangrove?). However, if the compensation
ratio is developed in a way that compares gains and losses in expected
streams of wetland services, it can be used effectively to both protect
wetlands and manage wetland mitigation. For example, by using
conventional analytical methods for dealing with differences in the
timing and riskiness of wetland services provided by lost and
replacement wetlands, it is relatively easy to justify that many acres
of a young, restored wetland may be needed to provide the equivalent
"value" of an acre of mature, natural wetland. Such a comparison, in
economic terms, is not very different from comparing how many shares in
a risky start-up company (e.g., a penny stock) would be equal, in terms
of expected earnings over time, to a share in a mature, proven company
(e.g., a blue chip stock).

The approach to establishing wetland mitigation ratios that is described
here is based on the universal "net present value" approach to asset
valuation. This approach is used routinely to compare the "value" of all
kinds of manufactured assets and financial assets, and has withstood
countless technical and legal challenges for at least a century. The
approach requires users to generate parameters related to a few key
characteristics about the impacted wetland and the replacement or
mitigation wetland that determine the relative "value" of the streams of
wetland services they are expected to provide over time. Illustrations
of the Wetland Mitigation Calculator (WMC) presented in Appendix A show
that in the most typical situations using the approach requires
estimating numerical values for eight parameters associated with the
impacted and the mitigation wetlands. These values can be generated in
many different ways, but the most likely approach will involve expert
consensus.

Using the tool to defend mitigation recommendations and/or to guide
negotiations regarding wetland mitigation will, in most cases, result in
higher mitigation requirements than not using the tool. Using the tool
routinely will also provide economic incentives for developers to avoid
or at least minimize wetland impacts as much as possible in order to
avoid the need for mitigation and/or the cost of challenging NOAA
wetland mitigation recommendations that are likely to be more
defensible. Because using the tool results in relatively low quantities
of mitigation (number of acres) when the quality of mitigation (gains in
wetland services per acre) is relatively high, it also provides economic
incentives for developers to provide higher quality wetland restoration
in order to reduce the number of acres of mitigation required and
associated costs.

## 1.3 Format of the Paper

The remainder of this paper contains sections that: describe the
economic basis for establishing mitigation ratios; define some key
variables; present and illustrate the use of a "universal" wetland
mitigation ratio estimating equation; and develop three versions of the
Mitigation Ratio Calculator (MRC). The first version is suitable in the
most typical situation where the mitigation that is under consideration
involves wetland creation, restoration or enhancement; and the
analytical focus is on the gains in wetland functions and values at the
mitigation site and how they compare with the losses at the wetland
impact site. The second is suitable in situations where the conservation
of one wetland area is being considered as mitigation for the
destruction of another wetland area. The focus here is on the likelihood
that the conserved wetland, in the absence of the action being offered
as mitigation, would be degraded or destroyed and when this is likely to
take place. The third version of the MRC is the most comprehensive and
combines the first two; it is suitable when proposed mitigation involves
both wetland conservation and wetland restoration.

The main body of the paper is followed by:

-   Appendix A, a four-page print-out from an interactive spreadsheet
    program called "the five-step wetland mitigation ratio calculator,"

-   Appendix B, a list and set of references for over 50 Wetland
    Assessment Methods that can be used with "the five-step wetland
    mitigation ratio calculator,"

-   Appendix C, which describes the effects of time discounting on the
    estimation of mitigation ratios,

-   Appendix D, which describes the effects of landscape context on the
    estimation of mitigation ratios; and

-   Appendix E, a version of the MRC tool that can be used in the
    unusual case where the project causing wetland impacts actually
    provides some \"self mitigation.\" This situation can arise when,
    for example, the losses from wetland development primarily involve
    negative impacts to fish resources, but are a result of the
    construction of a fish hatchery or other facility that has positive
    impacts on fish resources.

# 2. Background

## 2.1 Policy Context

Most state and federal wetland policies involve a three stage process
known as "sequencing" which requires wetland permit seekers to: *avoid*
wetland impacts if possible, *minimize* unavoidable wetland impacts to
the maximum extent "practicable", and *mitigate* any remaining wetland
impacts. (MOA 1990) In principle this approach makes sense. The costs
and delays associated with the third stage of permitting, wetland
mitigation, provide at least some economic incentives for land
developers to avoid and minimize wetland impacts. And, as long as
wetland mitigation actually offsets unavoidable wetland losses, the
approach results in "no net loss" of wetlands without preventing
worthwhile coastal economic development that really cannot be designed
to fully avoid wetlands. So, it is often during the third stage of
sequencing that NOAA can most usefully apply economics to help prevent
losses of wetland functions, services, and values. Where opposing a
proposed wetland development project cannot succeed, in other words, the
next-best strategy for NOAA to protect wetland services is to impose
quality control on the wetland mitigation associated with the project.

### Offsetting losses

Wetland mitigation is a sound idea and there are many specific examples
of wetland impacts that have been successfully mitigated. However,
virtually every review of wetland mitigation over the past twenty years
has shown that overall wetland gains resulting from mitigation projects
have not adequately offset overall wetland losses that are resulting
from permitted wetland development. (King 1997, NRC 2001, OPPAGA 2001)
Wetland experts often attribute the problems with wetland mitigation to
our limited understanding of wetland restoration science and technology
and our inability to measure and compare the value of wetlands. The
argument here is that wetland mitigation is failing because we do not
know how to create or restore wetlands and cannot measure what is
important about them. However, most reviews of wetland mitigation
failures indicate that this is probably a secondary issue. According to
these reviews the problems with wetland mitigation fall into two
categories: 1) the number of acres of wetlands provided as mitigation is
less than the number of wetland acres impacted; and 2) where mitigation
does result in at least "one-for-one replacement" in terms of wetland
acres, differences in wetland quality between the lost and replacement
wetlands result in a net loss of wetland functions and services.

Our national wetland mitigation policy is logical on both economic and
environmental grounds, but it is apparently being implemented in a way
that is resulting in a steady loss of valuable and often irreplaceable
wetlands. In terms of wetland services, if not in terms of wetland area,
this policy, as it is currently being applied, is failing to achieve our
national goal of "no net loss." While there are limits to restoration
science and technology that will always limit mitigation success, the
evidence indicates that the real problem is not these limits, but
perverse economic incentives in wetland mitigation markets. Mitigation
providers have strong economic incentives to lower permitting costs by
providing the lowest quality mitigation that wetland regulators will
allow; and mitigation regulators do not have the tools they need to
impose quality control on mitigation or to provide countervailing
economic incentives that promote high quality mitigation.

## 

## 2.2 Measuring Mitigation Success

Normal markets are essentially self-regulating as buyers and sellers
compete with each other over price and quantity. Wetland mitigation
markets, however, are very different. Sellers of mitigation (e.g.,
mitigation contractors and, more recently, mitigation bankers) and
buyers of mitigation (e.g., real estate developers and state DOTs)
actually have more economic incentives to work together to keep
mitigation costs low than they have to compete with one another. Both
buyers and sellers of mitigation tend to be only as concerned about
mitigation quality as mitigation regulators or the rules governing
mitigation require them to be. In this market situation, the high level
of confusion and uncertainty about the relative "value" of different
types of wetlands (e.g., restored vs. natural, urban vs. rural, tidal
vs. non-tidal, vegetated vs. mud) is an advantage to those interested in
controlling permitting costs and has contributed to widespread
mitigation failure. Uncertainty about wetland values has made it nearly
impossible for regulatory agencies to use conventional economic
arguments to justify imposing quality control on wetland mitigation. It
has also made it difficult for resource agencies to argue that any acre
of wetland creation, restoration, or enhancement that is offered as
mitigation is worth any less than the acre of natural wetland it is
supposed to offset.

Worsening this problem is the fact that in most regulatory and judicial
settings the burden of proof is not on permit seekers to demonstrate
that one-for-one wetland mitigation will result in no net loss of
wetland services, but on the wetland regulators to show that proposals
that involve one-for-one mitigation will result in losses in wetland
functions and values. The "value-free" bio-physical indicators of
wetland function that are preferred by wetland scientists may be useful
for making certain wetland comparisons, but they have not been useful as
a legitimate basis for determining the adequacy of mitigation,
establishing how much money permit seekers should spend on mitigation,
or deciding how liability for mitigation failures should be assigned to
buyers or sellers.

Underlying the high failure rates associated with wetland mitigation is
another economic reality that buyers and sellers of wetland mitigation
and most regulators understand. The cost of wetland restoration projects
that have a reasonable chance of providing wetland services that are
"equivalent" to those that are lost when a natural wetland is lost can
be enormous, and are often prohibitive. None of the groups involved with
wetland mitigation want standards that are so strict that they will
close out the option of using mitigation to resolve wetland permitting
problems. As long as the standards for what constitutes acceptable
mitigation are kept vague, on the other hand, it is possible to control
mitigation costs, and claim to be achieving the national "no net loss"
wetland goal without anticipating any technical or legal challenges.

In summary, the root source of the problem with our national wetland
mitigation policy is that the rules governing mitigation trading have
evolved primarily to keep the cost of mitigation affordable and to make
our national wetland policy appear to be successful. Tools that help
insure that wetland gains from mitigation actually offset wetland losses
are not available, and are not popular with mitigation traders or with
many wetland regulators. Despite protests to the contrary, the powerful
interests involved in wetland mitigation prefer using ad hoc (political)
negotiations over what constitutes acceptable mitigation to strict
(accounting-based) trading rules. If trade regulators had the political
support and technical tools to negotiate effectively, this would be an
acceptable situation, but they do not. This is why formula-based
mitigation trading rules like the one developed later in this paper are
so important.

## 2.3 Usefulness of Economic Approach to Mitigation Ratios

Differences in a wetland's condition and location can result in
significant differences in the functions, services, and values it
provides; an immature wetland also provides fewer ecosystem services
than an older mature wetland. To account for these differences in
wetland quality, most wetland regulatory institutions use mitigation
ratios to adjust the number of acres gained and lost as a result of
mitigation trades. This ratio is calculated as the number of acres of
created, restored or enhanced wetlands required as mitigation for each
acre of natural wetland being impacted.

From an economic perspective these ratios reflect a type of
quantity-quality tradeoff. Where two assets involved in a trade are of
equal value, whether they are wetlands or financial instruments, they
can be fairly traded on a one-for-one basis. Where the two assets are
not of equal value, some type of quality/quantity adjustment is
typically used to even out the trade. In principle, the mitigation ratio
is intended to balance gains and losses because the wetland functions
and services associated with an acre of created or restored wetland are
usually expected to be less than those associated with a natural
(impacted) wetland. Of course, in cases where the impacted wetland is
already severely degraded or is in an inferior location, it is
reasonable to expect that the appropriate compensation ratio could be
less than one-for-one.

In general, the mitigation ratio is supposed to be an aggregate index
that allows the quantity of wetlands gained and lost to be adjusted to
account for differences in wetland quality that result in differences in
the streams of ecosystem services they are expected to provide over
time.

### The Use of Mitigation Ratios

A national review of 68 wetland mitigation banks (Brown and Lant, 1999)
determined that the mean mitigation ratio used to score wetland
mitigation trades in the U.S. was 1.36:1, based on the number of trades,
and 1.41:1 when trades were weighted by wetland area. That is roughly
1.4 acres of created or restored wetland for each acre of natural
wetland destroyed. The review also showed that "the majority of wetland
mitigation banks use a 1:1 ratio, accounting for 73% of all the
acreage."

One-to-one is a surprisingly low "typical" compensation ratio,
especially considering that the sample of mitigation projects used in
the study had the following characteristics: creation (25%), restoration
(49%), enhancement (15%), preservation (12%)[^1]. Wetland restoration
projects are inherently risky, and it takes time for even successful
wetland restoration projects to achieve full functional capacity. Also,
providers of mitigation are not expected to receive "credit" for wetland
functions that exist at the mitigation site prior to mitigation. If
these factors were considered, one would expect to almost never
encounter a mitigation ratio of 1:1. In fact, using an economic approach
to establish mitigation ratios based on asset values, such as the one
described and illustrated below, a ratio of 1:1 can only result in "no
net loss" of wetland function and value in the unlikely event that each
acre of proposed mitigation provides full, immediate, and riskless
replacement of all wetland services provided by each acre of impacted
wetland.

One reason that prevailing compensation ratios are inconsistent with
asset-based trading is that wetland scientists and environmental
protection advocates have generally viewed all wetlands as valuable, and
have strongly resisted attempts to classify one wetland as being any
more or less valuable than another. While this position may have
prevented "low-valued" wetlands from being "cherry picked" for
development, it has also backfired by providing no technical basis for
distinguishing between the "value" of wetlands for purposes of managing
mitigation. The result has been that compensation ratios used to guide
wetland mitigation trades have been based, in most regulatory settings,
on political negotiations and ad hoc criteria, rather than sound science
or asset based economic tools.

In some cases political negotiations have resulted in official
mitigation ratio tables that are used routinely by regulators and
specify ratios for specific types of mitigation (e.g., 1.2:1 for
restoration projects, 2:1 for enhancement projects). In these cases,
reliance on fixed compensation ratios rather than ad hoc negotiations
seems to impart an element of fairness and predictability to the setting
of compensations ratios. It is also convenient for regulators and permit
seekers. However, a system that establishes fixed mitigation ratios
based on ad hoc negotiations also gives lawyers and regulators a great
deal of discretion in establishing the terms of mitigation trades,
including who bears the risks of failure. Permit seekers and mitigation
providers who constantly strive to keep compensation ratios and
associated mitigation costs low do so, at least in part, by managing the
expectations of regulators and political leaders concerning what are
viewed as "excessive" mitigation costs. As quality standards for wetland
restoration work become more standard, costs per acre become less
negotiable. Keeping mitigation costs low, therefore, requires low
mitigation ratios which can be achieved more easily through ad hoc
negotiations than strict "asset-based" decision rules.

### Elements of Mitigation Ratios

To account for differences in the ecosystem services provided per acre
by impacted and replacement wetlands, a mitigation ratio should take
account of five factors:

1.  The *existing level* of wetland function at the site prior to the
    mitigation;

2.  The *resulting level* of wetland function expected at the mitigation
    site after the project is fully successful;

3.  The *length of time* before the mitigation is expected to be fully
    successful;

4.  The *risk* that the mitigation project may not succeed; and

5.  Differences in the location of the lost wetland and the mitigation
    wetland that affect the services and values they have the capacity
    and opportunity to generate.

# 3. Proposed Framework

## 3.1 Overview

This section illustrates the proposed method by defining the necessary
conditions for one-to-one mitigation to provide adequate compensation
for lost wetland services, and then incrementally considering how the
five factors listed above should be considered to establish compensation
ratios that will provide "full" mitigation under more realistic
assumptions.

For the sake of illustration, consider the depiction of a wetland
mitigation project shown in Figure 1. The project is characterized using
three parameters, A, B and C, where: A represents the level of wetland
services at the mitigation site prior to mitigation expressed as a
percent of the level of wetland services at the wetland impact site; B
represents the maximum level of wetland services with mitigation
expressed in the same way; and C is the number of years expected for
wetland services to increase from A to B.

Under the situation described above, the box outlined in Figure 1
represents the 100% loss of annual wetland services per acre of wetland
over T years at the wetland impact site, and the shaded area represents
the amount of offsetting annual wetland services provided per acre by
the mitigation project over T years. The white area represents the lost
wetland services that are not mitigated with one-to-one mitigation
because it existed at the site prior to the mitigation project (the area
below A) or will not be attained after the mitigation (the area above
B). The ratio of the white area to the boxed area, therefore, is the
percent loss in wetland services with one-for-one mitigation.

Now consider Figure 2, which depicts the conditions under which a
mitigation ratio of 1:1 would provide no net loss in wetland services.
If we ignore the potential risks of mitigation project failure,
achieving no net loss of wetland services with acre-for-acre mitigation
would require that three conditions be met.

1.  In the absence of the mitigation activity, the wetland services
    provided at the mitigation site are negligible (A ≈ 0).

2.  With mitigation, each acre of mitigation produces wetland services
    that fully replace those associated with an acre of wetland loss at
    the wetland impact site (B = 100% or more); and

3.  The mitigation site generates these full replacement wetland
    services instantly as soon as it is constructed (C = 0);

    ![](media/image2.wmf){width="5.841666666666667in"
    height="2.520138888888889in"}

Obviously, the scenario depicted in Figure 2 is highly unlikely which
calls into question the widespread use of 1:1 mitigation ratios to score
wetland mitigation bank trades. More typical scenarios based on more
realistic values of A, B, and C and a few other parameters are described
below.

## 3.2 MRC Version 1: Creation/Restoration as Mitigation

In typical mitigation situations that involve wetland restoration rather
than wetland creation, there is already some level of wetland function
at the mitigation site (A\>0); the restored wetland cannot reach maximum
function immediately (C\>0), and the function of the mitigation wetland
may never equal that of the impacted wetland (B\< 100%).

Figures 3, 4 and 5 incrementally add factors that should be reflected in
mitigation ratios and show how the shaded area, depicting the amount of
mitigation, changes. Figure 3 shows that not giving "credit" for
existing wetland function at the mitigation site (area below A)
increases the mitigation ratio. Figure 4 shows that if the mitigation
project does not achieve full function immediately (C\>0) the mitigation
ratio is even higher. Figure 5 shows that if the stream of wetland
services from the mitigation wetland after mitigation is less than that
of the impacted wetland the appropriate mitigation ratio is still
higher.

![](media/image3.wmf){width="5.996527777777778in"
height="2.515277777777778in"}

### The A, B, C Framework

The framework outlined in section 3.1 above is relatively simple to
apply. Since the shaded area depicts the value provided by an acre of
mitigation and the entire rectangle from T~0~ to T~max~ depicts the
values lost with each acre of the lost wetland, dividing the shaded area
by the total area gives the percentage of wetland value compensated with
1:1 mitigation. The inverse of this percentage gives an estimate of the
"appropriate" compensation ratio. A 50% loss on an acre-for-acre basis
requires a mitigation ratio of 2, compensating 66.6% of wetland value
requires a mitigation ratio of 1.5, compensating only 33.3% of wetland
value requires a mitigation ratio of 3, and so on.

The percentage loss in wetland value with acre-for-acre mitigation
depends directly on the values of A, B, and C. The mitigation ratio, or
the number of acres of mitigation required to generate no net loss in
the stream of wetland services gained and lost over time, is also based
on A, B, and C.

### Other Important Factors to Consider

The simple A, B, C framework misses a few important considerations;
namely the timing, risk, and landscape context of the mitigation. A more
complete version requires adding parameters to account for these three
additional considerations, which can be defined as follows:

1.  *risk* -- that a wetland creation or restoration project will not
    perform as well as expected. Figure 6 illustrates the effect of
    considering risk in calculating the mitigation ratio.

```{=html}
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```
6.  *landscape context*[^2] -- to account for differences in landscape
    context of impacted and mitigation wetlands. Figure 7 demonstrates
    that enhanced or less-ideal landscape conditions can alter the
    mitigation ratio in either direction.

7.  *advanced or delayed compensation --* the possibility that a
    mitigation project may be completed and begin providing replacement
    wetland value either before or after the loss of the original
    wetland;

![](media/image4.wmf){width="5.997222222222222in" height="2.1875in"}

### Equation Parameters

The introduction of a few new parameters that consider time, risk that
the mitigation will fail, and landscape context into the simple A, B, C
framework completes the picture. When these factors are all included in
a compensation ratio formula it begins to look like a relatively
standard version of the universally used "net present value" formula,
which is used to evaluate all types of investments. The problem of
monetary valuation is avoided because we are comparing the streams of
services from impacted and replacement wetlands in relative terms.

Using the MRC formula, which is presented below, requires the user to
estimate or settle upon acceptable values of the following parameters:

*A:* The level of wetland function provided per acre at the mitigation
site prior to the mitigation project, expressed as a percentage of the
level of function per acre at the wetland impact site;

*B:* The maximum level of wetland function each acre of mitigation is
expected to attain, if it is successful, expressed as a percentage of
the per acre level of function at the wetland impact site;

*C:* The number of years after construction that the mitigation project
is expected to achieve maximum function;

*D:* The number of years before destruction of the impacted wetland that
the mitigation project begins to generate mitigation values (negative
values of D represent delayed compensation);

*E:* The percent likelihood that the mitigation project will fail and
provide none of the anticipated benefits (with mitigation failure,
wetland values at the mitigation site return to level A);

*L:* The percent difference in expected wetland values based on
differences in landscape context of the mitigation site when compared
with the impacted wetland (positive values represent more favorable
landscape context at mitigation site);

*r* : The discount rate used for comparing gains and losses that accrue
at different times in terms of their present value (tables provide
estimates based on discount rates of 0%, 5%, and 10%);

*Tmax*: The time horizon used in the analysis (Using the OMB recommended
discount rate of r=7%, the impact of gains and losses in wetland values
beyond about Tmax = 75 years has a negligible effect on the resulting
mitigation ratio)

Under the circumstances described above the discrete time equation that
can be used to solve for the appropriate mitigation ratio is as follows:

$$\text{MR} = \frac{\sum_{t = 0}^{T_{\text{max}}}(1 + r)^{- t}}{\left( B(1 - E)(1 + L) - A \right)\left\lbrack \sum_{t = - D}^{C - D}{\frac{(t + D)}{C(1 + r)^{t}} + \sum_{C - D + 1}^{T_{\text{max}}}(1 + r)^{- t}} \right\rbrack}$$

### Examples

Table 1 shows some calculated compensation ratios based on the
compensation formula in the MRC. The first three cases show the effects
on the resulting compensation ratio of delaying or advancing the
compensatory mitigation project. The next three examples illustrate how
preexisting wetland values at the mitigation site or compensation for
the loss of a degraded wetland affect compensation requirements. The
third set of examples demonstrates the effect of landscape context on
the mitigation ratio. The final set of examples illustrates how the
assessment of failure risk can affect the estimated compensation ratio.

The basic characteristics of the mitigation project itself, as reflected
in the values of A, B, and C are obviously important in determining the
appropriate compensation ratio. The last example shown in Table 1,
however, illustrates why advanced mitigation should provide a
significant advantage over concurrent mitigation in terms of
compensation requirements. Since many mitigation failures can 1) be
detected, and 2) be corrected within a year or so of project
construction, advanced compensation allows mitigation providers to
manage many controllable risk factors and significantly lower the risk
of failure. At the same time, advanced mitigation provides replacement
wetland values sooner than concurrent mitigation, so there is less
discounting of replacement values and more resulting mitigation provided
per acre. Combined, these factors result in a substantial advantage for
advanced mitigation as compared to concurrent or delayed mitigation in
terms of the number of mitigation acres required. Lower compensation
ratios for advanced mitigation mean lower mitigation costs, which in
many cases could more than offset the cost of committing funds for
advanced mitigation or investing in a mitigation bank.

**Table 1. Calculated compensation ratios for a variety of hypothetical
compen­sation scenarios, based on a time horizon (T*max***) of 50 years.

  -------------------------- ---------------- ------- ------- ------- ------- ------- -- ---------------- -------- ---------
                                                                                         **COMPENSATION            
                                                                                         RATIOS**                  

                             **Parameters**                                              **Discount                
                                                                                         Rate**                    

                             **A**            **B**   **C**   **D**   **E**   **L**      **0%**           **5%**   **10%**

  Concurrent Creation        0                0.7     10      0       0       0          1.6              1.9      2.3

  Advanced Creation          0                0.7     10      5       0       0          1.4              1.5      1.4

  Delayed Creation           0                0.7     10      -5      0       0          1.8              2.5      3.8

                                                                                                                   

  Concurrent Restoration     0.1              0.7     10      0       0       0          1.9              2.2      2.7

  Original Wetland Degraded  0                1.4     10      0       0       0          0.8              1.0      1.2

  Concurrent Enhancement     0.4              0.7     10      0       0.2     0          7.0              8.3      10.2

                                                                                                                   

  Concurrent, Enhanced       0                0.7     10      0       0       0.3        1.2              1.5      1.8
  Landscape                                                                                                        

  Concurrent, Less ideal     0                0.7     10      0       0       -0.3       2.3              2.7      3.3
  Landscape                                                                                                        

                                                                                                                   

  Difficult Creation         0                0.7     10      0       0.5     0          3.2              3.8      4.7

  Very Difficult Creation    0                0.7     10      0       0.75    0          6.4              7.6      9.4

  Same, Advanced & Risk      0                0.7     10      5       0.2     0          1.8              1.8      1.8
  Adjusted                                                                                                         
  -------------------------- ---------------- ------- ------- ------- ------- ------- -- ---------------- -------- ---------

## 3.3 MRC Version 2: Conservation as Mitigation

In conventional applications of the MRC, mitigation credit is based on
the difference between the wetland function at the mitigation site prior
to the mitigation (A) and the wetland function at the mitigation site
after mitigation (B). In the situation depicted in Figure 8, the value
of A is 0.3 and the value of B is 0.8, so the \"environmental lift\"
from the project is 0.5 per acre (B-A = 0.8-0.3 = 0.5). On an acre-acre
basis, this mitigation project would get credit for providing half the
function lost at the impact site, so the appropriate mitigation ratio
would be 2:1.

If we consider instead the case of preservation, where a conservation
easement at the same wetland described in Figure 8 is offered as
mitigation, there is no "environmental lift" to measure. That is, since
no restoration is being undertaken the value of B is equivalent to the
value of A (0.3). Note in the initial MRC equation that the situation
where B=A, (conservation, but no restoration) would require dividing by
a zero.

However, it is possible to use the MRC to estimate mitigation credit for
preservation as long as there is at least some risk that the wetland
would be developed in the absence of the conservation easement. For
example, if the annual risk of development is 5%, then at the end of
year 1, in the absence of preservation, there would be a 95% chance that
the wetland would remain undeveloped. At the end of year two, the
probability that the wetland would still be undeveloped would be 90.25%
(95% \* 95%), and so on. In the absence of the conservation easement the
"expected value" of the wetland function from the site declines over
time as the cumulative probability of the site being developed
increases. Preventing this loss is the basis for mitigation credits
which can be measured by comparing differences between the risk-adjusted
expected value of wetland function at the site with and without
development risk.

**Figure 8.**

![](media/image5.wmf){width="6.5in" height="3.9680555555555554in"}

**Figure 9.**

![](media/image6.wmf){width="6.995138888888889in"
height="3.446527777777778in"}

In Figure 9, the area in yellow represents this difference, and can be
thought of as the "gain" (actually expected loss of wetland function
avoided) associated with the conservation easement. In Figure 9, the
wetland site is shown to have a 5% annual risk of development. In this
case, therefore, the appropriate mitigation ratio, using a 20 year time
horizon would be 2.7:1. If the annual risk of development were 10% or
50% the appropriate mitigation ratio would be 1.7:1 or 1.1:1,
respectively.

As in the case with the initial MRC equation additional variables can be
factored into the "pure preservation" version of the MRC equation to
account for differences in site quality and landscape quality at the
impact and mitigation (preservation) site. Using the level of function
(A) and the landscape context (L) of the mitigation site in the
equation, for example, the appropriate mitigation ratio for pure
conservation would be as follows:

$\text{MR} = \frac{\sum_{t = 0}^{T_{\text{max}}}1}{\left\lbrack \sum_{t = 0}^{T_{\text{max}}}\frac{\left( 1 - (1 - k)^{t} \right)}{(1 + r)^{t}} \right\rbrack\left( A(1 + L) \right)}$

Where:

> k = The percent likelihood that the mitigation site, in the absence of
> the proposed conservation action (e.g., purchase or easement) would be
> developed in any future year. This is treated as a cumulative
> distribution function in the equation;

A = existing function at mitigation site as percent of function at
impact site

L = landscape context relative to impact site

r = discount rate

### Sensitivity Testing 

The preservation term is very sensitive to the value of k and to the
time horizon used in the analysis. Consider the following values:

  --------------------------------------- -------------------------------
  **Variable**                            **Value**

  A                                       100%

  B                                       100%

  C                                       0

  D                                       0

  E                                       0

  L                                       0

  k                                       n%

  r                                       5%

  T~max~                                  N
  --------------------------------------- -------------------------------

Given different values of k and T~max~, the calculator generates the
following mitigation ratios:

  -------------- -------------- -------------- -------------- --------------
  **T~max~ =                                   **T~max~ =     
  20**                                         50**           

  **k**          **MR**                        **k**          **MR**

  1%             12.8 : 1                      1%             7.3 : 1

  2%             6.8: 1                        2%             4.1 : 1

  5%             3.2 : 1                       5%             2.2 : 1

  10%            2.0 : 1                       10%            1.6 : 1

  25%            1.4 : 1                       25%            1.2 : 1

  50%            1.2 : 1                       50%            1.1 : 1
  -------------- -------------- -------------- -------------- --------------

Figure 10 shows how the value of k affects the probability that the site
will remain undeveloped (i.e., survive) over time. The x,y value of any
point along the curve is the probability that the mitigation site will
be providing habitat function at that time in absence of preservation.

**Figure 10.**

![](media/image7.wmf){width="6.896527777777778in"
height="4.815277777777778in"}

If the value of k is 50%, then there is only a 50% chance that the site
would have persisted beyond year 1 without protection. Therefore, the
expected value of the wetland function at this site is 0.5, and the
owner of a conservation easement on this site (likely a permit seeker)
could expect credit for preserving 50% of the function of the site in
year 1. At the end of year 2, without protection, there is only a 25%
chance that the site would still remain undeveloped (50% \* 50%),
therefore, the permit seeker could expect credit for ensuring 75% of the
function of the site that would have otherwise been lost.

With a development risk as high as 50%, the probability that the site
would persist in the absence of preservation drops to a value very close
to 0 in just a few years. When that probability approaches 0, the
expected "gain" from the preservation (the yellow area in Figure 9
above), is close to 100%. Therefore, if the mitigation site is providing
the same level of function as the impact site (i.e., A = 100%), the
appropriate mitigation ratio is close to 1:1.

Besides being sensitive to the likelihood and timing of development in
the absence of preservation, the mitigation ratio generated by the
preservation only version of the MRC is also sensitive to the time
horizon (T~max~) selected for the analysis. From the time the
probability of survival drops to a value very close to 0 until T~max~,
the conservation is providing mitigation at a rate close to or equal to
1:1. For example, when the risk of development is 50%, the probability
of "survival" in the absence of preservation drops to \<1% after year 6;
and to near 0 from year 6 until T~max~. The expected value of the
habitat function at the mitigation site during these years, therefore,
is near 0, which means that the conservation easement is effectively
providing 100% of the function of the site. When T~max~ is large,
therefore, the permit seeker accrues a great deal more credit than when
the T~max~ represents a more moderate time horizon. For example, when
the development risk is 5%, the MR is 2.7:1 when T~max~ = 20 years and
1.6:1 when T~max~ = 50 years. Because development risk over long periods
of time is not likely to be a constant, a more conservative approach
would be to use shorter time horizons when calculating credit for
preservation projects.

### Calculating k from Estimated Time of Loss of Site

Users of the revised version of the MRC might find it easier to estimate
a time at which the mitigation site is likely to be lost, rather than
the annual development risk. For example, based on development rates in
nearby areas, the user might estimate, with 95% confidence, that the
site is likely to be developed within 20 years if no preservation
activity is undertaken. In this case, the basic equation can be used to
back-calculate the value of k as follows:

$\frac{(1 - k)^{T_{d}}}{(1 + r)^{T_{d}}} = (1 - m)$

Where:

k = likelihood that the mitigation site will be developed in any given
year

T~d~ = the estimated time by which the site will be lost without
preservation

m = the confidence the user has in the estimated T~d~

1-m = the probability the site will "survive" at T~d~

r = discount rate

Solving this equation for k gives us the following:

$k = 1 - \left( (1 - m)^{\frac{1}{T_{d}}} \ast (1 + r) \right)$

The following table shows different calculated values of k, given the
confidence level (m) and estimated T~d~ shown, using a 5% discount rate.
For example, if the user believes, with 95% confidence, that the site
will be lost in 10 years, the appropriate value of k to plug into the
MRC would be 22%. Assuming k is 22% and a T~max~ of 20 years, the
appropriate mitigation ratio for preserving this site would be 1.4:1.

  ---------- -------------- ------------ ------------ ------------ ------------
  **Value of                                                       
  k with 5%                                                        
  discount                                                         
  rate**                                                           

  ** **      **Confidence                                          
             level (m)**                                           

  **T~d~**   **95%**        **90%**      **85%**      **80%**      **75%**

  **5**      42.3%          33.8%        28.2%        23.9%        20.4%

  **10**     22.2%          16.6%        13.1%        10.6%        8.6%

  **15**     14.0%          9.9%         7.5%         5.7%         4.3%

  **20**     9.6%           6.4%         4.5%         3.1%         2.0%

  **25**     6.9%           4.2%         2.7%         1.6%         0.7%

  **30**     5.0%           2.8%         1.4%         0.5%         NA
  ---------- -------------- ------------ ------------ ------------ ------------

## 3.4 MRC Version 3: Combined Creation/Restoration & Conservation

In some cases, preservation may be combined with restoration activity at
a site to provide a basis for considering mitigation using both
criteria. A situation may exist, for example, where preservation and
restoration of a stream are accomplished through land acquisition and
dam removal. In this case, the pure preservation equation described
above can simply be added to the standard MRC equation as follows:

![](media/image8.wmf){width="5.693700787401575in" height="1.0in"}

This equation is just the original MRC equation with the preservation
term added to the denominator. In essence, the numerator in the equation
measures the wetland services that are lost on a per acre basis at the
impact site and the denominator measures what is gained at the
mitigation site. If what is gained is only creation or restoration the
factor shown on the left hand side of the denominator is used. If what
is gained is only preservation the factor shown on the right-hand side
of the denominator is used. If what is gained is both restoration (or
creation) and preservation, then the equation above, which includes both
factors, is used.

As an example of this application, assume the following values for the
variables associated with the land acquisition/dam removal project
described above:

  ---------------------------------------- ------------------------------
  **Variable**                             **Value**

  A                                        50%

  B                                        75%

  C                                        0

  D                                        0

  E                                        0

  L                                        0

  k                                        5%

  r                                        5%

  T~max~                                   20
  ---------------------------------------- ------------------------------

This set of values indicates that the existing stream is providing 50%
of the function of the impacted stream, but with removal of the dam, the
function will increase to 75% of the impacted stream. Additionally, the
5% development risk will be removed when the land is acquired. Using the
equation above, at a 5% discount rate, the mitigation ratio for this
project would be 2.45:1.

# 4. Recommended Application Methods

## 4.1 Selecting the Equation

Equation 1 should be used to estimate the appropriate mitigation ratio
when the proposed mitigation involves wetland creation, restoration, or
enhancement. Wetland creation, in effect, is a special case of wetland
restoration where there is no level of wetland function prior to the
restoration project (A=0). A fully degraded wetland being considered for
restoration may also register an initial, pre-restoration value of A=0.
Differences in the appropriate mitigation ratio in each case will depend
on the values assigned to other parameters, such as B, the maximum level
of wetland function expected with the project and E, the likelihood that
the project will fail.

Equation 2 should be used to estimate the appropriate mitigation ratio
when the proposed mitigation involves wetland conservation
(preservation) only. The emphasis here is on the likelihood and expected
timing of the loss or degradation of the mitigation wetland in the
absence of the proposed purchase or easement.

Equation 5 should be used to estimate the appropriate mitigation ratio
when the proposed mitigation involves both conservation (preservation)
of wetland areas and wetland creation, restoration or enhancement. This
equation is a combination of Equations 1 and 2, and it reduces the acres
of wetland conservation required to provide adequate mitigation as the
quantity or quality of proposed wetland creation or restoration
increases, and vice versa.

The equation presented in Appendix E should be used in the unusual
situation referred to as "self-mitigation" where the development project
itself provides partial mitigation for the wetland impact it is causing.
This situation arose, for example, in a case in Alaska where a fish
hatchery intended to enhance natural fish stocks and generate
fishery-related benefits was proposed for construction on a wetland area
that was important primarily because of its fishery related benefits.
Except in the rare situation where "self-mitigation" fully offsets
wetland impact losses, this equation will need to be used in combination
with Equation 1, 2, or 5.

## 4.2 Estimating Parameters

The most direct way to estimate the relative value of wetlands is to
start with conventional wetland functional capacity indices, such as
those developed through Hydrogeomorphic Method (HGM) or Wetlands Rapid
Assessment Process (WRAP), and extend them to consider the effects of
landscape context on expected level of function (e.g., rate of
functional capacity utilization) and related services, values, and risk.
The recommended method is based on three sets of wetland site capacity
adjustment indices, including:

1.  *Functional Capacity Utilization Index* -- Indicators of landscape
    conditions that determine how much of the functional capacity of the
    site is likely to be used.

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8.  *Service Value Index* -- Indicators of landscape conditions that
    limit or enhance the level of services expected per unit of function
    (output per unit capacity) or the expected value per unit service
    (value per unit output).

9.  *Service Risk Index* -- Indicators of the likelihood of future
    disruptions in service flows that affect the value of expected
    wetland services. These are related to the exposure and
    vulnerability of the site or other critical landscape features to
    such threats as floods, droughts, fire, disease, infestations, water
    diversion, pollution, and industrial development.

## 4.3 Interpreting and Using Results

The mitigation ratios estimated using the standardized formula developed
in this paper can be interpreted to result in "no net loss" of the
expected stream of risk-adjusted wetland services. They are based on the
universal "net present value" formula that is applied routinely to
compare all types of income-generating and benefit producing assets.

This paper recommends the use of this standardized formula for
developing defensible wetland mitigation ratios that should withstand
technical and legal challenges. As a practical matter, however, it can
be presumed that for the foreseeable future wetland mitigation ratios in
the U.S. will continue to be based on some combination of ad hoc
negotiations or on the basis of pre-negotiated regulator-approved "look
up" tables. The most valuable application of the approach developed here
in the near-term, therefore, may be to influence the mitigation ratios
that are developed in these ways and to challenge them when they are
clearly inadequate.

## 4.4 Conclusions and Recommendations

The framework and formula described above and in the accompanying
spreadsheet program are based on generally accepted economic concepts.
However, the parameters used to estimate compensation ratios related to
any particular project (e.g., A, B, and C) are based on wetland science,
or at least the judgment of wetland scientists. It is useful to note
that employing the formula allows mitigation providers the option of
providing more mitigation by investing at either the intensive or
extensive margin. For example, if the mitigation provider spends more
per acre to increase the quality per acre of mitigation provided (e.g.,
higher B, lower C, or both), the mitigation ratio that reflects the
number of acres required will decline. If the mitigation provider spends
more on land (acres) and less on restoration efforts (\$ per acre), the
mitigation value per unit area will be lower and the required mitigation
ratio (number of acres) will increase.

The proposed formula can serve several purposes. It can help prevent
wetland mitigation trades that result in losses of wetland values and
impose risks on the general public. It can make mitigation requirements
more predictable and consistent for permit seekers. And, it can help
mitigation providers understand the payoff from investing in wetland
mitigation credits at the intensive margin (more \$ per acre) or at the
extensive margin (more acres). Finally, the formula also allows the
level of wetland mitigation to be based on science and economics, not
politics, and generates compensation ratios that will withstand most
technical and legal challenges.

# References

Bartoldus, C.C. 1999.  A comprehensive review of wetland assessment
procedures: A guide for wetland practitioners.  Environmental Concern,
Inc., St. Michaels, MD.   196 pp.

Brown, P.H. and C.L. Lant. 1999. The effect of mitigation banking on the
achievement of no-net-loss. Environmental Management 23: 333-345.

Environmental Law Institute. 2002. Banks and Fees: The Status of
Off-Site Wetland Mitigation in the United States. Environmental Law
Institute.

King, D.M. and C.B. Bohlen. 1994. Compensation ratios for wetland
mitigation: Guidelines and tables for applying the methodology. **In**:
Wetland Mitigation: A Framework for Determining Compensation Ratios. A
report prepared for the US EPA, Office of Policy Analysis, Washington,
DC.

King, D.M. 1997. Valuing wetlands for watershed planning. National
Wetlands Newsletter 19(3): 5-10.

King, D.M. and H.W. Herbert. 1997. The Fungibility of Wetlands. National
Wetlands Newsletter. 19)5):10-13.

Memorandum of Agreement Between the Environmental Protection Agency and
the Department of the Army Concerning the Determination of Mitigation
Under the Clean Water Act 404(b)(1) Guidelines, 55 FR 9210-01, 1990.

National Research Council. 2001. Compensating for Wetland Losses Under
the Clean Water Act. National Academy Press, Washington D.C.

Office of Program Policy Analysis and Government Accountability. 2001.
Cumulative Impact Consideration in Environmental Resource Permitting.
Department of Environmental Protection and Florida's Water Management
Districts Report No. 01-40.

Robb, J.T. 2002. Assessing wetland compensatory mitigation sites to aid
in establishing mitigation ratios. Wetlands 22: 435-440.

Ruhl, J.B. and J. Gregg. 2001. Integrating Ecosystem Services into
Environmental Law: A Case Study of Wetlands Mitigation Banking. Stanford
Environmental Law Journal 20:2: 365-392.

# Appendix A Wetland mitigation ratio calculator

![](media/image9.wmf){width="7.73125in" height="4.504861111111111in"}

![](media/image10.wmf){width="8.997222222222222in"
height="5.561805555555556in"}

![](media/image11.wmf){width="6.9527777777777775in"
height="6.499305555555556in"}

![](media/image12.wmf){width="6.989583333333333in"
height="7.741666666666666in"}

> ![](media/image13.wmf){width="8.995138888888889in"
> height="6.6722222222222225in"}

# Appendix B Potential Wetland Assessment Methods

  -------------------------------------------------------------------------
       Name                          Acronym          Reference
  ---- ----------------------------- ---------------- ---------------------
  1    Alberta Lentic                Alberta Lentic   Alberta Riparian
                                                      Habitat Management
                                                      Society 2003a, b,
                                                      2004a, b

  2    Alberta Lotic                 Alberta Lotic    Alberta Riparian
                                                      Habitat Management
                                                      Society 2003c, 2004c,
                                                      d

  3    Amphibian IBI                 Amphibian IBI    Micacchion 2002

  4    Avian Richness Evaluation     AREM             Adamus 1993a, b
       Method                                         

  5    Bay Area Watershed Science    WSA              Watershed Science
       Approach                                       Team 1998

  6    Bird Community Index          BCI              O'Connell et al.
                                                      1998, 2000

  7    California Rapid Assessment   CRAM             Collins et al. 2004
       Method                                         

  8    Connecticut Method            Connecticut      Ammann et al. 1986
                                     Method           

  9    Coral Reef Assessment and     CRAMP            Jokiel and
       Monitoring Program                             Friedlander 2004

  10   Delaware Method               DE Method        Jacobs 2003

  11   Eeelgrass                     Eelgrass         Short et al. 2000

  12   Evaluation for Planned        EPW              Bartoldus et al. 1994
       Wetlands                                       

  13   Floristic Quality Assessment  FQAI             Andreas et al. 2004,
       Index                                          Bernthal 2003, Herman
                                                      et al. 2001, Lopez
                                                      and Fennessy 2002,
                                                      Mushet et al. 2002,
                                                      NGPFQP 2001

  14   Habitat Assessment Technique  HAT              Cable et al. 1989

  15   Habitat Evaluation Procedure  HEP              USFWS 1980, 1981

  16   Hollands-Magee Method         Hollands-Magee   Hollands and Magee
                                     Method           1985

  17   Hydrogeomorphic Approach      HGM Approach     NRCS et al. 1995,
                                                      Smith 1993, Smith et
                                                      al. 1995, Whited 1997

                                     HGM Approach -   AR Multi-Agency
                                     AR               Wetland Planning Team
                                                      2001

                                     HGM Approach --  Rheinhardt et al.
                                     Deciduous        1995, Rheinhardt and
                                     Wetland Flats    Brinson 1997

                                     HGM Approach --  Adamus 2004
                                     Estuarine Fringe 
                                     OR               

                                     HGM Approach --  Hall et al. 2003
                                     Guidebook AK     

                                     HGM Approach --  Wardrop et al. 1998
                                     PA               

                                     HGM Approach --  Whited et al. 2003
                                     Prairie Potholes 

                                     HGM Approach --  Brinson et al. 1995
                                     Riverine         
                                     Guidebook        

                                     HGM Approach --  Adamus 2001, Adamus
                                     Riverine         and Field 2001
                                     impounding       
                                     Willamette       
                                     Valley, OR       

                                     HGM Approach --  USACE 1995a
                                     Riverine Coastal 
                                     Plain,           
                                     Chesapeake Bay   

                                     HGM Approach --  Ainslie et al. 1999
                                     Riverine Western 
                                     KY               

                                     HGM Approach --  Powell et al. 2003
                                     Riverine/slope   
                                     AK               

                                     HGM Approach --  Shafer and Yozzo 1998
                                     Tidal Fringe     
                                     Guidebook        

  18   Index of Biotic Integrity     IBI              Karr 1981, 1987, 1990

  19   Indicator Value Assessment    IVA              Hruby 1995

  20   Larson-Golet Method           Larson-Golet     Golet 1976, Golet and
                                     Method           Davis 1982, Heeley
                                                      and Motts 1976,
                                                      Larson 1976, Wencek
                                                      1986

  21   Maryland Department of the    MDE Method       East 1995, Taylor et
       Environment Method                             al. 1997

  22   Methods for Assessing Wetland MAWF             Hruby and Granger
       Functions                                      1996, Hruby et
                                                      al.1997, 1999a, b,
                                                      2000a, b, 2004, WA
                                                      State Dept Ecology
                                                      2002

  23   Minnesota Routine Assessment  MIN RAM          MBWSR 2004
       Method                                         

  24   Montana Wetland Assessment    MT Form          Berglund 1999
       Method                                         

  25   New Hampshire Method          NH Method        Ammann and Stone 1991

  26   New Jersey Freshwater Wetland NJ Freshwater    Balzano et al. 2002
       Mitigation                    Wetland          
                                     Mitigation       

  27   North Carolina Coastal Region NC-CREWS         Sutter et al. 1999
       Evaluation of Wetland                          
       Significance                                   

  28   North Carolina Guidance for   NC Method        NCDEHNR 1995
       Rating Values of Wetlands                      

  29   Ohio Rapid Assessment Method  ORAM             Mack 2001
       for Wetlands                                   

  30   Oregon Method                 Oregon Method    Roth et al. 1993,
                                                      1996

  31   Oregon Watershed Assessment   OR Watershed     OR Watershed
       Manual                        Assessment       Enhancement Board
                                     Manual           1999

  32   Oyster                        Oyster           Coen and Luckenbach
                                                      2000

  33   Pennsylvania Habitat          PAM HEP          Palmer et al. 1985,
       Evaluation Procedure                           USFWS 1980

  34   Process for assessing proper  PFC              Clemmer 1994,
       functioning condition                          Gebhardt et al. 1990,
                                                      Leonard et al. 1992,
                                                      Lewis et al. 2003,
                                                      Myers 1989, Prichard
                                                      1993, Prichard et al.
                                                      1993, 1996, Sada et
                                                      al. 2001

  35   Process for assessing proper  PFC -- Lentic    Prichard et al.
       functioning condition                          1998b, 1999

  36   Process for assessing proper  PFC -- Lotic     Prichard et al. 1998a
       functioning condition                          

  37   Salt marsh health             Salt marsh       Pennings et al. 2002
                                     health           

  38   Savannah District SOP         Savannah         USACE Savannah
                                     District SOP     District. 2003

  39   Synoptic Approach for         Synoptic         Abbruzzese et al
       Wetlands                      Approach         1990a, b, Abbruzzese
                                                      and Leibowitz 1997,
                                                      Hyman and Leibowitz
                                                      2000, Leibowitz et
                                                      al. 1992, McAllister
                                                      et al. 2000,
                                                      Schweiger et al.
                                                      2002, Vellidis et al.
                                                      2003

  40   TNC - Integrity Assessment    TNC - Integrity  TNC 2003, 2004a, b
       and Ecological Models         Assessment       

  41   TNRCC Stream Habitat          TNRCC Stream     TNRCC 1999
       Assessment Procedure          Habitat          
                                     Assessment       
                                     Procedure        

  42   Transport Suitability Index   TSI              Short and Davis 1999

  43   Vegetation Index of Biotic    VIBI             Mack et al. 2000
       Integrity                                      

  44   VIMS Method                   VIMS Method      Bradshaw 1991

  45   WA State Wetland Rating       WA State Wetland WA State Dept Ecology
       System (Western)              Rating System    1993

  46   Water Quality Index           WQI              Lodge et al. 1995

  47   Wetland Evaluation Technique  WET2             Adamus et al. 1987,
                                                      1991

  48   Wetland Functions and Values  Descriptive      USACE 1995b
                                     Approach         

  49   Wetland Habitat Indicators    WEThings         Whitlock et al.
       for Nongame Species                            1994a, b

  50   Wetland Habitat Indicators    WEThings - Birds Crowley et al. 1994,
       for Nongame Species                            Crowley 1997

  51   Wetland Rapid Assessment      WRAP             Miller and Gunsalus
       Methodology                                    1997

  52   Wetland Value Assessment      WVA              EWG 2002
       Methodology                                    

  53   Wildlife Habitat Appraisal    WHAP             TPWD 1991
       Procedure                                      

  54   Wisconsin Rapid Assessment    WI RAM           WDNR 2001
       Methodology                                    
  -------------------------------------------------------------------------

**BIBLIOGRAPHY OF ASSESSMENT METHODS**

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Abbruzzese, B., S. G. Leibowitz, and R. Sumner. 1990b. Application of
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Abbruzzese, B., and S.G. Leibowitz. 1997. A synoptic approach for
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Adamus, P.R., E.J. Clairain, R.D. Smith and R.E. Young. 1987. Wetland
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Adamus, P.R., L.T. Stockwell, E.J. Clairain, Jr., M.E. Morrow, L.P.
Ronzas, and R.D. Smith. 1991. Wetland evaluation technique (WET) Volume
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Adamus, P.R. 1993a. Irrigated wetlands of the Colorado plateau:
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Adamus, P.R. 1993b. User\'s manual: avian richness evaluation method
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Adamus, P.R. 2001. Guidebook for hydrogeomorphic (HGM)-based assessment
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Adamus, P.R., and D. Field. 2001. Guidebook for hydrogeomorphic
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# Appendix C Effects of Discounting on Mitigation Ratios

## 

**The Need to Compare Present Values**

Not discounting the streams of wetland services to account for time
differences implicitly assumes that replacement wetland services that
will be realized as far as 50 years in the future are equal to wetland
services lost today. In general, wetland-related benefits that accrue in
the future, like the benefits from all other natural and man-made
assets, are less valuable than those that accrue immediately. The
concept of "discounting" cannot be described here, but it is used
universally in economics to compare different streams of costs and
benefits in "present value" terms and should be applied here to compare
different streams of wetland benefits. To determine an appropriate
compensation ratio, in other words, one must compare not only the
magnitude of the values gained and lost, but also when the gains and
losses accrue. Since concurrent mitigation means losing the benefits of
a natural wetland now and having it replaced later after the
compensatory wetland is established, discounting will usually result in
higher compensation ratios than not discounting. Discount rates on the
order of 5% to 10% per year are typical for most applications.

The effect of discounting on the stream of wetland benefits is
illustrated in Figure B1. This curve represents a discount rate of 5%
applied over 50 years. While the current value of the stream of benefits
is 1.0, the present value of the stream of benefits 50 years from now is
0.09. The formula $\frac{1}{(1 + r)^{t}}$ is used to calculate present
value in year *t*, where *r* is the discount rate. The mitigation ratios
in the following sections all reflect the application of a 5% discount
rate.

![](media/image14.wmf)

Figure C1. Effect of discounting present value over 50 years.

# Appendix D Accounting for Differences in Wetland Location

Wetland location is included in the equation as a scalar of relative
change in landscape context of the mitigation site with respect to the
impacted wetland. Figure C1 illustrates the basis for considering
landscape factors in the assessment of wetland mitigation trades. The
wetland at Site A and the wetland at Site B in Figure C1 are shown to be
identical in terms of size and shape. For sake of illustration assume
that they are also the same type of wetland and are identical in terms
of bio-physical characteristics (e.g., soil, vegetation, hydrology).
Consider a situation where Site B is a created or restored wetland that
is offered as mitigation for the loss of Site A. Since we are assuming
that the two sites are identical we are, for now, ignoring the temporal
lag and risks associated with mitigation projects and focusing only on
landscape factors that might influence the relative value of the two
wetlands.

The factors listed above illustrate that the value of Site A, all other
things equal, is greater than the value of Site B. They also provide
evidence for a rebuttable presumption that a mitigation ratio used to
"score" a trade that involves losing wetland area at Site A and gaining
wetland area at Site B should be greater than 1:1. However, the existing
landscape context of the two sites provides only part of the criteria
for taking account of location. For sake of illustration, for example,
consider additional evidence that Site B is located where it is more
exposed to infestation (or re-infestation) from invasive species, or
where it is more vulnerable to disruptions from planned water diversions
or anticipated flooding. Consider also the possibility that a new
regional 10-year plan designates the area around Site A as
"environmentally sensitive---no-growth" and the area around Site B as
"industrial---quick permitting." Any of these conditions would imply
that Site A, already more valuable than Site B under current landscape
conditions, is likely to be even more valuable in the future. The
expected (risk-adjusted) value of each future stream of wetland services
from Site A is greater than the expected value of an identical stream of
services from Site B because the services from Site B are more likely to
be disrupted.

### Current Landscape Conditions

Since the wetlands at Site A and Site B are identical they have exactly
the same *capacity* to provide all wetland function. A first
approximation of the appropriate mitigation ratio based on site
conditions alone, therefore, would be 1:1. Differences in the landscape
contexts of Site A and Site B show that they can be expected to provide
significantly different services and that the services they provide on a
per unit basis are also likely to be different.

For example, consider how differences in landscape context of the two
sites would affect their relative value with respect to three specific
functions: wildlife habitat, fishery support, and water quality
improvements. Even though the two wetland sites are shown to be
relatively close to one another (on either side of Route #66) consider
the following differences which affect their relative value:

-   Site A has more opportunity than Site B to provide wildlife support
    because it is accessible to wildlife from the upland wildlife refuge
    area whereas the road blocks the wildlife corridor to Site B.

-   Site A has more opportunity to support fish habitat than Site B
    because it is adjacent to fish habitat whereas Site B is not.

-   Site A has more opportunity to improve water quality than Site B
    because of its proximity to the coast and because it's longest
    dimension is parallel to the coast, therefore providing greater
    \"buffering\" potential.

-   Site A is down-slope of agricultural land uses that generate harmful
    levels of nutrients that without a wetland at Site A would reach the
    water body.

-   Site B, on the other hand, creates a narrow \"buffer\" away from the
    coast and has no significant upslope source of nutrients to filter.

-   Even with a source of nutrients, the payoff from filtering nutrients
    at Site B would be less than at Site A because Site B is adjacent to
    a polluted and fast-moving section of the water body where harmful
    effects would be negligible.

-   Site A is located where it provides aesthetic and educational
    opportunities to a nearby residential population whereas Site B is
    surrounded by industrial sites and private forest lands which limit
    its amenity values.

These differences indicate how landscape context can affect the relative
value of wetlands even if they are identical in terms of site
characteristics. It also illustrates the mitigation ratio's need to
reflect location as well as time and risk.

### Conclusions about Wetland Location

The above illustration serves to demonstrate three points. First,
wetland functional capacity is a necessary but not sufficient condition
for wetland value; factors related to the landscape context limit or
enhance the expected value of wetlands. Second, information about
landscape context provides a logical and defensible basis for comparing
relative (non-dollar) wetland values without resorting to complicated
and controversial dollar-based valuation methods. Third, mitigation
ratios that are intended to take account of differences in the value of
wetlands gained and lost through offsite mitigation should take account
of differences in wetland location.

Differences in landscape context measured at greater geographic scales,
(e.g. different watersheds) can be expected to have similar effects. In
fact, the greater the distance between the impacted wetland and the
replacement wetland, the greater the potential for broad-scale and
systemic differences in landscape conditions that could affect their
relative value. This is particularly important when assessing the
cumulative impacts of mitigation at the scale of a watershed or a water
basin.

![](media/image15.png){width="5.583333333333333in"
height="7.1930555555555555in"}

# Appendix E Self-mitigation as a Special Case

**Statement of the Problem**

The MRC, as currently specified, assumes a 100% permanent loss of
environmental functions and services at an impact site which is
mitigated by way of mitigation project(s) that take place off-site. In
the case of the proposed aquaculture, what might be called
"self-mitigation" is expected to occur at the impact site as a result of
aquaculture operations. This should reduce the amount of off-site
mitigation that is required.

**General Approach**

This situation can most easily be characterized by continuing to specify
a 100% loss of environmental functions and services at the impact site,
and showing how it is mitigated partially by "self-mitigation" at the
impact site and partially by off-site mitigation. The task, then, is
merely to show how much off-site mitigation is required to offset the
100% loss of functions and services at the impact site less the losses
that will be mitigated as a by-product of on-site activities.

**Modification to the MRC**

In the current version of the MRC, the **numerator** represents 100%
loss per acre at the impact site and the **denominator** represents the
amount of offsetting gains per acre at the mitigation site. The MRC is
simply the ratio of two equations which shows the acres of mitigation
required per acre of impact to achieve no net loss of functions and
values.

The modified version that takes account of the aquaculture situation
involves only modifying the **numerator** to show that the loss that
needs to be mitigated off-site is the 100% loss associated with the
project impact less the gains expected from self-mitigation. This
involves three simple steps:

1)  determine the per acre environmental gain from the "self-mitigation"
    using exactly the same formulation as we have been using for
    off-site mitigation;

2)  subtract the resulting per acre gains from "self mitigation" at the
    impact site from the 100% per acre losses in the **numerator** of
    the MRC; and

3)  leave the **denominator** of the equation, which reflects the per
    acre gains associated with the off-site mitigation, unchanged.

**Results**

The result of modifying the **numerator** of the MRC in this way to
reflect the fact that the **net** loss per acre at the mitigation site
(including "self-mitigation") is less than 100% will result in each acre
of off-site mitigation offsetting more impacted acres. The modified MRC,
therefore, will result in a mitigation ratio that takes account of the
"self-mitigation" and is smaller than the mitigation ratio that would be
required using the basic version of the MRC.

One useful way to characterize the modification to the MRC is as
follows:

The current MRC is **R = X/Z**

The modified MRC is **R = (X -- Y)/Z**

where:

R = The appropriate mitigation ratio expressed as acres of off-site
mitigation per acre of impact

X = 100% loss of functions and services per acre at the impact site

Y = the % gain in functions and services per acre from "self-mitigation"
at the impact site

Z = the % gain in function and services per acre from off-site
mitigation.

The following section provides more details about how to implement this
modification to the MRC in order to incorporate time, risk, advanced and
delayed mitigation and so on. The most complicated version of the
modified MRC equation is provided at the end of the section. This
version allows for the possibility that the number of acres of
"self-mitigation" provided at the impact site may be less than the
number of acres impacted by the aquaculture operation. This could be the
case, for example, if docks or site maintenance or shellfish handling
facilities occupy some part of the impacted site reducing the size of
the aquaculture area that provides self mitigation. This would reduce
the overall level of self mitigation provided and increase the amount of
offsite mitigation required which would be reflected as an increase in
the mitigation ratio.

**Step-by-step Development of Self-mitigation Parameters**

### Simplified Current Version

One of the basic assumptions of the mitigation ratio calculator is that
100% of function is lost at the impact site. In the MRC, the numerator
accounts for the lost function. A simplified version of the formula
(only using parameters A, B, and C and no accounting for time or risk,
or landscape differences or advanced or delayed mitigation) appears like
this:

> where:
> $\text{MR} = \frac{\sum_{t = 0}^{T_{\text{max}}}1}{(B - A)\left\lbrack \sum_{t = 0}^{C}{\frac{t}{C} + \sum_{C + 1}^{T_{\text{max}}}1} \right\rbrack}$
>
> A = level of existing function at the mitigation site,
>
> B = maximum level of function attained at the mitigation site
>
> C = amount of time it takes to achieve full function (B) at the
> mitigation site.

In equation (1), the numerator reflects the lost function at the impact
site by assuming that, without impact, the function would have been 100%
(1 in the equation) from time t = 0 to t~max~. The denominator accounts
for function gained at the mitigation site over time. The ratio of lost
function to gained function indicates, on a per-acre basis, how much
mitigation is necessary to make up for the impact.

### Simplified with "self-mitigation"

The formula can be modified in the event that the function lost at the
impact site is less than 100% due to ecosystem services provided by the
project itself. Assuming that post-impact ecosystem function at the
impact site is constant across the entire area (i.e., no impacted acres
lose all function), the equation could be adjusted in the following way:

> where:
> $\text{MR} = \frac{\sum_{t = 0}^{T_{\text{max}}}{1 - (\alpha + \beta)}}{(B - A)\left\lbrack \sum_{t = 0}^{C}{\frac{t}{C} + \sum_{C + 1}^{T_{\text{max}}}1} \right\rbrack}$
>
> α = level of function remaining after impact
>
> β = level of function associated with the project itself

Incorporating these parameters into the equation reduces the value of
the numerator, and therefore reduces the amount of lost function that
the mitigation project would need to make up.

(In this version of the equation, parameter α is equivalent to parameter
b and parameter β is equivalent to parameter F, as described in
"Seagrass Habitat and Shellfish Aquaculture: Evaluating Shellfish
Aquaculture Functions/Services to the Environment Within a Wetland
(Seagrass) Mitigation Context")

### More Complicated with "self-mitigation"

The formula could also be modified to account for non-homogenous loss of
function at the impact site. For example, constructing a shellfish
aquaculture facility on 10 acres of seagrass beds could yield total loss
of function at 2 acres (due to construction of piers, etc), and partial
maintenance or restoration of function at the remaining 8 acres. Adding
this refinement, the formula would look like this:

> where:$\text{MR} = \frac{\left\lbrack \left( S_{i}\sum_{t = 0}^{T_{\text{max}}}1 \right) - \left( S_{\text{sm}}\sum_{t = 0}^{T_{\text{max}}}(\alpha + \beta) \right) \right\rbrack S_{i}}{(B - A)\left\lbrack \sum_{t = 0}^{C}{\frac{t}{C} + \sum_{C + 1}^{T_{\text{max}}}1} \right\rbrack}$
>
> S~i~ = total acreage of the impact site
>
> S~sm~ = area where some function remains (i.e., the area of
> self-mitigation).

To keep things relatively simple, the modification above divides the
impact into two parts. Putting this equation in terms of the shellfish
aquaculture example above, the first term in the numerator assumes that
all function is lost over the 10 acres of impact. The second term
assumes that some function remains and/or is regained over 8 acres of
impact. The difference between these terms is then divided by the total
acreage of impact to yield the per-acre function that requires
mitigation. In other words, if your α + β was 0.2, then the numerator
would be \[(10 \* 1) -- (8 \* 0.2)\]/10 = 0.84. Because this numerator
is less than 1, the resulting mitigation ratio would be lower than if
100% of function at the impact site had been lost.

If this incorporation of heterogeneous impacts (different acres of
losses and gains at the impact site) were not included, that is, if
equation (2) were used, and the same numbers used above applied, the
numerator would be 1 -- 0.2 = 0.80 (not \[(10 \* 1) -- (8 \* 0.2)\]/10 =
0.84) which would lead to an inappropriately low mitigation ratio
because the numerator would be too small. Adding this spatial refinement
to the formula may not always be useful, but does not complicate things
very much and allows the user to approximate the actual gains and losses
at the impact site in terms of quantity (acres) as well as quality
(gains and losses per acre) and capture mitigation tradeoffs more
closely.

### More Complicated by adding time

If it takes a certain period of time for the aquaculture project to
achieve its full ecosystem function, the equation would look like this:

$\text{MR} = \frac{\left\lbrack \left( S_{i}\sum_{t = 0}^{T_{\text{max}}}1 \right) - \left( S_{\text{sm}}\left( \sum_{t = 0}^{T_{\text{max}}}\alpha + \sum_{t = 0}^{\gamma}{\frac{t}{\gamma} + \sum_{\gamma + 1}^{T_{\text{max}}}\beta} \right) \right) \right\rbrack S_{i}}{(B - A)\left\lbrack \sum_{t = 0}^{C}{\frac{t}{C} + \sum_{C + 1}^{T_{\text{max}}}1} \right\rbrack}$

> where:
>
> γ = the amount of time it takes to attain function β.

### Most Complicated by discounting and adding risk, landscape factors, etc.

Finally, if the discount rate, time, risk and landscape context are
factored into equation (4), it would appear as follows:

$\text{MR} = \frac{\left\lbrack \left( S_{i}\sum_{t = 0}^{T_{\text{max}}}(1 + r)^{- t} \right) - \left( S_{\text{sm}}\left( \sum_{t = 0}^{T_{\text{max}}}\alpha(1 + r)^{- t} + \sum_{t = 0}^{\gamma}{\frac{t}{\gamma(1 + r)^{t}} + \sum_{\gamma + 1}^{T_{\text{max}}}{\beta(1 + r)^{- t}}} \right) \right) \right\rbrack S_{i}}{\left( B(1 - E)(1 + L) - A \right)\left\lbrack \sum_{t = - D}^{C - D}{\frac{(t + D)}{C(1 + r)^{t}} + \sum_{C - D + 1}^{T_{\text{max}}}(1 + r)^{- t}} \right\rbrack}$

where:

D = Number of years before destruction of the original wetland that the
mitigation project begins to generate mitigation values

E = Risk that the mitigation project will fail and provide none of the
anticipated benefits

L = Percent difference in expected wetland values based on differences
in landscape context of the mitigation site and impacted wetland

r = discount rate

[^1]: These percentages are taken directly from Brown and Lant (1999)
    and sum to 101%, presumably because of rounding error.

[^2]: For more information on how landscape context should factor in to
    decision making in wetland mitigation, see Appendix D.