Environmental Permits: Public Property Rights and the Extraction and Redistribution of Private Value

This Essay explores how private landowners bargain with federal environmental regulatory authorities under two important federal environmental permit regimes: wetlands permits under section 404 of the Clean Water Act and incidental take permits under Section 10 of the Endangered Species Act. These permit regimes transfer a landowner’s common-law development right to federal regulators, creating what are in effect public property rights in private lands. Unlike common-law property rights protection, under which injunctive relief and potential criminal sanctions for violating such an injunction are available only after a court balances the harm caused by the potentially enjoined activity against the social value of that activity, simply by issuing a cease and desist order, federal regulatory agencies such as the Army Corps of Engineers (for wetlands) and the U.S. Fish and Wildlife Agency (for species) can unilaterally trigger the accrual of fines and risk of imprisonment. Landowners are forced to bargain with federal regulators to buy back the right to develop their lands. This article explains the impact on incentives in bargaining of three key features of the reverse eminent domain system created by federal wetlands and species permitting: 1) whereas under a private nuisance regime, an adjacent landowner seeking an injunction bears the legal burden and cost of establishing her right to such relief, under an environmental permits regime, it is the private landowner who carries the burden and the bulk of the cost of persuading a court that the agency does not have a legal right to prevent the land use; 2) in determining whether the agency has a right to prevent private land use, courts do not balance the social value of the landowner’s development against the public value of its cessation; instead, courts defer to the agency – the ostensible rights holder – in determining if the agency has a right; 3) unlike private nuisance, where a private landowner does not risk fines or imprisonment unless and until a court has found that her land use if violating the rights of others, with environmental permits, merely by issuing a cease and desist order, federal environmental agencies trigger the accrual of civil and criminal penalties and a risk of imprisonment. The article shows these three features radically alter bargaining incentives – for example, making delay, which is typically a tactic used by potential buyers to get a lower price, instead into a force for sellers that causes buyers to pay more for permits – and create incentives that have little to do with the underlying social costs and benefits of the land use restrictions sought by federal regulators. Instead, under such deals, federal regulators permit development, but only if the developing landowner pays some other private landowner for its promise to preserve wetlands or species habitat elsewhere. In practice, environmental permit regimes – justified by the need to prevent irreversible, non-compensable harm – function as a system that routinely coerce compensation and redistribute private wealth among private landowners.