Inkinen, V., Coria, J., Vaz, J. and Clough, Y. (2022) Working Paper
Abstract: Mitigating the impacts of economic development on biodiversity is an urgent global priority. Offsetting policies reconcile development and conservation objectives by allowing environmental losses in some locations, given that the losses are compensated with equivalent gains elsewhere. In this paper, we quantify net losses of wetland area under the US Clean Water Act compensatory mitigation program, which is the most extensive and longest-running environmental offsetting program in the world. A unique feature of the program is how most of the compensation is financed through a market mechanism where permittees purchase compensation credits that specialized firms have generated from wetland conservation activities. We measure wetland area gains at 400 compensation sites over 1995–2020 using high-resolution satellite imagery and land cover change data. Comparing realized compensation projects to planned but withdrawn projects in a difference-in-differences framework, we find that the majority of the gains would not have occurred without dedicated conservation activities. We also find that the market mechanism allocates the type and location of conservation activities according to the opportunity cost of land use. Nonetheless, the wetland area gains appear insufficient to compensate for the wetland area losses regulated within the program. This makes it unlikely that the program will achieve its environmental goals in the long term.
