Does market-based offsetting work? Evaluation of Wetland Area Gains and Losses under the US Clean Water Act

Offsetting policies reconcile development and conservation objectives by allowing environmental losses in some locations, given that the losses are compensated with equivalent gains elsewhere. This study quantifies 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 restoration activities.

The study uses high-resolution satellite imagery and land cover change data to measure environmental outcomes at these restoration sites. In particular, it measures wetland area gains at 400 restoration sites that were established over 1995–2020. Comparing realized compensation projects to planned but withdrawn projects in a difference-in-differences framework, we find that the majority of the environmental gains would not have occurred in absence of dedicated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.

About Dr Ville Inkinen

Ville is a Postdoctoral Research Fellow at the Land, Environment, Economics and Policy Institute at the University of Exeter Business School. He received his PhD in Economics from the University of Gothenburg in 2023. Ville's current research focuses on the economics of land use and biodiversity conservation, particularly evaluating the additionality of policy interventions using applied microeconometric methods and geospatial data