Is mitigation banking possible in Japan?





I have referred to mitigation as an effective method to alleviate the adverse impact of development on ecosystems.

And I also mentioned the risk of the concept, which could be employed as a pardon for development when misused.

Let me first review the meaning of mitigation.

When a development project includes land incorporating a precious ecosystem, the concept of mitigation to alleviate the adverse impact of development can be implemented via the following three stages:

First, the stage of "avoidance": to exclude the area of the ecosystem when implementing the development project.

Secondly, the stage of "minimization": when it is impossible to exclude the area, shrink the size of the project itself to minimize the adverse impact to the ecosystem.

Thirdly, the stage of "compensation": in the event minimization is hard to achieve, to compensate and supplement the function of the ecosystem with different formats.

Mitigation is the implementation of these three stages starting from the stage of "avoidance" (which is called "sequencing") in order to minimize the adverse impact of development on the ecosystem.


A method to push forward "compensation" measures smoothly

In recent years in the United States, a leading country of mitigation, a movement to limit the concept only to the third stage of "compensation" and enhance the methodology emerged.

In the process from the second stage of "minimization" to the third stage of "compensation", there are two cases: 1) when compensation measures can be taken and 2) when compensation measures cannot be taken.

In case of 1), there is no problem. In case of 2), one might have to make the ultimate decision to "either develop or conserve".

A criterion here is the value comparison of "whether social values generated from the developmental acts outweigh natural protection".

If the answer is no, there is no problem. However, if the answer is yes or neither/nor, the case is serious.

"Compensation" measures are taken for the first time at this stage where "destruction of the ecosystem is inevitable".

When the mitigation method started becoming popular in the United States, development was permitted if the developer took "compensation" measures not only at the development site or adjoining location but also with artificial ecosystems, such as artificial tidelands and artificial wetlands, which had the same kind of function as the would-be-destroyed ecosystem.

In the early days, the order and control of compensation measures were under the auspices of government authorities.

However, this consequently created several problems.

First, the artificial wetlands created as a compensation measure were not only small in scale but also located dispersedly. In particular, a number of fragmented alternative wetlands were created by linear projects, such as highways and train trucks.

Secondly, as a result, restoration of the functions of ecosystems failed after monitoring and management of the newly created ecosystems was insufficiently conducted and those ecosystems eventually became abandoned.

Thirdly, even when monitoring and management were conducted perfectly, enormous costs and human resources were needed.

Fourthly, even when the same kind of ecosystem was created, it did not organically link with the greater ecosystem of the whole area and strategical alignment was not possible. In many cases, failure occurred when the water system was severed because the water level of the alternative wetland could not be secured.

Fifthly, the total social costs swelled as it took time to confirm the functions of "compensation" measures and issuance of permission for development was delayed.
These are some of the problems that occurred in the early days.

Meanwhile, when developing land containing wetland ecosystems, severe conditions are imposed to pass criteria for permission based on Section 404 of the CWA (Clean Water Act) and "Swampbuster" provisions of the FSA (Food Security Act). Therefore, the necessity of an improved mitigation system which is fairer, more credible, more motivative and less costly was urged by the developers.

This is how the idea of a mitigation bank came to be considered as an efficient method for smoothly carrying out the third stage of "compensation" measures.

This idea was raised during the administration of U.S. President George Bush and demonstrated in a tangible way for the first time in 1993 under the administration of President Bill Clinton. Simultaneously, a guide for establishing a mitigation bank was formulated in 1995.

The basic idea for wetlands conservation in the United States originates in the concept of "no-net-loss policy" (compensating net loss of wetlands with restoration and creation of wetlands quantitatively and qualitatively equal to what has been lost) adopted in 1988.

The countermeasures taken in the past were aimed at embodying this concept, namely the subtraction and addition of loss and restoration/creation of the same kind of ecosystems at the development sites.

The concept of mitigation banking, which grew from this idea, is based on the viewpoint that even when restoration and creation is implemented at different areas apart from the development site or, in some cases, even with different kinds of ecosystems, no-net-loss of wide-area ecosystems can be achieved if strategically proper.


Procedures for establishing and operating mitigation banks

Mitigation banks are established and operated according to the following procedures:

1) Regarding land containing an ecosystem larger than a defined area, the land owner, supporting sponsors and the MBRT (Mitigation Bank Review Team), which integrationally manage the mitigation bank, will meet to exchange an agreement to for establishing a mitigation bank and clarify its final goal.

2) Evaluate the value of the land containing the ecosystem by "credits" and determine how many credits the land holds.

3) Sell the credits to the following people and secure funds for the bank.
i) sponsors, ii) developers who plan to develop other lands containing ecosystems and iii) speculative clients, etc.

4) The developers who plan to develop other lands which contain ecosystems mentioned above can obtain permission for development by first converting the value of that ecosystem that would be lost by their development to "debits" and then purchasing the same amount of "credits" from the mitigation bank.
One-to-one transactions of development and compensation is hereby immediately complete.
Needless to say, this transaction is allowed only when there are no other measures that can be taken when the process of "avoidance-minimization-compensation" is concluded.

5) When all the credits are sold, the mitigation bank may withdraw and use the fund for restoration and creation of its own ecosystem under management by a third party (MBRT).
It is also possible to purchase and expand the adjoining land subject to a new ecosystem.
Moreover, the mitigation bank should monitor, conduct maintenance and manage the functions of these ecosystems.
Monitoring continues for roughly five years (in the case of forests and others, longer than that) after the success of the bank is confirmed.

6) When the state of the ecosystem of the land acquires sustainable stability after going through these stages, the bank may either be disbanded or management transferred to a public organization or a new bank, if the management by the existing mitigation bank is discontinued.

7) If the bank fails to restore and create an alternative ecosystem, actions including public support will be taken so that the functions of the ecosystem as a whole will not be degraded.
There are more than one hundred mitigation banks created this way in the United States.

Those who expected most from this system of mitigation banking were developers whose development sites contained ecosystems.

It is safe to say that their expectations strongly support the market mechanism of the mitigation bank.

They can not only purchase credits from mitigation banks to acquire permission for development but perhaps also purchase other lands which contain ecosystems, establish mitigation banks there by becoming sponsors themselves and enjoy a two-birds-one-stone effect, i.e. achieving development and enjoying the management merits of mitigation banks.


Arguing merits and demerits

However, in opposition to such a welcoming mood on the developers' side, some have pointed out the merits and demerits of the mitigation bank system.

Merits of mitigation bank are argued as follows:

First, the fundamental way of thinking that forms the basis of the concept of mitigation banking is the so-called "economy of scale", which maintains that 1) a larger area is better than a smaller area for an ecosystem, 2) ecosystems should be connected or gathered rather than isolated and 3) a good-quality ecosystem is better than a bad-quality ecosystem.

The idea is also applied to the costly monitoring and maintenance and management of ecosystems. Large and gathered ecosystems help cut costs, and therefore, the functions of the ecosystems can be perpetuated.

Also, in preparation for an unexpected large-scale adverse impact caused by development, it is better to enlarge immediately tradable areas.

Secondly, the completion time of a development project will be shortened and uncertainty of whether the project will be successful or not will be decreased.

Thirdly, a preferable result can be expected not only quantitatively but also qualitatively. In terms of alternative planning, monitoring and maintenance, better quality can be expected by securing experts.

Furthermore, the functions of a greater ecosystem of the whole area can be enhanced because a wide-area strategical alignment of ecosystems will be possible.

In particular, to make a region in the area that used to be a wetland a target region for restoration will lead to effective compensation.

Fourthly, it is more likely that those who own land with ecosystems having zero market value can make a profit through the mitigation banking system without building any structures on the land.

Fifthly, the mitigation banking system creates a new investment opportunity. So far, most of the mitigation banks are run publicly, but in recent years, private companies started entering the field of management of mitigation banks.

They now consider mitigation banking as an investment opportunity in the new era.

Sixthly, as a future possibility, we can think of the concept of an "umbrella bank", under which heterogeneous concerned parties, including developers and representatives of private companies, military projects, public and quasi-public offices, will cooperate in the multilateral development of the banking system.
On the other hand, the demerits of the mitigation banking system pointed out by the National Audubon Society, a major environmental NGO are as follows:

First, as the service area that one mitigation bank manages is so wide, the compensatory sites can be located hundreds of kilometers away from the original development sites.

Particularly, as mitigation banks for compensation of development in areas with high land prices, such as suburban areas, will be set up at areas where the land prices are low, the distance between them will be even greater.

The residents' accessing rights to the ecosystem therefore could be taken away by the mitigation bank.

Secondly, a mitigation banking system can be an easy way out at the very beginning of the project without undergoing the due process from "avoidance" through "compensation" via "minimization". The process of "avoidance" and "minimization" can be simply passed and it is likely to be used as a convenient measure or an excuse to obtain development permission.

Thirdly, the "no-net-loss policy" is a interim target as a nation and not a final target. The central governments have an obligation to increase and conserve ecosystems exceeding the loss.

Fourthly, public responsibility and compensation measures when the mitigation banking system fails to restore or create an ecosystem are not clear.

The range of social responsibilities of the mitigation bank should be clarified because even when it fails, it can sell the credits.

Furthermore, financial support for failed banks might be necessary.

Fifthly, regarding the advantage of bank management, there are gaps between ecosystems that are easy to restore or create in the short term and ecosystems that take longer time to restore or create, such as forests.

The inexpensive and easy creation of wetlands might impact unnaturally on ecosystems.

Developers might try to buy credits of ecosystems that can be created inexpensively in the short term from the bank and use it as an excuse for development.

Sixthly, the impact on an ecosystem by a development project for which permission was obtained by purchasing credits occurs immediately, while it takes quite a long time for the effective restoration and creation at the compensating ecosystem of the mitigation bank.

Therefore, chronologically speaking, there is a gap of timing between the "destruction" and "restoration and creation" of an ecosystem and a huge amount ecosystem loss will occur in the short term.

In order to avoid this, the exchange rate of debits (value of destroyed ecosystem) and credits (value of restored and created ecosystem) should not be one to one but a higher rate should be applied.

As to exchange rates for transaction between the same kinds of ecosystems, a young ecosystem and a mature ecosystem should be dealt with at a different rate because it is like exchanging a ripe banana with a green banana.

Moreover, when regarding exchange rates between heterogeneous ecosystems, the organic reaction between the two kinds should be considered when determining the exchange rates because it is like exchanging an orange with an apple.

Seventhly, the greatest circumspection should be paid to the reactions between ecosystems, such as the upper stream and the lower stream which are connected at a flood plain, or a large wetland and small wetland.

A uniform operation of mitigation banking could result in tremendous chaos for ecosystems in the future.

Early review for establishing a plan

In Japan, the concept of mitigation banking has just recently emerged and supporting legal institutions do not exist. It is still a blank sheet.

Not only that, it is so backward that only now is Japan tackling the primitive compensating measures between the homogenous ecosystems at the development site.

Unlike the United States, which has a huge environmental capacity, Japan has a small environmental capacity and the total amount of tradable credits is also small. Hence, service areas managed by a mitigation bank would be inevitably large.

The concept of "a small and low-quality ecosystem being sacrificed to maintain a large and good-quality ecosystem" is similar to the idea of "the weak becoming the victims of the strong", which may not be traditionally Japanese.

To create a unified criteria for evaluating the impact of a development project and evaluating an ecosystem is also a preconditioning task.

However, a tendency among certain environmental NGOs in Japan is to call for the establishment of "Japanese-style mitigation banks".

The combination of a mitigation banking system and ecotourism wherein tourists themselves become the buyers of credits is food for thought, as well.

I think that an early review for establishing a plan for a Japanese-style mitigation banking system under consideration of the above-mentioned merits and demerits is needed.





Back to the top