New from REAP: In-Lieu Fee Programs under Section 404 of the Clean Water Act for Coal Mining: Analysis of Restoration Costs and Alternatives

Farm Business Management Update, December 2005/January 2006

by John Bonham and Kurt Stephenson (kurts@vt.edu), Associate Professor, Resource and Environmental Economics, Department of Agricultural & Applied Economics, Virginia Tech

This REAP report describes the costs of meeting compensatory mitigation requirements for stream impacts under Section 404 of the Clean Water Act (Section 404). Section 404 requires that permits be obtained by parties discharging dredge or fill materials into waterways. As part of the permitting program to discharge dredge or fill into waterways, permit recipients (permittee) are required to perform compensatory mitigation to offset ecological services lost due to such fill activities. Compensatory mitigation occurs via activities designed to restore ecological services in stream channels either on the site of the disturbance itself or at an off-site location. The regulatory objective of Section 404 programs is to ensure that improvements in aquatic resources from compensatory mitigation offset the degradation in aquatic resources from the impacted areas.

Several of the Corps districts have, or are developing, in-lieu fee programs to secure off-site compensatory mitigation under NWP21. In these programs, permittee make payments to an approved mitigation sponsor in-lieu of implementing their own mitigation on-site. The sponsor, typically a government agency or a nonprofit organization, takes on the permittee's mitigation responsibility and then uses the collected fees to identify, construct, and maintain compensatory mitigation projects. In principle, in-lieu fee programs set the per unit fees for stream mitigation by estimating their cost of stream restoration and enhancement projects. This fee, typically expressed as dollars per linear foot, is then multiplied by the amount of stream mitigation (feet of stream) that a permittee is required to restore or enhance.

Based on preliminary evidence, in-lieu fee programs exhibit a mixed potential to deliver low cost compensatory mitigation back to permit applicants. In-lieu fee programs have limited incentives for program administrators to transfer any cost-savings incurred back the permittees. In-lieu fee programs also are not operated in ways that encourage active management of ecological risks that lower permittee costs. On the other hand, compared to many compensatory mitigation alternatives, in-lieu fee programs face relatively low regulatory approval costs, and these lower costs may be reflected in the need to charge higher fees.

The publication can be found at www.reap.vt.edu. Go to publications, REAP Reports.

Visit Virginia Cooperative Extension