Environmental offsetting: What drives the choice of offset mechanism in the US Wetland Mitigation Program?

Abstract

This paper examines offset method decisions under the US wetland mitigation program and compares the cost effectiveness of prescriptive on-site and market-based off-site approaches. By measuring costs through land values and benefits through flood control values, we highlight a clear trade-off between the two mechanisms. Prescriptive on-site compensation occurs in high-cost, high-benefit areas, whereas market-based off-site compensation occurs in low-cost, low-benefit areas. Our analysis also reveals that cost minimization heavily influences the regulator’s choice of offset method, while flood control benefits appear to be absent from policy determinations. This finding, combined with the increased adoption of market-based offsets, suggests an overreliance on the market mechanism. Although policy guidelines promote market-based offsets due to their potential for environmental gains, they also require that both costs and benefits be considered in offset method determinations. Our findings indicate that regulatory decisions overlook the flood control benefits of prescriptive on-site compensation, revealing a divergence between policy intent and observed offset decisions.