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There might be a few isolated cases in which a species could be saved only through a total restriction of activity on a given property, but in most cases deed restrictions would be sufficient to provide habitat for listed species. As already demonstrated under the current law, confiscation (even with compensation) is usually undesirable from both an economic and an efficiency perspective. Mandating outright purchase would actually be counter-productive, largely because the ability to maintain pristine ecosystems that way is minimal." The challenge, then, is to define the terms under which humans and natural systems can coexist. The determination of physical price for HPCs within an ecosystem would be largely, but not entirely, a scientific judgment. Biological requirements, while paramount, are not allor-nothing. While it is true that the more stringent the requirements, the higher the probability of species survival, survival probabilities will always be less than 100 percent. Many extinctions occur without any human culpability, and attaining the last few percentage points toward greater certainty of species survival (through adding or upgrading habitat) could be prohibitively costly. The process of determining how much suitable habitat is enough requires a prior decision as to what constitutes-acceptable probability for given species.

Like the determination of how much habitat is enough, both the selection of a definition for "habitat" and the determination of exactly which acres meet that definition are partly political questions. The correct definition of the property rights and the right physical price of HPCs would depend on how habitat is defined and on three parameters, each expressed in units of land area: (1) Unprotected habitat (UH); (2) Safe minimum additional secure habitat (ASH); and (3) Potential habitat (PH). For details of how to calculate the minimum additional secure habitat (ASH) required for species preservation, see the appendix.

Management agreements can be updated to incorporate new information, such as biological discoveries or technical innovations. For example, say the standardized agreement for an ecosystem is finalized in 1996, then a relevant discovery is made in 1998. The management agreement necessary to create a HPC for sale after the discovery date could be revised to incorporate that new information. The new information could also be used to change the terms of management agreements that were part of a pre-1998 HPC transaction, but only if there is a willing buyer (the government) and a willing seller (a landowner bound to comply with the pre-1998 terms).

The use of property rights and markets to retain biodiversity need not be limited to terrestrial plants and animals. Where air or water pollution threatens vulnerable species, effluent fees or tradable discharge permits could be used to fund mitigation measures or provide a safe level of minimum habitat. Where surface water or groundwater withdrawals during low flow periods threaten species habitat, water users could be required to share the expense of sustaining sufficient flows in the habitat areas, and or preserving the species in an artificial habitat until normal flows resume.

Such a problem now exists in South Central Texas. Spring flows from the Edwards Aquifer sustain several endangered species. During a severe drought, pumpage could eliminate several species by temporarily destroying their habitat. Depending upon relative cost effectiveness, the right response is for aquifer users to pay for some combination of

"Jan Ziegler, "Congress Seeks Action To Save Species," New Scientist (November 26, 1988), p. 21.

pumpage reduction through tradable firm and interruptible pumpage rights," spring flow augmentation, and artificial habitat creation and maintenance.

How HPC Markets Would Work

Market forces would determine the dollar price of a HPC (see Figure 1), with P = the price of a HPC. For the buyer, P is the amount paid for permission to eliminate habitat on one acre. For the seller, P is the amount received for accepting a management agreement on the amount of acreage specified by the physical price. Q = the number of HPCs produced and sold per time period (probably a year). The downward-sloping demand (D) line reflects the relative profitability of land use changes that eliminate habitat. In other words, as HPCs become scarcer and more expensive, fewer habitat-eliminated land uses will be profitable, so fewer HPCs would be purchased. Point A indicates each time period's highest return to habitat-eliminating land uses. Point B indicates how many acres of habitat would be eliminated per time period if HPCs were free (if there were no endangered species policy). The upward-sloping supply curve (S) reflects the physical price, expected losses from forgoing land uses prohibited by the HPC management agreement, and the costs of management practices imposed by HPC agreements. The smaller the number of HPCs sold per year (smaller Q*), the longer it will take to increase the amount of protected habitat to the safe minimum level.

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Figure 1. Determining the Dollar Price of HPCs.

S

"John Merrifield, "Groundwater Resources: The Transition from Capture to Allocation," working paper.

For a better understanding of the HPC market, and the kinds of factors underlying supply and demand, see the appendix or consider the following scenarios:

(1) If a region's population begins to rise more rapidly, urban land uses would increase in value, increasing the demand for HPCs (D shifts to the right). The opportunity cost of agreeing to forgo habitat-eliminating land uses would also increase for some landowners, slightly reducing the supply of HPCs (leftward shift of S). The combined effect of the S and D shifts would be an increase in P*, and a smaller increase in Q*.

(2) If the "takings" threshold (assuming there was one to begin with) was significantly lowered, HPC purchases would have to be subsidized to a greater extent. As in scenario 1, that would also increase demand, P*, and Q*.

(3) If the physical price (acres protected per acre of habitat eliminated) were raised, the supply of HPCs would decline. That would increase P* and reduce Q*.

(4) Making management agreements more demanding would have the same effect as scenario 3.

A simple example shows how the HPC process would work: Suppose a landowner in Bexar County wanted to purchase HPCs to develop 10 acres of land currently valued at $5,000 per acre. Under a law like HR 925, his maximum out-of-pocket cost for HPCs for the 10 acres would be 20% of the property value (or $1,000 per acre); the government would be obligated to expend compensation funds to the extent that the market price for those HPCs exceeded that amount. After calling his broker, the Bexar County landowner learns that a landowner in nearby Medina County, but within the same ecosystem, is selling HPCs for $1,200. To close the deal, the broker calls up the local Texas Parks and Wildlife Department office and asks for a check for $2,000 ($200 each for the 10 acres) to match the $10,000 from the Bexar County landowner. Although the Bexar County landowner is out $10,000, he is now free to subdivide his property into five 2-acre lots that will sell for $8,000 per acre. The Medina County landowner has had to set aside 15 acres which was lying fallow for species habitat, but he has $12,000 in cash with which to buy the new pickup truck he needs.

By allowing a rental market for HPCs, permanent habitat providers would not be the only landowners with an incentive to reveal and protect habitat. Landowners who expected to someday eliminate some of the habitat on their property could gain in the meantime. That would reduce their incentive to conceal or destroy species or their habitat, and it would also lower the probability that they would ultimately follow through with their habitat destruction plans. Once a rented HPC is taken from the market (by habitat elimination), the renter would have to replace it with another rental, or a purchase.

The HPC market process might also be more appropriate for government land than the current FWS procedures. Officials might frequently prefer the HPC process to the ESA Section 7 process that is available to virtually all government projects. Isolated examples such as the Army buying red-cockaded woodpecker habitat to minimize the restrictions on

their use of Fort Bragg - hint that implementation of the HPC process could help government officials perform their tasks more efficiently. Though agency directors might not react to market pressures in the same way as landowners, habitat-elimination practices, through HPC purchase requirements, would still drive the acquisition of enough additional suitable habitat to protect a species.

Since no two tracts of land are identical, the eliminated acre may be better or worse habitat than the acreage that will be protected to supply the HPC. Factors other than an area's physical features, including proximity to other habitat, are often important. Although instances in which the HPC process might result in harm to a species, the scheme should include an opportunity for agency review of HPC purchases challenged by a third party (government agency or citizen's group) on biological grounds. If it were necessary to interfere with the market by modifying or halting the HPC transaction, compensation might (if another HPC is not available at the same price) be required (under current statutory proposals) for affected landowners. Such a government role is like a watermaster's power to modify or stop proposed water rights transfers challenged by another water user.

Since administrative procedures can be slow, costly, and vulnerable to being biased by special interest lobbying, review and modification powers should be statutorily limited to cases with clear, compelling scientific merit. The possible harm caused by not reviewing marginal cases could be expected to be offset by HPC transactions that have an above average species protection benefit. Such especially beneficial transactions are likely, because many activities that would require a HPC would not always render the impacted area entirely unsuitable for species use.

Chapter 4. Bringing the HPC to Reality

Given the premise that habitat preservation credits would provide appropriate incentives for landowners to cooperate with federal and state regulatory officials in protecting and creating habitat for threatened and endangered species, there are still several questions to be answered regarding the best way to implement the concept of HPC markets.

Why a Legislative Change Is Needed

One question involves whether it is necessary to change the law at all (to institute HPCs; revamping the listing process, as outlined in Chapter 2, will surely require a statutory change). The ESA as currently written does not prohibit the use of market mechanisms and incentives to reduce the elimination and increase the production of habitat. Regional habitat conservation plans, like that proposed for the Balcones Canyonlands in Texas, have not required any statutory changes, and the FWS could promulgate procedures to establish HPC markets without any statutory changes, either.

"Bean, Environmental Defense Fund Memo, 1992.

On the other hand, Ruhl" has pointed out that these regional habitat conservation plans stand on shaky legal ground, and by the same logic administratively created HPC markets would likely be a bad economic risk. The reason is that regulations not backed up by the force of law can be amended or even rescinded with changing political tides. Property rights granted administratively are therefore far less certain than rights undergirded by legislation. Moreover, Brandes has provided evidence that the Balcones Canyonlands Conservation Plan has "from day one been a special interest plan" in which saving endangered species "has become a debatable byproduct."

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Of equal importance, the current ESA comes into play only after a species has been proposed for listing as threatened or endangered. By amending the ESA so as to specifically authorize the creation of HPC markets, species could be protected within ecosystems prior to any proposed listing.

The HPC structure, which would vary widely depending on the extent and distribution of habitat, land ownership patterns, and development pressures, might not be fully competitive in some ecosystems. While (see Chapter 3) even an imperfectly competitive HPC market would be preferable to the existing FWS procedures, the Section 7 and Section 10 permitting procedures in the current law could be retained as options in case a government agency or landowner preferred them.

Implementation Steps for the FWS

While the HPC process would reduce the paperwork needed for habitat protection (largely be eliminating case-by-case review), there would still be plenty of work for federal or state officials. To implement HPC markets, The FWS and perhaps various state governmental agencies would have the job of defining appropriate management agreement (MA) terms; estimating the amount of unprotected habitat (UH) and safe minimum additional secure habitat (ASH); ruling on contested HPC purchases; and enforcing HPC purchase requirements and the management agreements.

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The FWS already does, or at least is required to do, the equivalent of defining and enforcing management agreements through its review of species recovery plans. With the recently begun National Biological Survey," the FWS should soon be able to determine the values of UH and ASH for affected ecosystems. (Such a specific use of data obtained from the National Biological Survey in the HPC process should minimize fears that exist in some circles that the survey will be used as a land confiscation tool.) As noted in Chapter 3, the

19Op. cit.

Brandes, op. cit.

*Robert Brandes, "Voters Can't Afford To Gamble on BCCP." Austin American-Statesman, October 16. 1993, p. A23.

62 Wall Street Journal, op. cit.

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