Environmental and Resource Economics

, Volume 12, Issue 3, pp 323–344

Restoring Wetlands Through Wetlands Mitigation Banks

  • Linda Fernandez
  • Larry Karp
Article

DOI: 10.1023/A:1008225021746

Cite this article as:
Fernandez, L. & Karp, L. Environmental and Resource Economics (1998) 12: 323. doi:10.1023/A:1008225021746

Abstract

This paper offers the first economic analysis of wetlands mitigation banks. The banks are a new alternative for restoration of wetlands by developers before receiving regulatory approval for future development of wetlands in the same watershed. A stochastic optimal control model is developed which incorporates ecological uncertainty of wetlands restoration. The model helps in examining the decisions of how much to invest in a wetlands mitigation bank. The model is calibrated with data from California bioeconomic parameters. Numerical simulation of the model provides a sensitivity analysis of how model parameters of restoration costs, stochastic biological growth, interest rate, and the market value of credits affect the trajectory of investment and the optimal stopping state of wetlands quality when the investment ends. The analysis reveals that restoration of the whole site will occur when there is a reduction in restoration costs, an increase in biological uncertainty or an increase in the value of wetlands credits. Continued restoration is harder to justify with a higher interest rate.

option valuestochastic controlwetlands mitigation banks

Copyright information

© Kluwer Academic Publishers 1998

Authors and Affiliations

  • Linda Fernandez
    • 1
  • Larry Karp
    • 2
  1. 1.School of Environmental Science and ManagementUniversity of CaliforniaSanta Barbara
  2. 2.Department of Agricultural and Resource EconomicsUniversity of CaliforniaBerkeleyU.S.A.