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Economic Analysis of Habitat Conservation Banking in the United States

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Economic Analysis of Habitat Conservation Banking in the United States Economic Analysis of Habitat Conservation Banking in the United States by Jagdish Poudel A dissertation submitted to the Graduate Faculty of Auburn University in partial fulfillment of the requirements for the Degree of Doctor of Philosophy Auburn, Alabama August 05, 2017 Keywords: Endangered Species Act, conservation banking, market-based policy instruments, demand and supply, hedonic pricing analysis, cost-benefit analysis Copyright 2017 by Jagdish Poudel Approved by Daowei Zhang, Chair, Alumni and George Peake Jr. Professor of School of Forestry and Wildlife Sciences Hyeongwoo Kim, Associate Professor of Department of Economics Aditi Sengupta, Assistant Professor of Department of Economics Benjamin Simon, Chief Economist, U.S. Department of the Interior ABSTRACT The Endangered Species Act (ESA) is probably the most powerful environmental law ever enacted in the United States and is often portrayed as one of the most extreme forms of government intervention. Private landowners often avoid management activities that can potentially attract endangered species into their land and probably take actions to eliminate endangered species habitats. Several landowner incentive programs have been implemented by the U.S. Fish and Wildlife Service to encourage landowner to manage their land in ways that provide ecosystem services to promote the recovery of listed species. Habitat conservation banking offers financial incentives to landowners in exchange for managing land in a way that provides habitat for endangered species. This feature of the market-based approach is generating specific price signals for entrepreneurs to get involved in solving environmental issues. The United States pioneered habitat conservation banking program and is recognized as a leader in implementing biodiversity offsets as a means to conserve endangered species. Few studies have evaluated the performance of habitat conservation banking market. However, most of those studies were conducted a decade ago, except recent survey by Department of Interior (DOI). ii In the first chapter, we fill the gap by quantifying the number of total banks, conservation credit supply, sales, and analyze the trends and the characteristics of conservation banks. As of December 2015, we find 137 conservation banks conserving some 153,000 acres of land. Nearly, 519,540 conservation credits were generated from 137 banks. Based on 2,134 transactions record, some 71,365 credits were sold in last 21 years. About 66% of conservation credits were sold by private companies, and credit price ranges between $1,502 and $205,055 per credit. This chapter concludes that habitat conservation banking has become a business-based habitat planning system and that large urban areas tend to have the highest demand for conservation credits, and organizations in these urban areas are willing to pay the highest prices per credit. The second chapter presents an econometric analysis of factors influencing demand and supply of the conservation credit. The results show that demand and supply coefficient estimates are statistically significant with expected signs and are inelastic to price, suggesting that conservation credit price changes are not likely to lead to significant changes in the quantity of credit demand. Inverse price and quantity relation show the actual distribution of price in the market. Furthermore, the results suggest that the marginal production of conservation credit is likely to increase over time with more land area allocated for conservation bank and likely to decrease with increased in land value. The third chapter uses hedonics to explores the relationship between credit prices and the characteristics of credits. This approach allows an implicit price to be estimated for each iii covariate. Private bank ownership, species types, the number of listed endangered species, and time factors were significant predictors of credit price. These results should be useful for landowners, bankers, and investors interested in enhancing the marketability of their land and understanding the effect of management actions. Chapter four assesses the habitat conservation banking project investment by examining the costs structure, revenue, and profitability of several conservation banks. We calculated the net present value of selected numbers of conservation bank located in California at the discount rates of 8%. Results show that the all eight selected conservation banks’ NPV appears to be positive. Our findings suggest that the investment in habitat conservation banking is not only profitable but also yield high returns. Those landowners who may have been discouraged because of lack of knowledge and data and from the fear that presence of endangered species habitat in their land would result in a regulatory compliance can be reassured from our finding that habitat conservation banking can be a perspective market for financial incentives. Finally, we conclude that habitat conservation banking is dynamic and has a monopolistic market structure or imperfect competition in certain areas. An advance econometric model that incorporates either the dynamic or oligopolistic aspects of the habitat conservation banking market, or both, seems to be a more promising prospect for future research. iv ACKNOWLEDGEMENTS First, my in-depth gratitude goes to my major professor Dr. Daowei Zhang for his continuous guidance, encouragement, and assistance overcoming the difficulties that I have encountered and his meticulous support throughout this original research work. I would also like to express my sincere appreciation to my three committee members, Dr. Hyeongwoo Kim, Dr. Aditi Sengupta, and Dr. Benjamin Simon for their invaluable assistance and motivation throughout my program. They have been very understanding and supportive throughout my entire study at Auburn University. Particular appreciation is extended to Dr. Daowei Zhang who provided financial support and contributed his precious time and efforts to this study. I would have been lost without his guidance, training, and assistance through my entire Ph.D. program. A heartfelt acknowledgment goes to Dr. Benjamin Simon for an enlightening instruction into economic and policy analysis of species habitat conservation banking. Drs. Kim and Sengupta have provided invaluable advice as well. Thank you to the School of Forestry and Wildlife Sciences as a whole, and to many individuals who offered help and advice over the past three years. I extend my thanks to Willian Coleman (Founder & CEO Eco-Asset Solutions & Innovations) who provided me with valuable habitat conservation banking transaction data, Russ Krauss (EVP, Marketing & Research Resource Environmental Solutions, LLC) and National Mitigation and Ecosystem v Banking Annual conference participates who provided me with valuable information on the habitat conservation banking market. vi TABLE OF CONTENTS ABSTRACT ........................................................................................................................ ii ACKNOWLEDGEMENTS .................................................................................................v LIST OF TABLES ............................................................................................................. xi LIST OF FIGURES ......................................................................................................... xiii I. GENERAL INTRODUCTION ..........................................................................1 1.1 Habitat conservation banking in the United States ................................1 II. TRENDS OF HABITAT CONSERVATION BANKING IN THE UNITED STATES .............................................................................................................6 2.1 Introduction ............................................................................................6 2.2 Background ............................................................................................8 2.2.1 Literature Review.............................................................................8 2.2.2 The logic and challenge of habitat conservation banking ..............10 2.3 Methods ...............................................................................................13 2.3.1 Data Source ....................................................................................13 2.4 Results ..................................................................................................15 2.4.1 Region ............................................................................................15 vii 2.4.2 Ownership ......................................................................................16 2.4.3 Species credit availability and sales ...............................................17 2.4.4 Trends in credit price .....................................................................18 2.5 Discussion and conclusion ...................................................................19 III. ESTIMATING DEMAND AND SUPPLY OF HABITAT CONSERVATION BANKING MARKET .....................................................................................36 3.1 Introduction ..........................................................................................36 3.2 Background ..........................................................................................37 3.2.1 Model specification ........................................................................39 3.2.2 Two stage least square (2SLS) .......................................................43
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