Conservation Banking

1. Conservation Banking • Reference point is critical when you calculate “willingness to pay”. • Different ways to solve this puzzle. • We were not careful enough with our language, so different solutions could be defended.

2. One viable solution • Ask a land-owner: “If the price of a credit is p, how much surplus would you get from development (and thus having to purchase a credit), above and beyond what you could get from banking?” • If the answer is positive, then development is preferred to banking • If the answer is negative, then banking is preferred to development • Amount of wedge is the surplus, relative to the “opportunity cost”

3. Surplus for a landowner • Parameters: • Development value D, 1 credit, price p • 3 components • Benefit from development = D • Financial cost from development = p • Opportunity cost from development = p • Net surplus of permit to develop (above and beyond banking) = D-2p

4. What is “p”? • For any given p, this value is either positive or negative for every landowner • Need to find the p for which the market clears: • If p too low, too many want to develop, not enough want to bank • If p too high, too many want to bank

5. The basic result Surplus to Developers Surplus to Bankers

6. Mitigation ratio • Now suppose you need a permits to offset development of 1 permit. • 3 components • Benefit from development = D • Financial cost from development = ap • Opportunity cost from development = p • Net surplus of permit to develop (above and beyond banking) = D-p(1+a) • Again, need to find market clearing price

7. Compare with C&C • Everyone develops half: 656 • Remember, this is relative to nothing! • Conservation banking, above and beyond next best alternative (either banking or developing): 663 • Next best alternative: 325 • Total: 988 • Strategic development: 988