Providing Market Incentives: A Discussion of Potential Opportunities for Supply and Demand

Sustainable Landscapes Conference

Environmental Banc & Exchange, LLC

April 1, 2009Founders Hall – Milton Hershey School

Experience

Founded in 1997, EBX is one of the leading mitigation

banking firms in the United States

●

Over 50 miles of stream and over 10,000 acres of

wetland, forest, buffer and habitat acres restored or

under contract

●

Long and successful track record working with rural

land owners

CapitalFinancing provided for over

50 mitigation projects

●

Structured to carry the long term liability associated

with mitigation

●

Invested in and sponsored mitigation banks

throughout the US

●

Funds available for large tract conservation

acquisitions

ExpertiseBroad proficiency with the legal, tax, easement and

regulatory requirements of mitigation

●

Stream, wetlands, and habitat restoration; water quality trading and carbon

sequestration

●

Build project-specific teams with top engineering and

ecological firms

• Viewpoint of practitioner that has developed, financed and sold over $70 million in environmental credits

• Entrepreneur that has participated in over 100 projects resulting in the restoration and enhancement of over 50 miles of stream, 6,000 acres of restored wetlands, and the protection of 7,300 acres of critical species habitat, forest and buffer

• Vice President of National Mitigation Banking Association

• Aggregator of water quality credits throughout the Chesapeake Bay

• Participant in Nutrient Trading Task Forces in Chesapeake Bay, including serving on the Advisory Committee of the Water Quality Fund for the Chesapeake Bay; Member of the Maryland Climate Change Commission (Mitigation Work Group)

• Early stage private sponsor of Ecosystem Marketplace - www.ecosystemmarketplace.com

• EBX founded Sustainable Land Fund and sold in 2007 to Muni Mae – became MMASLI

• Working with mitigation bankers on the placement of investments

• Primarily focused on U.S. domestic market

PERSPECTIVE

•Resource Mitigation/Offsets

– Offsetting impacts to resources by restoring and enhancing another similar resource– Banking vs. off-site mitigation– Real estate type market

•Cap and Trade

– Trading resource use allowances to achieve a cap on total allowances– Air and water quality– Commodity type market– Carbon (hybrid cap-and-trade on offsets)

•Government Incentives and Taxation

– Using federal, state and local incentive payments to pay for specific objectives. Using federal and state tax incentives to achieve specific objectives

•Payment for Ecological Services (private or public)

– Environmental asset payments– Voluntary

MARKET CONCEPTS

Source: “The New Markets for Environmental Services: A Corporate Manager’s Guide to Trading in Air, Climate, Water and Biodiversity Assets”, BSR, December 2007

SELECTED MARKET SNAPSHOT OF ECOSYSTEM MARKETS

Ecosystem Market Current Size

(US$ per annum)

Potential Size-2010

(US$ per annum)

Potential Size-2050

(US$ per annum)

Regulatory Driven Ecosystem Offsets (including US Wetland Mitigation Banking)

Over $3 billion driven by US Clean Water Act, Section 404 and Federal Power Act. Unknown offset value under EIA regulations in developing countries.

$4.5 billion $5-10 billion

Regulatory Driven Species Offsets (including US Conservation Banking)

$370 million in the USA. Program just begun in Australia and possibly similar programs in France, Regulatory offsets apparently being required in Uganda, Holland, Switzerland, Columbia, South Africa and Mexico.

>$300 million $300 - $500

Natural Resource Damage Claims $87.7 million in US alone. EU issued directive that may require resource restoration.

$100 million $150 million

Government Conservation Payments and Biodiversity Offsets

$3 billion – just flora and fauna oriented programs (not including water and soil conservation); in developing countries, government involvement may be through state electricity, water and road agencies.

$4 billion $10 billion

Voluntary Conservation Payments and Biodiversity Offsets

$20 million (increased if money flowing through conservation organizations is included)

$25 million $150 million – if corporations take to the concept

Land Trusts, Conservation Easements (and expenditure by NGO’s for conservation)

$6 billion in USA alone. Size and use of easements in developing countries is unclear.

$10 billion $20 billion

Bioprospecting $17.5 – 30 million $35 million >$500 million

Certified Products

(Timber and NTFP)

Forestry Stewardship Council alone estimated at $5 billion.

$15 billion $50 billion

Certified Agriculture and Fisheries $26 billion in global sales $60 billion $200 billion

Source: “IUCN, “Building Biodiversity Business,” 2008; Environmental Law Institute, “Mitigation of Impacts to Fish and Wildlife Habitat: Estimating Costs and Identifying Opportunities,” October, 2007.

SELECTIVE CREDIT TYPES, GEOGRAPHIC SERVICE

AREAS AND CURRENCY (US)Type Geographic Service Area Regulatory Driver Currency

Wetland Sub-Watershed Federal and State Acres

Stream Sub-Watershed Federal and State Linear Feet

Buffer Watershed State Acres

Habitat Regions within Recovery Zone Federal and State Species / Habitat Acreage

Forest County State Acres

Water Rights State State Acre-feet of water

Nutrient Watershed Federal and State Pounds

Carbon / GHG National State/Regional (none at federal level)

Tons CO2e

• Market driven by Clean Water Act goal of “no overall net loss” of wetland acres and functions announced in 1989. Applies to streams as well.

• From 1989 to 1995, mitigation process was ad hoc. Federal Guidance was issued in 1995, which promoted increased mitigation through private sector.

• Three forms of mitigation: 1) permittee-responsible mitigation; 2) mitigation banks; 3) payment to in-lieu funds. Last two mechanisms are referred to as third-party mitigation, since responsibility and liability for completion is transferred to a party other than permittee.

• New regulations effective June 9, 2008, seeks to promote one standard for mitigation. “Preference” for mitigation banking. New web-based posting mechanism for available credits- Regional Internet Bank Information Tracking System (“RIBITS”). This standardization has spurred recent investment interest with the advent of at least nine (9) new equity investors dedicated to investment in mitigation projects or conservation lands.

• Pending Clean Water Act Bill that would clarify jurisdictional issues. This would potentially make wetland and stream jurisdiction more expansive.

• There are now over 500 mitigation banks in 42 states. Over 70% of mitigation banks are sponsored by private entrepreneurial companies.

WETLAND / STREAM MARKET (US)

• Clear policy goals and strict enforcement

• Evolution to uniform standards

• Rigorous certification process of mitigation process

• Mitigation easily understandable by impactors (Compensation ratio 1-2 times impact)

• Understandable currency

• Transfer of liability to mitigation project sponsor

• Permanent easement / restrictive covenant on land

CRITICAL WETLAND / STREAM MARKET ELEMENTS

EXAMPLE #1 MARSTON PROPERTY – NORTH CAROLINA

• Restored 65 acres of wetlands and 6,500 linear feet of stream

• Credits sold to North Carolina DOT from the Umbrella Mitigation Bank

• Site Specific Mitigation Plan produced and submitted

• Integrated Wetland and Stream Mitigation on one site

*

EXAMPLE #2- SOUTH CAROLINA

• Endangered Species Act and state counterparts (Section 7 and 10 of ESA are primary drivers)

• Obama administration reversed Bush administrative directive on less review under Section 7

• California Guidance: 1995 (Broad meaning and additional market drivers under CESA, CEQA and California Coastal Act)

• Federal Guidance: Department of the Interior 2003 (Conservation Banking Guidance)

• Federal Recovery Credit Guidance: July 31, 2008

• Speciesbanking.com reports that there are now 113 banks in 11 states, with 89 being in California covering 136,000 acres

• Most are preservation; based on acres of habitat; have greater credit ratios of 1:1; are adjacent to existing protected habitat; and allow for multiple uses (hiking, hunting, fishing, cattle grazing)

• Bank owners include: Timber companies, NGO’s; family ranches and municipalities

* Source: “The Experience of Species Conservation Banking in the United States”, Jessica Fox, April 2005 * Source: “www.Speciesbanking.com”

*CONSERVATION BANKING (US)

• Primarily in California and west where there are strong state counterpart laws and board drivers

• Mitigation concept for endangered species less clear than wetlands within statutory and regulatory framework

• States east of Mississippi not yet embrace

• Variability in enforcement leads to uncertainly in market

• Habitat Conservation Plans are often in-lieu fee programs that undercut the market

• Less homogenous currency due to multiple species with different recovery needs (i.e., Fairy Shrimp, Red Cockaded Woodpecker, Golden Cheek Warbler, Salmon, Burrowing Owls, Swainson Hawk, Kit Fox, Heelsplitter Mussel, Cheat Salamander, Gopher Tortoise, Scrub Jay, Indiana Bat)

• Ecosystem marketplace – www.Speciesbanking.com (template outlining credits, credit location and availability)

• Business and Biodiversity Offsets Program (“BBOP”) by Forest Trends/Ecosystem Marketplace 2004

CONSERVATION BANKING MARKET (US)

BOG TURTLEClemmys Muhlenbergii

WATER QUALITY MARKETS

• Evolving under Clean Water Act (separate provisions from wetlands)

• EPA Office of Water: Water Quality Trading Policy, January 2003

• Constituents primarily: nitrogen, phosphorus, sediment (not toxics)

• Point to non-point trading (marginal cost savings)

• Examples: Ohio Draft Rules, Pennsylvania Rules Maryland Draft Rules; Virginia Rules; Great Miami River Trading Program; The Long Island Sound Nitrogen Credit Program; Kalamazoo (Michigan) River Watershed Program; The Grassland Area Farmers Program (California); The Piasa Creek Watershed Program (Illinois); The Lower Boise River (Idaho); The Minnesota River Basin Program; The Neuse Nutrient River Program (North Carolina); The Tar Pam River Trading Program (North Carolina)

• New voluntary Water Quality Fund for the Chesapeake Bay being launched by Chesapeake Bay Foundation, World Resources Institute and Forest Trends/Ecosystem Marketplace

FIGURE 1. HOTSPOTS OF NUTRIENT POLLUTION LOADS IN THE CHESAPEAKE WATERSHED

PA SPECIFIC CHESAPEAKE BAY AGREEMENT: (CAP & TRADE)

• CAP Nutrient Load to the Bay

- 71.9 million pounds nitrogen

- 2.46 million pounds phosphorous

- 0.995 million tons sediment

• Reduction Goals to Meet CAP

- 48.2 million pounds nitrogen

- 1.98 million pounds phosphorous

- 0.25 million tons

PENNSYLVANIA PROGRAM BASICS

• Applicable for the Chesapeake Bay Watershed

• Credit = Unit of Trade

– Expressed as mass/per unit time (lbs/yr).

– Shelf life of one year (October-September).

• HOWEVER, many BMP practices such as forested riparian buffers may generate credits for 10-20 years

– Generated and traded in the same watershed (Susquehanna or Potomac).

– Must be certified, verified and registered prior to use for permit compliance.

• Total phosphorous and/or total nitrogen reduction credits.

– All trading must involve comparable credits (nitrogen for nitrogen).

• Nitrogen and phosphorous reductions TO THE BAY beyond baseline and threshold requirements.

• Credits may be sold by an individual farmer or third party (aggregator) and the price and contract length depends on the market participants.

PENNSYLVANIA CREDITS AND CONTRACTS

• 65 proposals submitted for review with 43 approved for 946,272 nitrogen credits, 111,236 phosphorus credits and 35,593 sediment reductions.

– Total since the release of the interim final policy in 2005 through 1-16-09.

• 5 contracts completed

– 3 for new development

– 2 for existing WWTP facilities

EXISTING GHG MARKET INFRASTRUCTURE

• Kyoto Protocol

– Set goals of GHG reduction of 5% of 1990 baseline between 2008 – 2012. Two “flexible mechanisms”- CDM (certified emission reductions between Annex I and developing countries ) JI (emission reduction units between Annex I countries) (to be updated in Copahagon in 2009)

• EU Emissions Trading System

– ETS covers 25 member countries of the EU; mandatory cap-and-trade, allowances established by national governments in the form of National Allocation Plans, which cap in turn is applied to covered industrial facilities

US STATE AND REGIONAL GHG INITIATIVES

• Global Warming Solutions Act of 2006 – California AB 32. Statewide emissions cap to 1990 levels by 2020 (approximately 25%).

• The Regional Greenhouse, Gas Initiative (“RGGI”) Northeast – Cooperative effort by 10 Northeast and Mid-Atlantic states to reduce CO2 from power plants and use of a regional cap-and-trade system. States include – New York, Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, Rhode Island, Vermont and Maryland.

• Western Regional Climate Action Initiative – Washington, Oregon, Arizona, California and New Mexico and 4 Canadian Provinces announced in February 2007 an initiative to develop joint regional strategy for GHG emissions that would include a regional emission trade system. Six other states (Alaska, Colorado, Idaho, Kansas and Wyoming), 2 Canadian Provinces provides and 6 Mexican states are “observers”.

VOLUNTARY INITIATIVES

• Chicago Climate Exchange (CCX) - Voluntary cap-and-trade program in U.S. (52 members). In Phase I, members agreed to contractually reduce emissions 4% year below the average of their 1998-2001 emissions baseline by 2006. Phase II calls for an additional 2% below baseline by 2010. CCX members register emissions and are allocated Carbon Financial Instruments. Pricing ranges from 90 cents per ton to $4.00 per ton / CO2e.

• U.S. Department of Energy – 1605 (b) Voluntary GHG Reporting Program. Voluntary reporting of GHG emissions and database on emissions of GHGs, reductions and offsets.

• Carbon Neutral Retail Projects – Carbon offsets used to neutralize carbon emission from travel, conferences and home activities. Over three dozen companies now offer the public the ability to purchase offsets in the retail marketplace.

INTEGRATED RESOURCE MANAGEMENT

A project can be designed to integrate a broad range of distinct environmental objectives, including the following:

• Wetlands restoration, enhancement and preservation

• Restoration and enhancement of streams and watercourses

• Achievement of significant nutrient reduction

• Reforestation of agricultural lands

• Endangered or threatened species habitat restoration, enhancement and preservation

• Providing renewable energy functions• Providing management of stormwater• Allowing for selective timber management, oil and gas and

cattle operations

CONCLUSION

• Evolving use of credits used to support land acquisition, land protection and maintenance (incentive for conservation)

• Environmental credits can be used to satisfy ongoing environmental offset requirements in a cost-effective manner

• Integrated resource management / Credit “nesting” or “stacking”

• Markets are evolving in a positive direction

Environmental Banc & Exchange, LLC

10055 Red Run Boulevard, Suite 130 Owings Mills, MD 21117

Phone: (410) 356-5159Fax: (410) 356-5822

909 Capability Drive, Suite 3100 Raleigh, NC 27606

Phone: (919) 829-9909 Fax: (919) 829-9913

604 Greene Street

Camden, SC 29020 Phone: (803) 432-4890

Fax: (803) 236-5123

www.ebxusa.com

George Kelly

george@ebxusa.com

CONTACT INFORMATION