An analysis of economic incentives in wetlands policies addressing biodiversity

This paper offers an economic analysis of economic incentives within the Habitat Conservation Plan and Wetlands Mitigation Bank policies. Both policies are relatively new policies for protection and restoration of ecosystems such as wetlands that support biodiversity. The components of the policies such as the measures of success, conversion of biological units into economic units, and timing of the actions by policymakers and landowners influence the incentives to carry out protection and restoration. 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 or habitat conservation plan. 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, discount 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 more restoration 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 at a higher discount rate and cost.