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Conservation Banking

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. One viable solution.

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Conservation Banking

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  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

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