While many American landowners would groan and curse at discovering their property is home to an endangered species, Glenn Hawes has made it work for him—to the tune of more than $300,000 already. Hawes, a California landowner, converted his land into a “conservation bank” that sells credits to developers who unavoidably harm the habitat of an endangered species within a specified service distance.

Hawes, whose bank was approved in the spring of 2001, has sold only a small portion of his approximately 150 available credits so far (some to Safeway and Wal-Mart) at the going price of $65,000 to $75,000 each.

Hawes is not the only one to realize that money can be made from protecting the habitat of endangered species. Since the state sanctioned the trading of these credits in 1995, about 40 conservation banks have sprung up around California.

One of the main advantages of conservation banks is they permit the destruction of small, often isolated, chunks of habitat in exchange for the permanent protection of larger, more apt, tracts of land for endangered species.

The history of conservation banking lies in mitigation banking—a similar concept that was designed for wetlands in the 1970s.

The federal government has established a “no net loss” wetlands policy. If a wetland is unavoidably destroyed or degraded, the party responsible must mitigate the damage by restoring, enhancing or creating a wetland similar in function within a certain geographical distance.

This policy sounded sensible but until tradeable wetland credits came along in 1995, the track record of wetland mitigation was dismal.

Mitigation was usually done by individual developers and landowners on a case-by-case basis, resulting in small, isolated wetlands whose long-term management was often shaky. For instance, a 1991 study for the South Florida Water Management District found that of the more than 100 projects needing wetland mitigation, only 40 of them carried out the mitigation. Of the 1,058 acres of wetlands that were supposed to be created, only half actually were. Also, only three sites had long-term management plans.

In 1995, the mitigation concept was given new life when several federal agencies jointly published guidelines for mitigation banks, clarifying rules and expectations. Over the last seven years, mitigation banks have been forming across the country.

In general, a mitigation bank restores, enhances or creates wetlands for which it then sells credits to developers in need of mitigation for an impacted wetland. By taking advantage of economies of scale, banks are able to conduct a large project cheaper than several small projects. There are also environmental benefits because one large wetland offers more undisturbed habitat and more hydrological functions than small wetlands. Also, by selling credits only after proving successful restoration, the “no net loss” policy can be realistically achieved and the wetlands will have long-term management plans and endowments in place.

One example of a successful mitigation bank is Wildlands Inc. near Sacramento. The bank currently operates 2,631 acres in eight parcels in northern California for which it sells a variety of types of credits such as vernal pools, emergent marshes and riparian habitat. One parcel, an island in the Sacramento/San Joaquin river delta, took an investment of $2 million to make hospitable for several endangered fish species, but has earned them $9 million in credits.

Mitigation banks across the country (and conservation banks in California) have demonstrated the potential for market incentives to help improve and protect the environment.

Harnessing the power of incentives is particularly important in the field of endangered species conservation because of the bad blood that has been created between regulatory agencies and landowners. The Endangered Species Act (ESA) is the main culprit in creating this conflict by using heavy-handed regulation on private land that causes landowners to unfortunately view rare critters as a liability.

Safe harbor agreements, a 1995 innovation in ESA regulation in which landowners are not penalized for making improvements to their land that attract more rare species, are a positive step toward reversing those perverse incentives. However, more steps like this are needed.

California is currently the only state to have a clear policy on conservation banking. Although individuals and companies in other states are making efforts in this area, for instance International Paper is breeding endangered red-cockaded woodpeckers on its land in southwest Georgia hoping to one day sell woodpecker credits, there is no clear framework for how to proceed.

Other states, as well as federal agencies, should examine this concept more closely and look to California’s example of employing the power of the market to protect critical habitat.

California’s banks have protected species such as the coastal California gnatcatcher and the Quino checkerspot butterfly. If more states allow for this type of innovation, we may see credits for everything from the eastern prairie fringed orchid to the Virginia northern flying squirrel.