FWS could get by with a rough estimate of potential habitat (PH), which would require physical data and a restoration cost judgment.

The preferred ecosystem approach for HPC markets would eliminate the costly, lengthy, and politically sensitive listing process for thousands of potentially threatened or endangered species. Since the HPC process would relieve the FWS and landowners of the cost and uncertainty of case-by-case rulemaking, its implementation would not place greater demands on taxpayers. Indeed, the reverse is more likely.

Should Habitat Consumers Pay?

Two issues stand out in the debate over whether habitat preservation should be a burden on landowners. The first is the cost to the government of administering species protection programs; the second is the cost to the landowner of forfeiture of property rights in order to provide habitat.

A strong case can be made that the current FWS procedures are overly costly. After all, FWS appropriations increased nearly 80 percent from 1988 to 1992,63 a time during which both landowners and environmentalists were becoming increasingly dissatisfied with the agency's performance. As explained in Chapter 3, the HPC market approach would be much less expensive to implement, especially if it is based on ecosystem management. In addition, the government's role in all but the most severely habitat-deficient areas would be limited to defining habitat, determining the amount of land within each ecosystem needed as habitat, defining appropriate management agreements for landowners considering producing HPCs, and occasionally adjudicating disputes.

The HPC approach would also be far less expensive than forcing the government to reimburse landowners for taking their land for habitat through the current FWS procedures. That would greatly increase federal land holdings and associated land management costs while only aiding landowners who suffer a minimum 20% value loss, should HR 925, a bill approved in February 1995 by the U.S. House of Representatives, become law. The issue of "just compensation" for landowners whose property rights are compromised or forfeited under the current FWS procedures remains the chief focus of today's Congressional debate over ESA reauthorization.

On one side are landowners, who consider the habitat values of private land as a costless byproduct of land use practices that have left the values intact (or even created the habitat values), not as an unused right in the public domain. They believe the public should pay for the benefits once there is an opportunity cost.

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On the other side are those who believe general natural environmental attributes like clean air, clean, water, and biodiversity belong to the public. They argue that, if landowners are responsible for their share of impact on shared air and water, they should be responsible

Wall Street Journal, op. cit.

*Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, New York), 1989; Mark L. Pollot, Grand Theft and Petit Larceny: Property Rights in America (Pacific Research Institute for Public Policy, San Francisco), 1993.

for their share of impact on biological diversity. According to that view, any restrictions on land to provide habitat do not entitle affected parties to compensation because they only represent a public claim of rights that landowners have left in the public domain.

Public ownership of biodiversity is rejected by some people because habitat elimination does not produce observable physical impairment of third-party property rights like pollution does. The existence of public rights to protect species was asserted in the ESA, yet the law's failure to propose equitable means for allocating public costs for the assertion of those rights remains a chief obstacle to ending the range war between regulators and rural landowners.

The HPC approach actually provides a mechanism for resolving this dilemma. First, landowners will be able to capture the economic value in already-fallow land they agree to set aside as habitat without in most cases ceding all their rights to the land. Second, HPC consumers would in most cases see the value of their own property rise as well, especially in areas where development pressures are highest.

The cost to the public for asserting its-claimed public rights in these properties can be measured as the combined net loss (if any) in property value to HPC producers and HPC consumers. The government could compensate counties and other political subdivisions for the loss in tax revenues due to the lowered property values of land set aside as habitat. Another way to pay for this assertion of public rights would be to provide tax concessions to HPC purchasers who suffered a net loss (which should, of course, be automatic under the current tax code).

Summary and Conclusions

The current FWS procedures for implementing the ESA do too little to protect species; they also threaten an unnecessarily high toll on some regional economies. The HPC market approach would create incentives to maintain and restore habitat and to avoid habitat elimination, and it would do so in a way that safe biological minimums could not be violated. It would also serve to minimize the fiscal impact of takings legislation by limiting regulatory takings to a percentage of the value of the HPC purchaser's property (which in most cases would not be exceeded in HPC transactions).

For landowners, the HPC approach would also represent an enormous improvement over the current system. Landowners with low-value non-habitat uses would be able to increase their incomes by supplying HPCs. Landowners with valuable non-habitat uses would benefit by avoiding the costly, time-consuming, uncertain ESA Section 10(a) permitting process.

The HPC approach asserts public ownership of biodiversity, in that habitat eliminators (HPC consumers) would (when they do not produce HPCs themselves) have to pay for certain uses of their own property, while HPC providers would be rewarded for protecting habitat on their property. While some property rights advocates may not be wholly appeased by this approach, it is far better than the current scheme in which all property rights in an area being considered for listing are in jeopardy and in limbo indefinitely. Moreover, by setting economic values on the rights being forfeited (the price of each HPC), the HPC approach also

sets definable criteria for compensation of negatively affected HPC purchasers should Congress opt to provide for such reimbursement.

As noted earlier, the HPC approach has at least six advantages over the FWS' current procedures and most existing proposals (including the Clinton initiative). In addition, the proposed ESA revision could help avoid another unpleasant potential outcome of species protection efforts. Many natural scientists, including Reed F. Noss," have concluded that "land use and human settlement patterns must be regulated, much more so than today." Measured in dollars or freedoms lost, what Noss suggests would be a much more costly approach than just specifying general outcomes, such as reducing the need for additional secure habitat to zero over time, and achieving them through economic incentives.

The greatest enemy of any reform proposal is inertia. Transition issues are always thorny, and people have proven willing to pay a high price to avoid the uncertainty that comes with change. They stick with the devil they know. A successful defense of the current FWS procedures against the proposed market-based reform, or replacement of the ESA with another command-and-control approach, would-be a great tragedy.

*Op. cit.

Appendix: Technical Details

The correct definition of property rights and the right physical price of an HPC depends on how habitat is defined and on three parameters:

(1) Unprotected habitat (UH);

(2) Safe minimum additional secure habitat (ASH); and

(3) Potential habitat (PH).

Each of these parameters is expressed in units of land area. Note that for any region:

where . and

(A-1)
(A-2)

APH = already protected habitat, including park and wildlife refuge acreage, NH = land area that is not habitat, and that could not be made suitable habitat at a reasonable cost.

PH is the land area that cannot support the species now, but that could be made (at a reasonable cost) into habitat. PH > 0 in most areas with a significant human population; for cost reasons, existing habitat (UH + APH) plus potential habitat (PH) is likely to be less than the amount of habitat that existed prior to human settlement.

A land use inventory would be needed to determine the values of UH and PH; a conservative estimate of PH would be sufficient. ASH depends on a species' behavioral characteristics and how much of its habitat is already protected, such as in parks or refuges. The objective of any species protection strategy should be to assure that enough land will remain as suitable habitat, or to make ASH = 0.

Species Not Yet on the Brink of Extinction

By definition, a species is not on the brink of extinction (threatened or endangered) whenever UH > ASH. For expositional purposes, if UH = 1,200 acres, ASH = 800 acres, and PH = 200 acres, another 800 acres must be assured of remaining suitable habitat to provide enough for the species to have a satisfactory chance to survive (or to protect a specified ecosystem). Those 800 acres would have to come through management agreements (MAs) for some combination of the 1,200 acres of existing, but unprotected habitat (UH) and restoration of some of the 200 acres of potential habitat (PH). To link habitat elimination and protection in a market, the 400 acres [(UH - ASH) = 1,200 - 800] that can still be eliminated without threatening the species must be used to bring about the protection of ASH of 800 more acres (equation A-3):

where

(A-3)

PP = physical price, expressed as newly protected units of habitat per eliminated unit of habitat.

In this case, the physical price (PP) equates to 2 acres that must be protected per acre eliminated (Option A):

=

PP ASH/(UH - ASH)

(A-4)

Alternatively, one non-habitat acre must be restored with an MA per acre eliminated (Option B).

There are two versions of pre-endangerment Option A. With the first version, appropriate MAS would be set up for 2.0 acres per acre of habitat eliminated. With the second, a total of 400 transferable HPCs would be issued to landowners (public and private) in proportion to their share of unprotected habitat (UH), and an MA would be imposed on the remaining ASH acres. HPC sales would concentrate the habitat on the property where non-habitat land uses were the least valuable. The two versions of Option A would differ to the extent that MAS required active management.

With pre-endangerment Option B, landowners would obtain one HPC by purchasing a MA for one restored acre. Restoration would be more attractive as UH approaches ASH; that is, as the physical price increases [since PP = ASH/(UH - ASH)]. If Option B were exercised, the physical price (PP) of Option A would decline because the conversion of an acre of potential habitat (PH) to habitat protected with a MA reduces ASH, but not UH.

To see how the physical price (PP) could change, use the numbers to examine the effect of purchasing 200 HPCs, 100 each through Options A and B. The HPC purchases with Option A would shrink ASH by 200 acres and UH by 300 acres (100 eliminated, plus 200 protected), which by itself would leave ASH/(UH - ASH) unchanged at 2. But the use of Option B would further reduce ASH to 500, thereby changing PP to 1.25. Restoration of the other 100 acres of PH would lower the PP to 0.8. For administrative purposes, an annual update of the PP is sufficient. In cases where ASH and UH reach zero together, Option B would be the only remaining way to acquire a HPC.

Species on the Brink of Extinction

The best time for government intervention to create and define property rights is before a species is endangered or threatened, or when UH > ASH (although a species could still be classed as "threatened" while UH > ASH based on the rate of decline of UH). Unfortunately, for many species, ASH already exceeds UH (though UH + PH may still be greater than ASH).

If ASH is roughly equal to (UH+ PH), there is nothing for market forces to allocate. The best approach in those instances, especially as PH's share of (UH + PH) increases, would be for the government to restore all of the PH acres, then to purchase a MA for all of the habitat. Short of that level of pro-active involvement, the current scheme is reasonably well-suited to such situations, which would be most likely to occur on small islands, isolated mountain summits, peninsulas, or other small, isolated habitats.

So long as (PH + UH) > ASH, it is possible to allocate up to [(PH + UH) - ASH] acres, and markets do that better than bureaus. To illustrate, let UH = 800, ASH = 1,000, and PH = 400 acres. Then the 200 acres [(PH + UH) - ASH] which can still be eliminated