Using Environmental Offsets in Wetlands Management

Environmental offsets have been proposed as a technique for managing the environmental impacts of newdevelopments in regions that are not in compliance with environmental standards. By requiring developersto 'offset' any impacts by purchasing 'environmental credits', environmental quality can be maintained oreven improved. Environmental offsets have a lot of intuitive appeal, and are being used widely in the USA,Australia and other countries. However there is at present no robust theoretical framework for analyzing theuse of offsets, which has led to some of the weaknesses of existing programs and criticisms against the use ofoffsets. We present an economic model for designing offset programs that is based on identifying andvaluing environmental service flows. We also discuss a number of factors that influence the effectivenessefficiency of offset programs including fungibility, effects on incentives of landholders and uncertainty andmake recommendations about how to respond to these factors based on our model. The distributional effectsof offsets are also explored and it is noted that offsets are not distributionally neutral. We argue on the basisof distributional effects that it is not appropriate to use offsets alone to seek to improve environmentalquality. Furthermore, we recommend the combining of offsets with other market-based instruments such asPigouvian taxes or cap and trade systems in order to reduce the negative distributional effects of offsetprograms, provide greater scope for achieving environmental improvements and to increase the probability ofachieving first best (socially optimal) solutions.