by Martin Doyle
Ronald Reagan implemented much of the ideology proposed by the Chicago boys. But applying market ideas to the environment—and especially to rivers—fell to his successor, George H. W. Bush. Bush’s most significant adoption of free-market environmentalism was a series of amendments to the Clean Air Act, which applied John Dales’s thought experiment to the real-world problem of the acid-rain-causing pollutants emitted by industrial smokestacks. Polluters were given permits for a certain quantity of pollution and told they could use their permits or trade them. The program worked shockingly well; air pollution was drastically reduced at a fraction of the expected cost.
Less visible was Bush’s subtle application of markets to streams and wetlands through an obscure program known as “no net loss.” Calls for no net loss started in the mid-1980s with the widespread realization that America’s wetlands were rapidly disappearing. Since the turn of the nineteenth century, wetlands had been drained or filled—lost—at the rate of over sixty acres per hour. Wetlands conservation had become a surprising environmental plank in Bush’s 1988 campaign. In 1989, as president, he followed up on that issue in a speech at a Ducks Unlimited meeting, where he asserted that the simple policy approach of no net loss would be an environmental legacy for generations to follow. In the nuance of regulatory language, streams and rivers were considered a special class of wetlands, and so the principle of no net loss applied to them as well.6
“No loss” of streams would have taken form as a cap—a ban on any development that happened to damage a stream or river. The inclusion of “net” was essential; it let in Dales’s ideas. No net loss created a scarcity of conserved streams, along with a commodity that would enable possible stream markets to operate. If developers wanted to move or channelize 300 feet of a stream on a property, they simply had to ensure that 300 feet of stream elsewhere was restored to compensate; there had to be a net balance of natural streams. Destroying streams, or polluting them, or filling them, or running them underground was not illegal; it just required a permit by the Corps of Engineers, the regulatory agency charged with overseeing the no net loss program. The permit approach built in the flexibility for government to be responsive to the changing demands of society. The requirement for a permit meant that the government had a say in where wetlands and streams were lost, and the discretion to evaluate those permits according to shifting priorities. Making Dales’s thought experiment real, the government created a cap-and-trade program for stream ecosystems.
In 2006 alone, the Corps evaluated approximately 96,500 permit applications under no net loss. That was the demand side. But this new market also required a supply side; that is, a supply of restored streams to be sold to developers in search of wetland and stream credits. This situation created an unusual business opportunity—a whole new market within an infant economy.
“We’re in the business of swapping swamps.” This is George Howard’s summation of the whole stream-trading business and of his particular firm—Restoration Systems. Like many other enviropreneurs, George Howard and his business partner John Preyer got into stream trading without much idea if it would actually work.
Neither Howard nor Preyer are scientists; neither has spent much, if any, time on rivers or in labs like Doug Thompson’s. But what they don’t know about river science they make up for in spades with their knowledge of business and policy; they can plumb the absolute depths of any topic related to water policy and environmental markets. In 1996, when they founded Restoration Systems, environmental markets seemed like they had a big future, but there was no end of unknowns involved in entering such a nascent market.
Howard and Preyer met in college in the late 1980s. They both ended up in Washington, D.C., as congressional staffers at about the time that no net loss was simmering in federal policy circles. Over beers in D.C. bars, they guessed that if and when no net loss was given some teeth and made a requirement for all development projects, then dozens—maybe even hundreds—of land developers would need stream restoration projects for their developments to get permits from the Corps. The first people with stream restoration projects in motion and credits stored up would have a corner on the market.
And so Howard and Preyer were among the first people to put together a bank of environmental credits. As Preyer describes the new, emerging market, “At first, developers did the restoration themselves; they simply set aside a portion of the project property to move streams, did some token restoration, and that’s it.”
Howard finishes the thought: “But what developer wants to deal with environmental mumbo jumbo? They want their permit from the Corps to develop, and they don’t want to give up any land if they can help it, so they’d rather just pay someone to make this whole environmental problem go away. That’s where we come in.”
The restored streams Howard and Preyer produce are formally called mitigation banks. And the commodity that Restoration Systems banks is called a stream credit. In North Carolina, where Restoration Systems was founded, one linear foot of restored stream equals one stream credit. Thus, when a developer impacts 300 feet of stream, that developer is debited 300 credits by the Corps of Engineers. That is, the developer owes the Corps 300 stream credits from somewhere, somehow. When the no net loss policy first went into practice, a developer simply would have restored 300 feet to generate the needed 300 credits, or found someone to restore 300 feet of stream on the developer’s property. But before long, stream restoration firms like Restoration Systems began banking credits by restoring streams on land the company bought itself. Once the Corps approved a mitigation bank and certified it as a restored stream, the bank could sell its credits to developers, road builders, and whoever else needed credits for their projects but didn’t want to deal with the hassle and expense of restoring streams foot by foot themselves.
In 2005 the going rate for a stream restoration credit was just above $200 per foot—a million dollars a mile. Stream restoration began to have the characteristics of a real market. Venture capitalists backed new mitigation banks. Federal and state agencies carefully regulated and monitored the market. Entrepreneurs leased or bought land, restored streams, and sold their credits to a wide range of buyers. And across the landscape, streams were tweaked and twisted, filled with woody debris, loaded with gravel, and scoured for fish to show their success. Mitigation bankers even had a trade group that lobbied state and federal legislators.7
But more and more bankers were getting into the business. An emerging army of engineers, hydrologists, and ecologists formed mitigation companies, competing to find available land on which to restore streams. Everything that John Dales had speculated about and that Milton Friedman had promised seemed to be happening; there was competition, and there was environmental restoration being done by private industry. With multiple mitigation banks in an area, developers soon had several options to choose from for credits. With competition came lower prices. With that, the aquatic dream of John Dales was realized: a functional market for streams, created by the government.
The bulldozers financed by mitigation bankers did largely the same type of work that had been done over the past decade in Oregon and Montana, reshaping channels into meandering rivers with pools and riffles as per the equations of Leopold and Wolman. With multiple companies doing similar work in similar areas, competition drove down prices. In North Carolina, one of the most competitive and active states in the restored stream market, it was difficult to get the price below $200 per foot of stream. Doing the work of restoring streams, regardless of the length of channel restored, seemed inevitably to require real estate attorneys, engineers, designs, and heavy machinery. Banking river credits had been a lucrative business, but it was quickly becoming a marginally profitable one.
In 2002, George and John from Restoration Systems saw an opportunity to innovate. Actually, they saw thousands of opportunities. Their home state of North Carolina had thousands of what the state called “functionally obsolete” dams. For George and John, all of these old, aband
oned, and obsolete dams presented an unusual opportunity: they were environmentally damaging and a persistent public safety hazard, not to mention a financial liability for whoever happened to have inherited one of them. The dams of greatest interest to George and John were very old ones that had been abandoned when the textile industry left North Carolina decades earlier. Dams like Carbonton, which had been impounding the Deep River for well over a century. In fact, William Tecumseh Sherman had for some reason left the Carbonton Dam untouched while he blazed a path through the South in the closing days of the Civil War. The dam was eventually converted to power a textile mill that was itself eventually abandoned, after which the dam sat idle and obsolete for decades. George and John had seen the dismantling of dams paid for by government agencies and even a few removed by power companies that could no longer profitably produce power from them. They knew dam removal was possible; they wanted to see if it could be profitable.
The Deep River is aptly named. Relative to the rest of central North Carolina, it cuts a deep valley through the rolling agricultural landscape. On the cool morning of October 20, 2005, fog had settled in, filling the river valley. From the bridge, the river below was completely shrouded in mist; just a sinuous gray cirrus cloud snaking through the landscape. Eerie sounds rose from it—a persistent clanging and banging, as though trolls were at work below in the bowels of the earth. Occasionally the fog would clear and reveal first a glimpse of a yellow backhoe and then the wall of the dam with a gaping hole at its middle. Gradually, grudgingly, the Deep River was rerouting itself from the historic spillway of the dam toward the middle of the channel. As fog again engulfed the scene and the hidden sounds of restorative destruction echoed up the valley, George Howard stood on the riverbank with an enormous smile on his face. He had found a way to innovate river restoration.
The novelty—the innovation—was how simple it was to restore the river. The creative destruction planned by Restoration Systems restored over five miles of stream in one fell swoop, creating an enormous bank of stream credits for less than $70 per foot. These credits could easily be turned and sold on the market for $200 per foot—a tidy profit. George and John had just changed the calculus of stream restoration markets. Within five years after the Carbonton Dam was removed, two endangered mussel species had reestablished a home where the Deep River ran through the former impoundment. Fish were regularly migrating to and fro through the area, as they had been unable to do for over 150 years. The Deep River took its straight path through the impoundment and started to wiggle it; meanders began to form on their own, and sandbars, pools, and riffles appeared—just like Doug Thompson said should happen.
This work of removing a dam was a step forward in comparison to the hundreds of millions of dollars of federal funds needed for dam removal and restoration on the Elwha River. Like the other more typical stream restoration projects sprouting up on the landscape, this work was being funded by credit-seeking land developers. In this new restoration economy, the real estate market was setting the demand for restored streams. The Sunbelt states of the Southeast were undergoing a building boom in the early 2000s. Along with buildings came roads. Each time a road crossed a stream, the road builder had to buy stream credits. From 2000 to 2007, nearly 227,000 miles of roads were built in the United States, creating enormous demand for credits. Almost a thousand mitigation banks were started to meet this demand, resulting in developers purchasing nearly $3 billion worth of stream and wetland credits between 2000 and 2007. By the numbers, the program looked like a resounding success.8
But a problem had developed as stream restoration shifted from private Montana ranches to credit markets. It was a problem that had arisen before, almost a century earlier, when Hubbs was doing his restoration work for the CCC: there was no clear user for the restored streams. In a few cases, there were genuine buyers for restored streams. For instance, when Greg Koonce designed a river for a rancher or neighborhood in Idaho, it mattered whether trout actually showed up in the stream. Stream restoration was advertised for its ability to deliver the conditions for trout, and so Koonce’s success was determined by whether his restoration produced more trout for the private landowner. But when permitting purposes were the motivation for stream restoration, the commodity was just linear feet of stream, restored to a point that satisfied the Corps’ arbitrary standards: a stream restored that no one genuinely seemed to want. Even if re-meandering, or even dam removal, worked for restoring the actual ecology of streams and rivers, the work at Carbonton Dam had still been done to create the fictitious commodity of stream credits for sale in the equally fictitious credit market. The “market” forces were the pure creation of government—a purely political economy—little different perhaps from the government doing the work itself during the Great Depression.
The key question for restoration, and the true test of Adam Smith’s philosophy, was whether anyone would take on restoring streams for purely self-interested motives without any government intervention or requirements.
In the high desert of eastern Oregon, cattle branding is a traditional community event, comparable to a barn raising back East. Neighbors—a relative term when the nearest ranch may be dozens of miles away—exchange help to get their annual branding, castrating, and vaccinating work done.
Scott Campbell runs his branding the old-school way—with neighbors and hired cowboys lassoing calves out of the herd. Cowboys on horseback plunge into a herd of cattle and emerge with a calf, roped at the head and feet. A dozen dusty hands leap on the wide-eyed calf, do their necessary deeds, and in less than three minutes the calf is back with mom. The event has an air of managed chaos; it’s a cacophony of mooing cows and bleating calves, twirling lassos, and frantic cowhands dashing around pulling red-hot brands out of the coals of an open fire. It is hot, dusty, and hectic, yet also functionally elegant: an efficient system for branding that has evolved and been adapted to the realities of Western desert ranches over the course of generations.
Scott Campbell likes systems that have evolved over long periods of time, and the system that he believes is saving his ranch begins with saving the streams. There aren’t many streams in this region. Campbell’s ranch—Silvies Valley Ranch—is perched at an elevation of over 5,000 feet in eastern Oregon. A few of the hills have ponderosa pine, but the semiarid landscape is otherwise a barren stretch of dusty sagebrush occasionally broken up by rocky outcrops. Those streams that do exist are typically little more than occasionally moist gullies, resembling nothing more than trenches, incised deep into the silty valley sediment. There might be a narrow belt of grasses, or even willows here and there, but these are often settled deep within the gully, removed from the broader landscape by high streambanks. Above them, yet more sagebrush grows. This is the alluvial landscape of the high desert of the West, stretching from eastern Washington down to Arizona.
Cattle can’t live on sagebrush; so ranchers have to irrigate to grow grass, if they can, or else buy hay. Both cost money. In a drought year like 2013, hardly any ranchers can grow enough forage to feed their herds. So they face buying hay—in a market where demand is driving the prices up rapidly—or selling much of their herd. With all the ranchers facing the same climate, a drought can lead to a massive sell-off of cattle across the region, and cattle prices inevitably plummet.
This arid landscape has a few unusual features. One of them is near a beaver dam, on Forest Service land adjacent to Silvies Valley Ranch. The view upstream from the dam is striking: surrounded by an expanse of drought-stricken, sagebrush-ridden landscape sit forty acres of lush green grass. “This is what this region would have looked like with beavers,” is Campbell’s perfectly reasonable interpretation. And to a rancher, a patch of green grass like this one is as good as gold.
Campbell grew up in this valley and is the son of the town doctor. He went to Oregon State University, became a vet, and then went big by seeing systems where others didn’t. As a vet he started a pet hospital that grew into Banfield Pet Hospital
s. He and his wife, Sandy—who also grew up in the high desert of eastern Oregon—built their first hospital into a franchise of 450 pet clinics. When PetSmart Stores began putting vet clinics in their stores, those were Banfield clinics.
During the astronomical growth of the Banfield business, the Campbells would return to a cabin in the Silvies Valley for vacations with their two sons. The cabin sits on a bluff, and below the bluff runs Hay Creek—a creek just like the myriad other gullied streams of the area. But in 2003, Campbell decided to work on the stream to give his sons somewhere to fish. Redband trout are the fish of choice here, and they are generally found only in the most pristine valleys of preserved lands. Campbell didn’t know about Reds Wolman and Luna Leopold. He didn’t hire engineers or geomorphologists. He just looked around, scratched his head, and got to work building rock weirs—dams about the same height as the streambanks—across the creek and floodplain. The idea was to slow down the water and create pools, and then the stream would flow across the weirs and create a small riffle, thus making some kind of habitat for redband trout. It worked, and Campbell’s sons spent the next couple years pulling trout out of Hay Creek during summers at the cabin.