Professor Looks at Winners and Losers Under Environmental Permit Regimes

Jason Johnston’s Paper Looks at How Landowners, Regulators Bargain
Jason Johnston

Jason S. Johnston is the Henry L. and Grace Doherty Charitable Foundation Professor and directs the Olin Program in Law and Economics. Photo by Jesús Pino

June 24, 2021

Farmer John Duarte faced $40 million in penalties from the U.S. Army Corps of Engineers for trying to grow wheat. How did he get there?

Professor Jason S. Johnston of the University of Virginia School of Law wanted to examine the case and others like it to better understand who wins and loses in the environmental permitting process.

His resulting article, “Environmental Permits: Public Property Rights and the Extraction and Redistribution of Private Value,” was published in the latest edition of the Notre Dame Law Review. Johnston, an expert in environmental law, is the Henry L. and Grace Doherty Charitable Foundation Professor at UVA and directs the Olin Program in Law and Economics at the Law School.

In the paper, he focuses on two of the most powerful federal environmental permit regimes: wetlands permits under Section 404 of the Clean Water Act and incidental take permits under Section 10 of the Endangered Species Act.

“The paper gets more into the details of how landowners and regulators bargain in these regimes,” Johnston said. “It’s very different than in the world of private rights. It’s not like bargaining with a landowner to get them to change or stop an activity you consider to be a nuisance.”

He added, “No one has tried to analyze in detail how this permit bargaining takes place. I trace through and unpack bargaining incentives under these permit regimes.”

While he acknowledges that preserving both wetlands and species habitat is important, Johnston explains in the paper how the cost of such preservation may be concentrated on particular private landowners.

He references the plight of Duarte, the farmer who acquired 445 acres in California’s Tahoma County for wheat farming. The land contained vernal pools, where fairy shrimp, which are under the threat of extinction, appear during the wet winter; their habitat dries up as warmer weather returns. Duarte knew about the ponds and hired an environmental consultant to help him plan around the pools before plowing his fields.

Despite not having earlier objections, by the time he had plowed his fields, the Army Corps of Engineers decided that the rows — 3 to 4 inches deep — constituted “small mountain ranges” that discharged fill into the ponds. Citing the agency’s favored interpretation of what defines navigable waters under the Clean Water Act, as set out in a concurrence by Justice Anthony Kennedy, the Corps argued the ponds were protected by the Clean Water Act because of their proximity to a nearby stream, which also cycles between wet and dry over the course of a year.

Duarte fought back in court. But after about five years, the Corps said he owed $40 million in penalties. He decided it was best for his business, and the employees who relied on him for a paycheck, to settle. Duarte agreed to pay a civil penalty of $330,000 and to purchase $770,000 worth of vernal pool mitigation credits.

Credits like the ones Duarte bought are part of a larger banking system.

“Landowners who have agreed with USACE to mitigate the loss of wetlands caused by their own land development can then buy preserved wetlands credits from mitigation banks that have been approved by USACE,” Johnston writes. “Wetlands credits represent wetlands located elsewhere that typically have been preserved by being included in conservation easements on private land.”

He argues that the economic winners in the system are the landowners who comprise the banks, to whom the monies flow. The losers are landowners who must buy the credits or else incur potentially business-killing fines.

Johnston refers to the environmental permitting regimes as “reverse eminent domain” because, under such regimes, federal regulators assert a preexisting interest in the property, rather than one that a court has determined is required by law. And instead of paying the owner fair market value based on the government’s interest in the land, they begin tallying up the fines that the owner potentially owes, prior to any court potentially weighing in.  

“A landowner can bargain around the cease and desist order, buying back the right to develop, but otherwise has no right to develop and can be criminally prosecuted for violating the cease and desist order,” Johnston writes.

Johnston said he has been thinking about the problem for many years. Federal regulators, who have great individual discretion, are under no obligation to consider the value of private assets, or the impact of regulatory actions.

“You’re relying on someone who works for the public to be reasonable, but they don’t have to be, legally,” he said.

His recent paper started to take shape in his mind after the Duarte case, which he discusses in his Legislation and Regulation course. Last year, the Classical Liberal Institute of New York University Law School hosted a conference via Zoom, “The Public Valuation of Private Assets,” at which he presented the paper.

His paper includes mathematical equations that break down the different financial impacts on landowners that can be generated by the legal powers held by regulators under a permits regime.

Johnston’s scholarship has examined other topics related to natural resources law, and to torts and contracts. He has published dozens of articles in law journals, such as the Yale Law Journal, and in peer-reviewed economics journals, such as the Journal of Law, Economics and Organization.

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