Government-Run Offsets Gone Awry
And safeguards drawn from their struggles
I’ve been reviewing wetland protection and mitigation policies across several states for an upcoming white paper and recently submitted public comments to Colorado’s draft Regulation No. 87. That work got me thinking once again about ongoing challenges with government-run offset programs, known in the US as “in-lieu fee” programs (ILFs).
I want to state upfront that I don’t think ILFs are a bad idea full-stop. Governments have good intentions for establishing them - to jumpstart a mitigation market, address credit shortages, or supplement paltry budgets for restoration and land management. However, you’ll see with the list of examples below that these programs frequently encounter significant problems. Consideration of safeguards is worthy of attention. This is especially true for states like Colorado considering how best to write and implement wetland mitigation regulations for the first time.
Problems with government agencies developing offsets are predictable. Issues arise from common patterns like agencies giving themselves lower standards as compared to other forms of offsets, lacking expertise to develop and run an offset program, and not fully considering or including all costs into the price of an offset. Staff may also face direct and indirect political pressure to make sure that fees are low or ‘at cost.’
The result? Dramatically underpriced and underfunded offsets. The underfunding problem is severe. Many programs can’t even finance the initial offsets they are supposed to provide, let alone provide long-term management. The problems aren’t unique to the US - national, regional, and local agencies worldwide experience the same issues because they stem from identical bureaucratic constraints, biases, and cultural issues.
The Consequences of Poorly Managed Offset Programs
When government-run offset programs don’t have prudent safeguards, significant problems emerge:
Undermined Incentives. The financial incentive to avoid impacts can be undermined when offsets are artificially cheap.
Taxpayer subsidies. Taxpayers (or NGO donors) pay for land conservation and inadvertently subsidize developers who don’t face the full cost of their impact on wetlands and streams.
Delivery challenges. The credit provider finds challenges in delivering the amount or quality of restoration, and with delays, inflation and overhead costs erode the funds available to complete the restoration.
Market disruption. When subsidized, cheaper credits run out, and developers have to face the reality of higher costs - which can be jarring.
Case Studies: When Government Agencies Fall Short
Below we provide some real-world examples of government agencies poorly managing offset development or failing to follow their own rules (sources: EPIC research, Madsen 2023; Male, personal communication, 2023; Doyle 2019).
Getting in Over Their Head - the Western Association of Fish and Wildlife Agencies’ (WAFWA) Lesser Prairie Chicken Mitigation Program. In a case involving an endangered bird, a consortium of regional wildlife agencies proposed and received license to run a large offset program for energy development in the American Midwest. The effort was proposed as an alternative to higher national regulation of the species. The program largely failed to achieve its objectives and ran out of funding.
A 2019 audit of the WAFWA program estimated that the agency had committed to $95-$110 million in offset needs but only collected $65 million for that purpose, a 32-40% underestimate of the price at which offset credits should have been set. One documented problem was that regulators set a pre-assigned value for mitigation fees with no flexibility to change them (and would have lacked political support to do so if they had tried).
Persistent Problems with Fee Management - Kentucky’s Stream ILF. Kentucky's stream In-Lieu Fee (ILF) program has been plagued by continued problems with spending money and setting fees. A 2015 report documented numerous challenges including: unsuccessful efforts to find acceptable project locations (described on page 4), suspension of permission to accept project fees in one watershed because of failure to find offset project locations (page 6), and collection of $61 million in fees from 2012-2015, but only spending $46 million (pages 9-11).
By 2021, the agency’s unspent mitigation fees had grown to $167 million (page 11). While much of that money had theoretically been allocated to projects, it remained in the account and unspent on land acquisition or habitat restoration. Damages permitted 1-10 years had not been offset by the $167 million in habitat benefits expected when the fees were collected.
Program Termination Due to Non-Compliance - the Tennessee Stream Mitigation Program (TSMP). Tennessee failed to deliver on a portion of mitigation obligations from fees collected from 2003-2021 in the TSMP. In 2021, the ILF was terminated due to non-compliance and unsatisfied credit liabilities.
In 2025, a nonprofit organization - the National Fish and Wildlife Foundation (NFWF) accepted the $35 million leftover from the state program and took over the role of running what was renamed the Stream Mitigation Fund for Tennessee (SMFT), releasing an RFP to fulfill mitigation in 2025. One industry insider noted that it’s near impossible to fulfill the obligations (145,000 credits) given the funds available, or not without heavily relying on preservation, which erodes the goal of no net loss. To put things in context, the total offset obligations divided by the funds available is $247 / credit, while stream credits in credits in North Carolina are $791 / credit, and credits in Virginia range from $400 - $1,800 / credit.
Inflation Eroding Buying Power. Government ILF programs often fail to update their fees annually, allowing inflation to eat away at buying power over time. A $50,000/acre fee set in 2020 will only buy $40,000 worth of mitigation in 2025 (source: US Bureau of Labor Statistic’s Consumer Price Index inflation calculator). For example, the Massachusetts ILF hasn’t updated their stream credit fee over the last eight years; and only updated the wetland credit fee ten years after their initial price was set. The Indiana Department of Natural Resources last set its fees for stream and wetland credits seven years ago.
Eroding Additionality. Additionality is compromised when offsets become "too expensive" and a government entity creates a lower-cost alternative. For instance, Miami-Dade County in Florida was considering developing offsets on “...County lands that were [previously] purchased as part of DERM’s Environmentally Endangered Lands (EEL) Program and set aside for conservation” (Resolution R-1051-21). If taxpayers in the jurisdiction think they are getting lower costs by using public lands, they’ve forgotten that they already paid for it before - supposedly to protect it in perpetuity. Taxpayers are not “getting a good deal” but rather giving a good deal - a subsidy - to developers in their area.
Ignoring Existing Offsets. Advance offsets are sometimes ignored when a government entity wants to funnel funds into a priority project. For example, a reservoir impacting >250,000 feet of streams and 350 acres of wetlands plans to develop offsets on a National Wildlife Refuge (public lands that have already been conserved). The plan claims there are not enough credits available and does not mention the 150,000 feet of stream credits and roughly 350 wetland credits that indeed did exist in the watershed (as of December 2023 when this example was identified).
When NGOs or government agencies develop offsets, they can avoid the problems above by ensuring that the prices of offsets are based on the full cost accounting of developing those offsets, and following the same standards as other forms of mitigation.
Here’s How Government-Run Offset Development Could Head in the Right Direction
The key thing the government can do to minimize the risk of underdelivering on mitigation or inadvertently subsidizing wetland impacts is to ensure that their credit pricing truly represents the full cost of offsets. Duke University's comprehensive review of ILFs found numerous failures stemming from offset pricing issues (see discussion starting on p.12 of “The Financial and Environmental Risks of In Lieu Fee Programs for Compensatory Mitigation,” Doyle 2019).
What I Recommended to Colorado
As Colorado begins writing state wetland permitting and mitigation regulations, EPIC suggested several important safeguards:
Include All Costs in Determining ILF Credit Costs. While there is already language stating that ILF credits costs “must be based on full cost accounting,” the list of example expenses should add the following: inflation by the three year deadline, and periodic independent audits. The former provides a mechanism to account for the increase in mitigation costs between fee collection and project implementation (half of ILF programs indicated they had missed or expected to miss the 3 year deadline, according to a 2019 review of ILFs by the Environmental Law Institute). Additionally, regulations could require ILFs to implement routine forecasting on program revenues and liabilities for a range of potential credit prices to assess the most appropriate program pricing (as suggested in a comment letter by the Ecological Restoration Business Association in 2025)
Automatically Adjust for Inflation. Our suggested language is: “Credit costs will apply an inflationary index applied automatically on an annual basis. These inflationary increases will not require an instrument modification.”
Require Independent Audits. Under the list of requirements for an ILF proposed plan (“compensation planning framework”), we suggest adding: “A plan for independent audits every five years (or until the ILF is sold out), to identify any credit and financial liabilities of the program. All books, accounts, reports, files, and other records relating to the in-lieu fee program account shall be available at reasonable times for the audit.”
Clarify Consequences for Missing Deadlines and Credit Liabilities. Under elements required for a draft ILF instrument, we suggest adding: “A discussion of consequences, penalties or other required activities should the three year deadline be missed, and who would bear the costs of credit liabilities should they be identified by the ILF program or during an audit & / or should the program be in default as identified in 87.10(8)(d)(vi)(D).”
Two Additional Safeguards Relevant if States are Running an ILF (Colorado is not).
The first safeguard is stipulating credit cost methods in regulation rather than allowing for politically influenced credit pricing. North Carolina includes their credit cost methodology in state code (15A NCAC 02R .0402), and stipulates that costs will be adjusted at least annually.
Second,due to the relatively poorer track record of government-run ILFs over mitigation banks, ILF credit prices should be higher than mitigation bank prices to account for inflation and risk. Virginia's prospectus for a state-run Wetland and Stream Replacement Fund (WSRF) purposefully set their credit prices 2-3 times higher than an existing statewide ILF program to: lessen the likelihood that the state is competing with other ILFs and mitigation banks; to cover risk of more costly implementation due to lack of economies of scale with smaller scale restoration; and to meet the state law’s goal of no net loss of wetlands. After fulfilling the offsets needed from collected fees, any excess funds may be used to purchase “other water quality improvement projects.”
The Broker Model: A Better Alternative to Government as Developer
The second thing government can do is back away from being an offset developer and move into a position as an offset broker.
The North Carolina Success Story. North Carolina initially attempted to deliver offsets as an ILF, but struggled to deliver all offsets in a timely manner. The state subsequently adopted an annual Request for Proposal process. Over 20+ years, they’ve restored and/or protected over 4 million feet of stream and 29,000 acres of wetlands, meeting the compliance needs of over 650 development projects.
The majority of the state’s cumulative $508 million in contracting for their ILF is for full delivery of restoration outcomes ($398 million, or 78%), and another $5.6 million (1%) is the purchase of outcomes from mitigation banks (figures are as of 2023).
The industry association ERBA acknowledged the system’s effectiveness:
“We have seen the value of a well-functioning statewide mitigation program for permittees and for our industry in North Carolina where their Department of Mitigation Services (NC DMS) administers a transparent and competitive bid process for fair pricing and timely application of ILF funds towards actual on-the-ground restoration outcomes. Indeed, many in the industry view the NC DMS program as the gold standard, representing best practices learned over years of trial and error.” (ERBA comment letter, 2025).
It should be noted that to use the state ILF system, a permittee must first certify that credits are not available in the watershed of the impact.
Other Promising Approaches
Virginia’s ILF intends to be an option of last resort. The state will hold fees and purchase credits if they become available within two years, and if not, will submit a Request for Proposals to fulfill the offset obligation. However, there are concerns that the state may not deliver on-the-ground mitigation within the required three-year timeframe.
The non-profit National Fish and Wildlife Foundation (NFWF) has led a successful ILF in California, targeting areas with few offset options, purchasing credits if they become available, or contracting for delivery of offsets when necessary.
By implementing full cost accounting, following consistent standards, and transitioning from developer to broker roles, government agencies can significantly improve the effectiveness of environmental offset programs while avoiding the pitfalls that have plagued past efforts.
