Research Highlights Podcast
June 3, 2026
Environmental market design
Will Rafey discusses how contracts to remediate or restore Florida’s wetlands generated billions in gains from trade, but also increased total regional flood damage.
Source: kvd design
Since the 1990s, developers in Florida who want to build on wetlands have been required to buy offset credits from "wetland mitigation banks," private restoration projects that convert degraded land, often former pasture, back into functioning wetland elsewhere in the same region. Like other environmental offset markets, the program has proved controversial.
In a paper in the American Economic Review, authors Daniel Aronoff and Will Rafey found that wetland offsets generated roughly $2.4 billion in private gains from trade but also a significant increase in overall flood damage because wetlands were moved away from places where they protected existing homes.
Rafey recently spoke with Tyler Smith about what the results mean for the design of environmental markets and wetland regulations.
The edited highlights of that conversation are below, and the full interview can be heard using the podcast player.
Tyler Smith: What are offsets, and what is the basic problem they're trying to solve?
Will Rafey: The main problem that environmental policy typically tries to solve has to do with a variety of people who might be degrading the environment through different kinds of economic activity. The historical approach for dealing with those kinds of economic decisions was to focus on the people creating those externalities and to regulate them directly. So, you can imagine a polluter who is putting something into a water stream or into the air, and you go directly to that polluter and ask them to change what it is that they're doing. Over the last few decades, there have been a number of new technologies which have allowed us to have a more expansive view of environmental regulation, where we can think about technologies that may not have anything to do with the direct creator of the externality, but can substitute for mitigation actions through directly restoring the environment or creating new environmental value. An offset is really any of those activities that can offset environmental destruction. At a high level, offset markets have both tremendous promise and controversy. On the one hand, they offer the opportunity to potentially deliver the same or greater levels of environmental protection at considerably lower cost. But, at the same time, not all of the aspects of environmental quality are measured perfectly; it's possible that equilibrium outcomes in these markets might be quite inefficient.
Smith: How did you approach studying the wetland offsets in Florida?
Rafey: I think the cleanest way to describe how we apply our framework is to first talk about the private gains from trade and then talk about the environmental externalities. For the first aspect, the private gains from trade, we're really just estimating supply, estimating demand, and then integrating under the difference of those two curves over the range of realized trades that we see. We have the full ledger of every offset transaction that happened. We have every contract with every restoration project that specifies all of the offsets that they produced over time. We have measures of the costs that they incurred when they set up these so-called “wetland mitigation banks.” We also know exactly where the banks were. And further, with our model of equilibrium supply of offsets, we can learn about the payoffs that a bank would have—in particular, the payoffs that a bank would have if they were to think about entering a given market—which is somewhat not obvious because some of these markets are quite concentrated. The background here, which I didn't mention, is that there are about 20 to 25 markets in Florida that are all segregated because Florida does not allow people to substitute wetlands across unlimited distances. And so each of these markets is within its own hydrological region. In each of those markets, we can think about the supply of restoration projects as emerging from a set of potential developers or entrepreneurs who are looking for places that are suitable for wetlands restoration. That is what gives us the ability to capture supply of offsets in this market. The demand we capture uses very high-resolution satellite data, which was produced by NOAA, the National Oceanic and Atmospheric Administration, specifically to look at changes in coastal land cover. And it's not just what the pixel looks like in a given moment, but also changes in the pixels. We can see 30 meter by 30 meter pixels that start as wetland before the market and then become developed at some point before our study period ends in 2020. And that lets us get a very fine measure of who is potentially purchasing these wetland offsets. We then combined this with data on wetland offset prices, which we obtained from an NDA with a key broker in this industry, as well as some Freedom of Information Act (or state equivalent) requests to county agencies and the Florida Department of Transportation. We then have prices and quantities, and we can measure both demand and supply and capture the surplus of these markets.
The second part of the application that we pursue is thinking about flood externalities. In 2019, FEMA, the Federal Emergency Management Agency, released redacted data on every flood insurance claim that was ever filed, going back to the late 1970s. That data is really important because although FEMA does not administer all flood insurance policies, their system of record keeps all of them. Even private contracts are included in this data. We can see the surface of all the realizations of flood damage. We have a Poisson model that tries to predict where these flood claims happen at a very high level of spatial resolution, and how that might change when wetlands are developed. And, in particular, because we can see the time at which the building was constructed for all these flood claims, we can look at buildings that were constructed prior to the beginning of this market so we don't confound the fact that when you develop a wetland, you're putting new property on that place that could then itself be exposed to flood risk. So, we're really trying to get this externality measure. We do all of that almost as a distinct exercise from the equilibrium supply and demand, and then we put them together when we think about counterfactuals.
Smith: In what ways is this market working as intended, and how is it maybe falling short?
Rafey: It really depends on what you think the market designers intended when they set up this market. Our view is that they had in mind certain values of wetland conservation that they wanted to attain. And we show that, holding fixed those conservation objectives, they were able to obtain those objectives in a way that cost significantly less than if they had used the historical regime of more prescriptive permitting. By integrating under the demand and supply curves for these offsets, we find about $2.2 billion of gains from trade over the course of this period. That's a very promising result from the standpoint of the market delivering its intended goals because one of the stated goals here was to deliver more flexibility to land developers and attain the same conservation objectives as were intended. At the same time, we find that the market seems to have increased flood damage by about $1.6 billion over this period—although it's a wide range because these are events that occur quite infrequently and so there's a lot of statistical uncertainty about how one measures those externalities. We do think that the market delivered a lot of value, but it also had some consequences in terms of where flood damage happened.
The market seemed to deliver pretty considerable cost savings, and a lot of that had to do with the fact that the offset activities were a lot lower cost than the direct protection. So, in some sense, that's where you should be looking for the opportunities to set up these markets and try to deliver a lot of value.
Will Rafey
Tyler Smith: What do you suggest we might add to this market in order to help prevent these externalities?
Rafey: We don't have much to add beyond standard textbook Pigouvian corrective pricing. I think our point is that there is an additional externality, on top of all the reasons why you already care about wetlands, that aren't embedded into the way the market boundaries are drawn and the scoring rules are set up by the regulator. If you thought that wetlands were delivering pretty high protective value in terms of floods in some locations, then you'd want to adjust the trading prices to account for that. You could do that by levying a fee on private developers who are converting wetlands into development that is proportional to the flood protection value that they are eliminating. You could equivalently do that on wetland banks so that every time the wetland bank goes to the regulator to confirm that it has retired a credit—that it has sold the credit to a land developer—they pay a proportion of the offset—or perhaps even are subsidized—if the way the wetland has been changed leads to greater value of flood protection.
Tyler Smith: What do you think are the ideal conditions for implementing these offsets? When are offsets a particularly valuable tool for regulators?
Rafey: In our setting, the market seemed to deliver pretty considerable cost savings, and a lot of that had to do with the fact that the offset activities were a lot lower cost than the direct protection. So, in some sense, that's where you should be looking for the opportunities to set up these markets and try to deliver a lot of value. But those are the same settings where there's a lot of potential for the quality of the offsets to be quite different—especially when quality is correlated with cost.
Something else that we learned in the course of doing this work is just how important government involvement is—in particular, the role of the public entity that is very long-lived—in the design and operation of these markets. The government sustains a ledger that tracks who is doing restoration and who is using the fruits of that restoration to comply with rules that would otherwise require them not to undertake development. By maintaining that public ledger, the government is not doing anything with respect to prices—it's not brokering these transactions, it's not actively involved in either side of the market directly—it’s just maintaining this registry in exactly the same way that we maintain registries for other kinds of property, like land. It's very important that a regulator is an appropriate entity to maintain that ledger of property rights.
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“Conservation Priorities and Environmental Offsets: Markets for Florida Wetlands” appears in the May 2026 issue of the American Economic Review. Music in the audio is by Sound of Picture.