Government Issues Final Rule on Economic Impact Analyses for Endangered Species Act Habitat Designations

Because of its huge impact on land use, the designation of critical habitat is one of the most controversial and heavily litigated areas of the Endangered Species Act (ESA), as seen with the designation of millions of acres to protect the habitat of the spotted owl, the California Fairy Shrimp and the piping plover. While the ESA explicitly prohibits consideration of economic impacts when determining whether to list a species, it requires consideration of the economic impacts when designating critical habitat.

On August 28, 2013, the U.S. Fish and Wildlife Service (FWS) and National Marine Fisheries Service (NMFS) (collectively, the Services) issued a final rule resolving a long-standing dispute regarding how they should analyze economic impacts of critical habitat designation.

The rule — which takes effect on October 30, 2013 — could substantially affect important land use activities by codifying the use of an "incremental approach" adopted by the U.S. Court of Appeals for the Ninth Circuit and several federal district courts. That approach considers only the additional economic burden of designation over and above the listing of the species. The new rule flatly rejects the co-extensive approach advanced by the U.S. Court of Appeals for the Tenth Circuit, which considers the total economic burden from both the listing and the actual designation.

Background

The purpose of the ESA is to protect listed species and conserve their ecosystems. Because habitat destruction and degradation contribute to the decline of listed species, the ESA created tools to enable the Services to conserve listed species. One such tool requires the Services to designate critical habitat concurrently with the listing of a species. 16 U.S.C. §1533(a)(3); 50 C.F.R. §414.12(a). "Critical habitat" is the "specific areas within the geographical areas occupied by the species . . . . on which are found those physical or biological features (I) essential to the conservation of the species and (II) which may require special management considerations or protection . . . ." 16 U.S.C. §1532(5)(a)(i).

Based on the best scientific and commercial data available, the Services must consider the probable economic impacts of critical habitat designation and weigh the benefits of inclusion versus exclusion of habitat. They may exclude any particular area upon a determination that the benefits of such exclusion outweigh the benefits of designation. 16 U.S.C. §1533(b)(2).

The economic impacts of critical habitat are especially important in the context of the ESA's Section 7 consultation process, which requires agencies to consult with the Services for any proposed federal action that would either jeopardize the continued existence of a listed species or destroy or adversely modify critical habitat. Such consultations often result in conditions and restrictions on the land to ensure the survival and recovery of species.

New Rule Takes an Incremental Approach

The new rule provides that the Services will "make available for public comment the draft economic analysis" of a proposed critical habitat designation at the time of publication. It also requires that the Services summarize the draft economic analysis in the Federal Register notice of the proposed designation of critical habitat.

More controversially, however, the rule codifies the "incremental approach" to analyzing economic impacts, stating that the Services "will compare the impacts with and without the designation." These "[i]mpacts may be qualitatively or quantitatively described." Under the incremental approach, the Services consider only the economic impacts associated with critical habitat designation and not the baseline economic impacts from the actual listing itself.

Critics of the incremental approach, including landowners, claim it is overly narrow, enabling the Services to dismiss or minimize the economic impacts of critical habitat designations. As a result, they claim, the economic effects are frequently understated, because the costs associated with the underlying species listing are often significant for landowners.

In adopting this rule, the Services explicitly rejected the "co-extensive approach" advanced by the Tenth Circuit in New Mexico Cattlegrowers Ass'n v. FWS, 248 F.3d 1277 (10th Cir. 2001). The Tenth Circuit found that due to the similarity in two standards for Section 7 consultations (destruction/adverse modification and jeopardy) that existed in the Services' 1986 joint regulations, FWS usually concluded that designation of critical habitat did not result in incremental impacts. This foregone conclusion, the court stated, made the requirement to consider economic impacts of the designation meaningless. Instead, it held that FWS must analyze "all of the impacts of a critical habitat designation, regardless of whether those impacts are attributable co-extensively to other causes." Id. at 1285.

The Ninth Circuit later rejected the Tenth Circuit's co-extensive approach and struck down the FWS regulations that "adverse modification" of critical habitat would not result in any incremental impacts beyond the impacts from the listing itself during the Section 7 consultation process. The court stated that the FWS definition "gave too little protection to critical habitat by not giving weight to Congress intent that designating critical habitat support the recovery of the listed species." Gifford Pinchot Task Force v. USFWS, 378 F.3d 1059 (9th Cir. 2004).

The Services explained that its adoption of the incremental approach was also supported by another subsequent Ninth Circuit decision. In Arizona Cattle Growers Ass'n v. Salazar, 606 F.3d 1160 (9th Cir. 2010), the Ninth Circuit rejected the Tenth Circuit's criticisms of the incremental approach, finding that the court's conclusion was based on a faulty premise since the definitions had been revised. The Ninth Circuit found that the incremental approach is "more logical" than the co-extensive approach. Id. at 1173. It stated that the "very notion of conducting a cost/benefit analysis is undercut by incorporating in that analysis costs that will exist regardless of the decision made." Thus, "if there is no net benefit (such as reduction in economic impacts) to excluding the area, the agency must designate it." Ibid.

The Service's rule, revising 50 C.F.R. §424.19, also relied on a legal opinion issued by the Solicitor of the Department of the Interior on October 3, 2008. The Solicitor found that the Services have wide discretion when weighing the benefits of exclusion versus inclusion of habitat, and that it is appropriate to consider impacts of a critical habitat designation on an incremental basis. The rule also responds to President Obama’s subsequent memorandum to the Secretary of the Interior, dated February 28, 2012. That memorandum directs the Secretary to revise the regulations requiring the Services to provide an economic impact analysis of a proposed critical habitat designation and make that analysis available to the public at the time a proposed rule designating critical habitat is published.

Looking Ahead, Without Clear Standards

The Services' attempt to clarify how to analyze economic impacts of critical habitat designation may have added ambiguity to an already volatile issue and could result in legal challenges. The rule provides no clear standards as to how the economic impacts of critical habitat should be considered leaving wide discretion to the Services. The Services may continue to produce economic analyses finding there are little or no additional economic impacts to landowners beyond the listing. Such economic analyses may very well be challenged as understating economic impacts. However, given the Services' broad discretion, even such challenges may not preclude designations given the Ninth Circuit's strong direction that critical habitat must facilitate the recovery of listed species.

The real world impacts of the rule will likely be significant: critical habitat designations often cover large land areas that are prime locations for a range of activities from residential and commercial development to energy extraction.

The lack of clear standards in the rule and likelihood that more species will be listed and areas designated for critical habitat for these species will also increase uncertainty for many land owners, developers and energy companies who depend on clear standards for investing in major projects such as subsurface oil and gas extraction. Only time will tell whether such activities will become more costly, and whether critical habitat designations will actually further the recovery of listed species.

The final rule is published at 78 Fed. Reg. 53058 (Aug. 28, 2013), and the Service's online information regarding the rule is available at http://www.fws.gov/endangered/improving_ESA/CH_Econ.html.