DEFENDERS of Wildlife is a national environmental group devoted to the protection of wildlife and the restoration of habitat. For years, Defenders strongly advocated the regulatory approach to species protection. But they now realize the limitations of regulations, particularly when dealing with private landowners. This October, they published a collection of essays titled "Building Economic Incentives into the Endangered Species Act." The collection features incentive-based approaches to species preservation.

Dayton Hyde has also learned the importance of incentives - negative incentives. Hyde is a rancher, conservation writer, and the founder of Operation Stronghold, a private wildlife-conservation group. He created a lake and new wildlife habitat on his ranch, attracting a variety of species including bald eagles. For his efforts, state and federal agencies increasingly regulated his operation.

For a time, the Forest Service actually restricted him from entering his property by truck, claiming he might disturb the eagles.

Dayton Hyde's experience is all too common. Under the current Endangered Species Act, as well as other laws, landowners frequently improve or protect habitat, then face land-use restrictions imposed by government agencies (commonly the EPA or Fish and Wildlife Service). These restrictions often have perverse ecological and ethical consequences.

First, they often impede efforts to protect threatened species and critical habitats. Second, they constitute uncompensated "takings," a form of political plunder.

The Endangered Species Act has failed to encourage species and habitat protection because it employs the wrong kind of incentives. Landowners with threatened species on their property may face restrictions that diminish the value of the property and reduce their income from ranching, farming and similar activities. The Act's negative incentives do not enlist the talents and resources of private landowners. Instead, they often discourage cooperation and innovation.

The Fifth Amendment was designed to protect citizens from government takings. Its framers understood the harm caused by negative incentives. But today their wisdom is ignored. Landowners know that designated species are likely to impose significant financial costs and restrict their use of the land. Anticipating restrictions, they may accelerate the destruction of habitat.

Norman Hutson Jr., of Fort Lewis, Wash., reluctantly clear-cut his tree farm in anticipation of restrictions to protect the spotted owl. Other landowners may covertly disobey regulations or eliminate species and habitat to preclude losses.

In the United States, 50 percent of endangered species dwell almost exclusively on private lands. Given the Endangered Species Act's dismal record on private lands, a new approach is needed. With the Act facing renewal in 1994, there is a tremendous opportunity to erect positive incentives with the creation of Biodiversity Trust Funds.

The trust funds would purchase conservation easements, much as the North American Elk Foundation, Trout Unlimited, and Ducks Unlimited have done. The trust funds would pay landowners to pursue conservation on their property and could copy Defenders of Wildlife's policy of paying landowners a bounty when an endangered species breeds on their land. Another possibility, noted by Vice President Jim Kraft of Plum Creek Timber and professor Bruce Lippke of the University of Washington, is to use long-term federal bonds to accelerate purchase and retirement of critical habitats.

The forces that control land use are largely economic. With this in mind, trust funds have a significant advantage over the current reliance on legal penalties. By buying land and easements or paying bounties, trust funds create positive financial rewards for saving species and habitats. At the very least, landowners who already favor environmental improvements on their land (and many do) are no longer punished for their efforts. The Dayton Hyde dilemma is avoided. Landowners who are good stewards are rewarded or compensated for creating wetlands, preserving old-growth trees, or encouraging wolves to breed on their lands.

In the environmental area as elsewhere, rewards work much better than penalties. They foster innovation and entrepreneurship in environmental protection. With rewards, ranchers might reserve some lands from grazing to improve wildlife habitat, then charge recreationalists and hunters user fees. Commercial forest owners could lengthen rotation times of harvest and selectively log their older trees. Whatever specific approach is taken, owners would have financial incentives to nurture environmental health. Rewards also make compliance and progress easy to monitor because landowners advertise their environmental improvements.

Penalties, like fines or imprisonment, are often less effective. They make monitoring difficult because they encourage landowners to covertly evade the law, accelerating logging or eliminating species before costly regulations are enacted or enforced. Penalties also encourage some landowners to abandon commercial or recreational projects, even if these projects could have been undertaken in environmentally sound ways. Private caution becomes society's loss.

Incentives are a major factor in shaping individual behavior. Reform of the Endangered Species Act offers an important opportunity to encourage species and habitat protection, not discourage it. By linking personal gain with environmental health and by using cooperation rather than fines, imprisonment, and "takings," a reformed Environmental Species Act can harmonize ecology, individual creativity and initiative, and prosperity.