Cost-effectiveness of reverse auctions for watershed nutrient reductions in the presence of climate variability: An empirical approach for the Boone River watershed

Abstract

The Intergovernmental Panel on Climate Change (IPCC) has predicted that changes in climate patterns (higher temperatures, changes in extreme precipitation events, and higher level of humidity) will adversely impact water quality. Given the implications of climate change on water and soil quality, it is important for watershed managers, stakeholders, and policymakers to understand not only the effectiveness of different conservation practices in improving water quality, but also the cost-effectiveness of a watershed-level policy program designed for implementing conservation practices. A system of points measuring the efficiency of five conservation practices in reducing nutrient (nitrogen [N] and phosphorus [P]) runoff are estimated using the Soil and Water Assessment Tool (SWAT) model in this study for the Boone River watershed (BRW) in north central Iowa. The points can be interpreted as indices of the environmental benefits associated with each conservation practice. Among the various market instruments proposed as resource and cost-revelation mechanisms, competitive biddings, also referred to as “reverse auctions” or procurement auctions, have come to the attention of researchers and policymakers. Competitive bidding mechanisms induce landowners to submit bids close to their opportunity costs, thus increasing the budgetary cost-effectiveness and revealing the true costs of adopting different conservation practices. This study considers the cost efficiency of reverse auction programs designed for improving water quality in the BRW, where the bids are constructed using the system of points.