How Cost Effective are Conservation Auctions

Abstract

Several trials have recently taken place in Australia of sealed bid discriminant price auctions for conservation contracts. The trials encourage landholders to competitively tender for funds to provide conservation actions on private land. In these auctions, environmental benefits of offers are evaluated using an environmental benefits index and bids are selected based on estimated environmental benefits per dollar cost. Such auctions represent a departure from past practice in Australian payment schemes to encourage private landholder conservation in two significant ways: 1) a new way of assessing benefits using an environmental benefits index is introduced and used in project selection, 2) a new way of setting price using a competitive tender process is introduced. In this paper we evaluate the cost effectiveness of the Catchment Care conservation contract auction trial in the Onkaparinga catchment in South Australia. This evaluation differs from past Australian conservation contract auction evaluations by offering a disaggregate assessment of saving attributable to two sources: 1) use of an EBI to assess benefits and target high environmental value projects and 2) use of an auction mechanism to set prices. In addition, this article reconsiders the assumption in many evaluations of efficiency benefits of auctions (and other market based policies) that the appropriate comparison benchmarks are rather naive uniformly applied polices. In reality, conservation payment (and other environmental) policies in place prior to auction trials (or other market based instruments) often include mechanisms to differentiate 2 among projects based on environmental value and to elicit truthful revelation of landholder opportunity cost. For example, the program in place prior to the auction evaluated in this article included bi-lateral negotiation of in-kind labour contributions as mechanism to reduce rent payments to landholders. One key conclusion is that credible estimates of cost saving achievable with discriminant price auctions requires comparison of discriminant price auction outcomes to outcomes of realistic policy alternatives. In this case study a naive interpretation of the alternative as an input payment program with no effort to reduce rent seeking or select projects based on environmental cost effectiveness lead to a relatively large 80% estimated cost saving from discriminant price auction implementation. A 56% saving was estimated from the implementation of the discriminant price auction compared to the extant negotiated input payment price setting mechanism (without an EBI). No savings from the auction were estimated when the comparison was comprised of a hypothetical strategic input payment policy including bi-lateral negotiation of payment rates and use of an environmental benefits index to develop a $/EB threshold for project selection. In fact the strategic input payment comparison policy was estimated to be negligibly (0.5%) more environmentally cost effective than the actual Catchment Care auction. The finding for this case study that the estimated value of cost savings potential is critically sensitive to assumptions about the policy to which the discriminant price auction is compared, suggests that it may to desirable to re-estimate cost savings to other conservation auctions that have taken place in Australia.