Paying for Environmental Performance: Potential Cost Savings Using a Reverse Auction in Program Signup

A reverse auction in the Conestoga watershed in Pennsylvania demonstrated that auctions are a more cost-effective way to allocate conservation funding than the traditional funding allocation process used in the U.S. Department of Agriculture’s Environmental Quality Incentives Program (EQIP). On average, the reverse auction resulted in a seven-fold increase in the reduction of phosphorus runoff per dollar spent compared to EQIP during the same period and in the same watershed.

In a reverse auction, multiple sellers compete to provide services (environmental outcomes) to a single buyer. In the context of conservation programs, sellers are typically land managers such as farmers or ranchers; the buyer is typically a governmental entity. The Conestoga Reverse Auction differed from traditional funding allocation strategies in three ways:

• It quantitatively estimated the expected reduction in phosphorus runoff from proposed changes in management practices.
• It allowed farmers and ranchers to compete for funding through unrestricted bidding.
• It prioritized program payments based on how cost-effectively reductions in phosphorus runoff could be achieved. Cost-effectiveness was measured as the expected reduction in phosphorus runoff per program dollar spent.

Policy Implications

Government could improve the cost-effectiveness of their conservation funding by implementing reverse auctions or incorporating the principles of reverse auctions into their conservation program design. Specifically, policy-makers could improve the allocation of conservation funding in three ways:

• Increase the use of quantitative measurements of performance (e.g., measuring the reduction in nutrient runoff for water quality improvement) to rank funding applicants.
• Use measures of cost-effectiveness to rank funding applicants.
• Allow competitive bidding between funding applicants.