When it comes to allocating money for conservation, reverse auctions can help governments get the biggest bang for their buck.
Reverse auctions are auctions with many sellers but only one buyer. They are often used in the private-sector to procure services inexpensively, but reverse auctions can also be used to cost-effectively allocate public conservation dollars.
In 2005, WRI, together with the Pennsylvania Environmental Council and other partners, conducted a pilot reverse auction in the agriculture-heavy Conestoga watershed of Lancaster County, Pennsylvania. The goal was to pay farmers to implement best-management practices that reduce phosphorus, a leading cause of water pollution in the watershed.
We held two reverse auctions that resulted in allocations of $486,000 to farmers who showed that they reduced the most phosphorus for the least amount of money. Farmers first selected the best management practices that they wished to propose. Next, phosphorus reductions from each proposal were estimated using WRI’s NutrientNet software. Farmers then placed competitive bids indicating the payment they would accept to implement each proposal. Bids with the lowest prices per pound of phosphorus reduced were funded; those with the highest prices were not.
As a result, an estimated 92,000 pounds of phosphorus are expected to be reduced over the lifespan of the best-management practices implemented through the reverse auction. Results showed that the allocation method resulted in seven times more phosphorus reductions per program dollar spent than traditional government-subsidy allocation methods within the watershed.
The federal government even has an in-house example of this method of award allocation. In July 2006, a wetlands reserve program pilot used reverse auctions to reduce the acquisition costs of program easements in several areas across the country. It was a huge success, enrolling 3,500 acres and reducing acquisition costs by 14 percent, or $820,000.
Reverse auctions can maximize the effectiveness of federal and state dollars because they combine performance measures with cost. Many conservation programs do not currently consider cost as a factor when allocating funding. Furthermore, reverse auctions allow for competitive bidding—which encourages applicants to reveal the “true cost” of adoption—and do not rely on fixed payment schedules.
In the face of rising concerns about climate change and water quality, it is critical that governments become more effective at allocating money to achieve environmental objectives. One way for them to do it is to formally adopt reverse auctions for agricultural conservation programs, but also for programs that aim to protect and restore wetlands, species, and habitats.