Author: Mark Eigenraam

The Australian state of Victoria has for some years now been experimenting with a new way of delivering environmental benefits for its citizens. Called "Bush Tender" the system operates on a reverse auction mechanism and has delivered remarkable results. Now Victoria is seeking to take the lessons of Bush Tender and apply them to a broader array of ecosystem services in a program they are calling "Eco-Tender". The Ecosystem Marketplace asks Mark Eigenraam, one of the program's architects, to tell us about this new experiment.

Question: What do the following two activities have in common: paying for a second-hand car, and paying farmers to rehabilitate degraded ecosystems?

Answer: Without the relevant information, you could be buying a lemon.

That's why in the Australian state of Victoria has begun piloting a 'lemon-proof' system for determining which areas of land it should pay landholders to rehabilitate. The new EcoTender auction system will ensure that before the government hands over those precious tax-payers' dollars, it can be certain that the product it's paying for--the protection and rehabilitation of local ecosystems--will be delivered.

The $500,000 EcoTender pilot is an initiative of the Victorian Department of Primary Industries (DPI), funded by the National Action Plan (NAP) for Salinity and Water Quality Market Based Instruments Program (MBI). The pilot is being developed and implemented by DPI and the Department of Sustainability and Environment (DSE), and is currently being road-tested in northern-central Victoria.

Local landholders have been invited to submit competitive 'bids' for government funding to pay for improved management of remnant vegetation and revegetation on their properties. Those interested in putting forward a bid receive an obligation-free site assessment by environmental experts employed by DPI. In the same way that the would-be purchaser of a second-hand car often sends in a mechanic to assess the vehicle's market value, the information gathered by the government's environmental experts can then be used to assess the ecological value of the bidder's land.

Gathering previously 'missing information' is a vital ingredient in the pilot tender process. No matter what transaction you're engaged in, it can be difficult doing business with someone who has relevant but hidden information. The uninformed party is liable to be exploited, and so may be reluctant or unwilling to participate in the deal. In economic terms it's called a problem of 'asymmetric information'.

On the other hand, if relevant information is gathered and shared between buyers and sellers of environmental goods and services, new markets can be created for these products. The EcoTender process ensures that the government has the information it needs to be able to directly link environmental outcomes with actions on private land.

Beyond Bush Tender

EcoTender is based on the highly successful BushTender trials that took place in Victoria in 2003 (Stoneham et al 2003). BushTender used an auction system to distribute environmental funds to landholders who were interested in improving terrestrial biodiversity on their properties. The implementation of BushTender led to 5000 hectares of native vegetation on private land being secured under management agreements. In economic terms, it created the supply side of a market for nature conservation, and generated significant cost savings when compared with previous grant-based systems for distributing conservation funds to landholders.

EcoTender is the next advance in the application of market-based instruments to solve environmental problems on private land. Where BushTender focused on a single environmental outcome (increasing terrestrial biodiversity), EcoTender aims to achieve multiple environmental benefits including improvements in saline land and aquatic function.

No two pieces of land are alike

Anyone who has ever bought a second-hand car would understand that no two vehicles are exactly the same. The condition of the engine and the car's performance will depend on the number of kilometres the car has travelled, under what conditions, over what period of time, and with what kind of driver(s).

Similarly, one of the key assumptions behind the EcoTender pilot project is that no two farms are exactly the same. Management practices, geological and biodiversity variations and local climate have all contributed to creating a unique environment on each and every property. Consequently, the cost of land-use change will be different on each individual farm.

In the past, grant-based systems for encouraging farmers to improve their land management practices have failed to take this infinite variation into account. Instead, they have adopted a one-size-fits-all approach, which has led to some property owners receiving either too little or too much funding for the environmental improvements they have committed to making on their land. EcoTender aims to ensure that the price is right for both the landholder and the government.

Of course, not all landholders are looking for financial compensation for rehabilitating their own property. Some are personally committed to making environmental improvements, and willing to incur the financial costs. The only obstacle in the way of their good intentions may be a lack of knowledge (ie. missing information) about which improvements to undertake in order to get the greatest environmental benefit. Using the EcoTender approach, these 'altruistic' farmers can also access expert advice in order to formulate a plan of environmental action for their farm.

Assessing the Ecosystems

The EcoTender pilot project is taking place in two areas within the Goulburn Broken and North Central Catchment Management Areas of Northern Victoria. It employs the same approach to the assessment of biodiversity benefits as the BushTender project, but EcoTender has been bolstered by the addition of a unique environmental impact assessment system called the Catchment Modelling Framework (CMF).

The CMF brings together vital information about the current location of native vegetation (or terrestrial biodiversity) with information about the impact of land-use change from three environmental dimensions: carbon sequestration, aquatic function and dryland salinity impacts.

The CMF is a 'biophysical modelling framework' incorporating a suite of one-dimensional plant-based models that are explicitly linked to a fully distributed 3D-groundwater model. Importantly, the CMF reflects the fact that environmental outcomes are often correlated or connected, ie. several benefits may result from the same action.

For example, the farmer who embarks on a campaign of revegetation may find that the new vegetation on his property simultaneously produces carbon, improves water quality, reduces the area of saline land, and provides habitat for local wildlife. The CMF can measure all of these outcomes, and in the process provide both the government and the landholder with the previously 'missing information' with which to assess the environmental value of each rehabilitation project.

By considering multiple environmental impacts (both positive and negative) EcoTender has developed a unique approach to interpreting and addressing ecosystem function.

Five Steps to a Better Environment

The EcoTender pilot project is essentially a five-stage process. Once the landholder has submitted a formal Expression of Interest to the DPI to become involved in the project, expert field officers visit the landholder's property to gather information about the landscape value of the site.

Secondly, DPI staff use the CMF to estimate the likely outcomes for terrestrial biodiversity, carbon sequestration, aquatic function and dryland salinity impacts, for both the local landscape and the surrounding catchment area. The CMF 'environmental benefit' scoring system (the sum of terrestrial biodiversity, aquatic function and saline land) picks up on both the current value and the government's preference for future value; ie. location and connection with existing indigenous vegetation.

In the third stage of the process, the DPI provides advice to the landholder about how well they have scored. If the landholder decides to continue to stage four of the process, they can use the advice provided by DPI to calculate how much it would cost them to undertake the agreed management interventions, and submit a formal bid for funding. Each landholder bid is then divided by its 'environmental benefit' score and the bids with the lowest cost per unit of environmental outcome are selected, until the available budget is exhausted.

Once the successful bids have been determined, the fifth and final stage in the process involves drawing up a performance-based contract (ie. a management agreement) to formalise the landholder's proposed actions, and outlining a schedule of payments from the government to the landholder. In return for receiving progress payments, the successful bidders will have to submit an annual report which details the actions they have carried out on their property. Additionally, they need to provide evidence of those actions having been completed.

Only when they have submitted this report will they be able to invoice for their next payment. This way, the government has an ongoing mechanism for ensuring that the environmental product they're paying for doesn't turn into a 'lemon'.

A Better Transaction and Better Results

EcoTender is a fair way for everyone to realise the environmental value that we all place on the future health of local ecosystems. Under the EcoTender system, the information gathered via the Catchment Modelling Framework should ensure that each bid will be judged fairly against all the others according to:

• The estimated change in the environment as a result of changed landholder management practices


• The value of the assets affected by these changes


• The dollar cost of effecting these changes

In broad economic terms, the EcoTender pilot project is based on the assumption that market-based systems can deliver cost effective and productive outcomes for the well-being of the natural environment. In other words, if markets are missing for environmental goods and services, resources are likely to be over-allocated to exploitative activities.

For example, land-clearing conducted by farmers for the purpose of running extra livestock on their cleared land may appear to offer more immediate economic gains to those farmers than the conservation of remnant vegetation or revegetation. Using the EcoTender system, the government can help to create a new market for the rehabilitation of the natural environment, whilst targeting its 'investment' to those areas which can guarantee the best environmental returns.

In the same way that they might sell their extra livestock at auction, the farmers are able to sell 'environmental outcomes' to the government, which in turn is acting on behalf of the community as a purchaser of those environmental outcomes.

Broader Implications

There is potential for the EcoTender framework to be applied more widely to the delivery of government environmental policy. The new framework offers a replicable, transparent, evidence-based approach to the procurement of environment outcomes; an approach can be applied in any location, assuming the right data is available.

The EcoTender process should also lead to more accurate reporting for government on the cost-effectiveness of its environmental investments. Meanwhile, the CMF provides a unique mechanism for the ongoing measurement of the system's success. With the detailed information gathered by the DPI throughout the term of each landholder's contract, the government can inform the Victorian community about exactly how much money has been spent on conserving and rehabilitating the natural environment, and precisely what is being achieved with that money. Armed with that information, Victorian tax-payers can then use their vote at the ballot-box to communicate to the state's political leaders whether they would like to see more or less of their money spent on achieving environmental outcomes.

The Triple "Eco" Bottom Line

The 'eco' in EcoTender refers to ecology, ecosystems and economics, and all three are equally important. This pilot aims to produce the most valuable ecological and ecosystem outcomes for the lowest economic cost, by providing returns to all those who participate. Landholders will benefit financially if they are successful bidders, the community will benefit from the fact that their resources are being used in the most efficient and productive way possible, and we will all benefit from the knowledge that we are contributing to an ecologically sustainability future for ourselves and for the generations of Victorians to follow.

Mark Eigenraam is a principal economist in the Economic and Policy Research Branch of the Department of Primary Industries, Victoria, Australia.

References

Stoneham, G., Chaudhri, V., Ha, A., Strappazzon, L., (2003) Auctions for conservation contracts: an empirical examination of Victoria's BushTender trial. Australian Journal of Agricultural and Resource Economics 47(4): 477-500.

Eigenraam, M., Beverly, C., Stoneham, G., Todd, J., (2005) Auctions for multiple environmental outcomes, from desk to field in Victoria, Australia, Paper presented to the 80th Annual Western Economic Association International Conference. July 4-July 8, 2005, San Francisco, California.

First posted: October 12, 2005