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

In a reverse auction, multiple sellers compete to provide services (environmental outcomes) to a single buyer. This policy note documents a reverse auction in the Connestoga watershed where farmers and ranchers competed for government funding to implement management practices to reduce phosphorus runoff, with payments awarded based on the most cost-effective proposals. 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. Increasing the use of quantitative measurements of performance, using measures of cost-effectiveness to rank funding applicants, and allowing a competitive bidding process are all expected to improve the conservation funding allocation process.