Conservation Auctions in Manitoba: A Summary of a Series of Workshops

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  • Currently, the effect of human impact on the environment is becoming increasingly apparent. The encroachment of human activity has inevitably resulted in the loss or impairment of ecological goods and services (EG&S) around the globe as well as in our own backyard. EG&S include features such as wildlife habitat, biodiversity, soil renewal, or nutrient cycling. The loss of such features has become a sobering reality for Manitobans in the face of the eutrophication of Lake Winnipeg as a result of practices contributing to nutrient loading into the lake. Since EG&S are very important to Manitobans, efforts are being made to explore different vehicles to encourage their provision. In order to address some of the environmental issues transpiring in Manitoba, there has been discussion on the usefulness of Market Based Instruments (MBIs). In the past, a number of programs focused on the environment in agriculture have been put forward and administered, however these have not been overly successful in incenting producers or providing significant levels of EG&S. This report will provide a summary of a series of workshops developed to bring awareness to stakeholders on an MBI known as a conservation auction (which may also be referred to as reverse auction, procurement auction, or tender). The purpose of this series of workshops was to create awareness of the conservation auction process and how it applies to the provision of EG&S by producers in Manitoba; moreover it was an opportunity to receive feedback on the applicability of auctions in Manitoba. The objectives for this series of workshops are as follows: 1) Determine the opinions of relevant stakeholders in regards to the relevance of auctions in Manitoba 2) Investigate auction design features such as payment type, competition, and communication 3) Conduct an economic analysis of the results of the auction simulations provided in the workshops for educational purposes. EG&S are the positive environmental benefits arising from healthy ecosystems. They are fundamentally complex and have no associated market value, which makes it difficult to develop relevant policy. Environmental programs typically use fixed payment or cost sharing agreements to procure EG&S but they have been found to be unsuccessful partly because of inadequate levels of compensation. An alternative approach is to use MBIs to deliver EG&S programs. MBIs are policy instruments that use market forces, prices, or other economic variables to change behaviour. They can eithe create a market, where no market is currently operating, or improve a market if there is market failure. These tools utilize trading mechanisms, direct payments, price signals, or auctions to capture value that may have been overlooked under the present policy scheme. This is a key feature that makes MBIs appropriate to use in the context of EG&S since their value is unknown. Therefore, through the use of MBIs we can gain more knowledge and understanding of the costs and benefits of EG&S. In the case of EG&S procurement, conservation auctions are a viable option as a method to purchase EG&S from producers in a cost effective way. Auction mechanisms use market forces in the face of information asymmetry (where two parties both hold private information that is not known to the other party, in this case the parties are government and producers) and act as a price discovery system for EG&S. With competition as the driving force, participants are induced to reveal their compliance costs through the bidding process (Latacz-Lohmann & Schilizzi 2005). This is because participants must face tradeoff related to the probability are revealing some of their own cost information while receiving a payment adequate to cover their costs. Conservation auctions are a unique type of procurement auction where participants place bids for providing EG&S. Like a conventional procurement auction, participants submit bids indicating the price they are willing to accept/willing to sell their good or service for. The bids are then ordered from lowest to highest (can be either $/unit or whole price). Unlike conventional procurement auctions, typically, multiple winners are selected from lowest to highest until either a budget is exhausted or a unit target is met. Auction design is an important factor in maintaining economic efficiency in conservation auctions. Since conventional auction theory cannot be used to guide design, auction experiments in an economic laboratory have been utilized to test different designs to understand their efficiency capability as well as their ability to act as a cost discovery tool (Lohmann & Schilizzi 2005). Important design measures to consider are: the method of payment; use of target versus budget constraints; is information revealed or hidden; the use of a reservation price or target; and bid evaluation systems. In total 13 workshops were completed between the dates of March 8, 2010 and March 19, 2010. Originally 15 sessions were scheduled; however due to limited attendance participants from two sessions were scheduled; however due to limited attendance participants from two sessions were rescheduled to other sessions. Four treatments were used during the series of workshops; two payment structures (discriminatory (D) and uniform(U)) and two bid ranking structures (maximize coverage (MC) (or acres) and maximize kg phosphorous abatement (MP)): 4 MCU, 3 MCD, 3 MPU, and 3 MPD. Light economic analysis of the auction simulation results was conducted. As these workshops were being used more as an information tool to stakeholders, the results of the auctions most likely do not reflect real behaviour; therefore caution and scrutiny should be used when interpreting the results. Despite discrepancies, lessons may still be learned from the results. Profit maximizing, or rent seeking, behaviour was apparent in almost all auction simulations. This is mostly attributed to the low rate of competition in some rounds. Where there was low competition the cost effectiveness of the auction would ultimately decrease and could not be used as a cost discovery mechanism. It was difficult to see any major differences between the two payment methods, however on two occasions the uniform payment yielded negative rent, in other words people were bidding below their costs on average. At the conclusion of each auction simulation, participants were asked to fill out a questionnaire asking for their opinions on the workshop itself, as well as more detailed questions pertaining to environmental programming in Manitoba and opinions about the conservation auction mechanism. Overall, there was a positive response to the mechanism. There was a distinct divide between producers and other groups (e.g. government, NGOs, and academia) according to the recorded responses. In the discussion that followed each workshop, similar concerns were brought to the table regardless of demographics. These encompassed how the auction would be implemented down to details about administration and monitoring; producer concerns related to the estimation of costs, fairness to the producer, the competitive nature of the auction, and contract lengths; as well as discussions about environmental programming in general that were not specifically related to the conservation auction process. Taking time to think through auction design will also be necessary in order to have an auction that caters to the public and producers, and will be cost effective. While it may be too soon to be discussing details surrounding the implementation or design of an auction in Manitoba, more thought may be required on related issues such as development of an Environmental Benefits Index (EBI) and associated extension program. These workshops were developed to allow stakeholders to become aware of the conservation auction, and learn more about the process and why they are implemented around the world. It was also a platform of discussion amongst stakeholders to gauge how acceptable an auction would be in Manitoba to procure EG&S from producers: a lot of information and ideas were shared from all sides of the story. Overall, it was a very positive experience for those involved and a positive reaction to the auction process was encountered. However, some still remain apprehensive and skeptical of the mechanism in terms of its application in Manitoba.

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    Attribution-NonCommercial-NoDerivatives 3.0 International