1. Predicting the supply of mitigation services by landholders Associate Professor John Rolfe Central Queensland University

2. Outline of the talk Understanding where incentive mechanisms might be used Predicting the opportunity costs of potential mitigation actions Case study 1 – Desert Uplands Experimental auctions Land value analysis Case study 2 – Fitzroy basin Choice Modelling Experimental auction

3. Acknowledgements Results drawn from two National Market Based Instruments Pilot Projects funded by Australian and State governments Co-researchers include Jill Windle, Juliana McCosker, Stuart Whitten and Andrew Reeson

4. Who bears costs of salinity and water quality impacts?

5. Relative size of costs If most of the costs were private, on- farm costs, perhaps little intervention needed - but There may be substantial public costs on- farm and off-farm Because impacts are usually diffuse and multi-party, difficult to sort out private off- farm impacts with property rights Risks of on-farm private impacts may be poorly assessed – and a market failure could lead to public costs being incurred

6. Addressing these costs Where there are public benefits in mitigation actions, then enforcement or ongoing incentives may be needed to change behaviour Where there are private benefits available from mitigation, then may only need information or short term incentives to change behaviour

7. Tools to address these costs Regulation appropriate in some cases, but large hidden costs relating to compliance, administration and opportunity costs Suasion and information provision have limited benefit Developing interest in Market Based Incentives (MBIs)

8. Types of MBIs Price based instruments Taxes, subsidies Competitive tenders Quantity based instruments Cap-and-trade mechanisms Offsets (including mitigation banks) Bubble schemes Market friction instruments Insurance mechanisms Access to capital, trading opportunities

9. Predicting the supply of mitigation actions Important information need when designing MBIs (particularly quantity based mechanisms) Need predictive information to set caps and reserve prices in auctions Need predictive information to get support for policy implementation Need information to get funding for competitive tenders

10. Trade opportunities can be estimated from supply functions Normal to predict trading activity by estimating then interacting supply and demand functions Price of mitigation action Quantity of mitigation action

11. Potential trade between sectors Potential trade in mitigation actions can be predicted from difference in supply functions Price of mitigation action Quantity of mitigation action Sector 1 Sector 2 Q1

12. Potential trade within sector Potential trade in mitigation can be identified from shape of supply function Identifies variation in opportunity costs Price of mitigation action Quantity of mitigation action Q1

13. Estimating opportunity costs Important to assess economic impacts of changing management at property level Four main options to do this Farm production models Analysis of expected impacts on land prices (expectations about future profitability) Experimental auctions (assessing expectations of landholders) Quantitative surveys (eg Choice Modelling)

14. Case study 1 Desert Uplands region of central-western Queensland About size of Tasmania Beef cattle, extensive grazing Low productivity country, but generally good condition Some fragmentation from clearing Fragile in many areas Increased pressure from grazing

15. Scenario of interest Landholders enter voluntary agreement to have minimum level of biomass – 40% - over certain areas of grazing country Could be over particular area or for corridor across property Expect that lower stocking rates would be needed to achieve condition

16. Used two approaches to assess scenario of interest Simple production models Estimated returns per acre Multiplied by change in stocking rate Multiplied by area involved Experimental auctions Asked landholders to design conservation areas and submit bids Assessed bids to identify drivers of bid values

17. Simple production models

18. Experimental workshops Held 3 hour workshop with small group of landholders in Barcaldine and Jericho Each allocated a ‘dummy property’ to treat as their own Had to indicate the area that they would manage, and a bid for being paid Several rounds held in each workshop Small cash prizes awarded to most efficient bids Efficiency estimated by calculating environmental benefits and dividing by price Like BushTender process with single management action

19. Hypothetical bias Put pressure on workshop participants to deliver cost-effective bids Provided cash prizes after each round for the most cost-effective bids Repeated the rounds 3 or 4 times Tried to guard against artificially low bids Asked participants to base bids on their own property operations Said that our results might be used by government to allocate funding to the area

21. Cost-effectiveness of pooled bids

22. Regression analysis of bids

23. Outcomes - 1 Comparison shows that in experimental auction process: Area of yellowjacket and ironbark not significant Value/acre of other vegetation types much higher than in simple model A number of other factors important Property characteristics (size, % of vegetation) Interest in being paid for providing services Bidding round (effect of competition

24. Outcomes - 2 Both approaches used to estimate the value of conserving an option: 1000 acres of gidgee scrub 1000 acres of box 1000 acres of ironbark 1000 acres of yellowjacket 1000 acres of cleared country (regrowth) Value under simple model = $3440 Value from experimental auction / regression model = $15, 028

25. Why did the experimental auctions predict higher values than simple production models? Production models too simple Did not take into account location factors (creek lines, water points, fences) Did not account for risk and uncertainty Did not consider extra management costs (extra mustering, fire breaks) Experimental auction results included more factors transaction costs (for negotiating and monitoring agreements) Engagement costs (pain and suffering for dealing with the government)

26. Case study 2 Case study of interest – Fitzroy Basin in Central Queensland Major catchment draining into Great Barrier Reef lagoon High levels of sediment and nutrient export – >80% coming from agriculture Key agriculture industries are grazing and dryland farming Also limited impacts from urban, industrial and mining activities Results of project may be more generally applicable to catchments with water quality issues

28. Assessing potential supply of agricultural mitigation is complex Range of mitigation actions Focused on riparian buffers in case study Range of management actions E.g. size of buffer, type and period of exclusion Variations in biophysical attributes and ecological impacts E.g. stream order, soil type, existing cover Variations in landholder characteristics, attitudes and experience Contract design options

29. Predicting supply useful for mechanism design & application Mechanism design Type of information needed to make initial broad choices about MBIs E.g: likely takeup rates, incentives needed, overall budget Mechanism application Type of detailed information needed to design a particular application E.g: key factors that impact on takeup and bids

30. Tested three approaches A. Comprehensive CM survey Pilot survey collecting detailed information has been tested in field B. General CM survey Pilot survey collecting summary information has been tested in workshops with landholders C. Experimental auctions Auction process has been tested in workshops with landholders

31. Comprehensive CM is too complex to operate Designed to fulfil both mechanism design and application roles Landholders asked to complete a series of choice sets 4 attributes (payment, stream length, contract length, contracting body) 4 alternatives (3 options + status quo) Required management level fixed Additional information about necessary capital costs requested for each option selected Pilot survey achieved low response rate

33. Example of followup If you chose an option other than option A, will you need to : A. fence some part of your river frontage area? – Yes / No If Yes, how many kilometres? ________ B. put in extra watering points? – Yes / No If, yes, how many? _____________

34. General CM is appropriate Used simple CM format Asked participants to answer for a stream section on their property 3 alternatives, including status quo 3 attributes (price, buffer width, minimum biomass target) Did not include capital costs in choice sets Other issues covered by a single question in a survey to participants E.g. preferred contract arrangements, necessary capital costs

35. Example of general choice set

36. Summary of initial model

37. How to use CM results Model gives information about how supply will change with management conditions Need to compare this to environmental gains associated with conditions Select most cost-efficient conditions E.g. cost of buffer width is $3.70/m/km At what width do costs outweigh benefits? Additional data will allow better models to be developed

38. Direct questions reveal variation in capital costs

39. Variation in capital costs

40. Experimental workshops reveal variation in bids Workshop participants given a dummy property Key property attributes were constant across maps, but shuffled to appear different Asked to mark in a buffer zone they would consider and the bid amount needed Prizes for most cost-effective bids Simple metric converted buffer details to tons of sediment averted 5 year contract

41. Initial round focused on opportunity cost (no capital)

42. Workshops explored opportunity costs + capital costs

43. Implications for devolved grants Results show that dealing only with capital costs will not attract large number of bids

44. Final summary Potential use of different MBIs for dealing with different issues Choice modelling and experimental auctions have complementary roles in predicting potential supply of mitigation CM useful for making initial broad choices about MBIs Gives understanding about broad tradeoffs E. A. useful to design particular mechanism Additional 2-way communication benefits