Experimental auctions to evaluate incentives for cost-effective agricultural phosphorus abatement in the Great Lakes

Research on payments for environmental services (PES) largely focuses on two contract types – cost-share and annual stewardship payments. But other types of transactions, such as tax credits, green insurance, and price premiums tied to environmental stewardship certification, can also promote conservation. Using experimental conservation procurement auctions we evaluate farmers’ willingness to adopt agricultural best management practices (BMPs) that reduce phosphorus runoff from farm land in the Maumee watershed to help abate damaging algal blooms in western Lake Erie. We determine how bids change depending on the type of transaction offered (e.g. payment, payment with green BMP insurance, tax credit, price premium tied to stewardship certification) to identify cost-effective incentive mechanisms that reduce the most phosphorus runoff per dollar of payment. Two kinds of transactions were found to be less cost-effective: a price premium for product certification and PES with green insurance to protect against yield loss from BMP adoption. The certification price premium cannot spatially target conservation practices to vulnerable locations, so average impact per dollar of payment (and hence cost-effectiveness) is reduced. Green insurance is perceived to have high transaction costs so it elicits demand for higher payments, reducing its cost-effectiveness.