Green auctions versus flat rate agri-environmental payments

This study examines how jointness of environmental benefits and environmental heterogeneity affect auction designs and the potential benefits of green auctions over conventional flat rate agri-environmental policies. A sealed bid green auction is used to promote an agri-environmental program with two environmental targets, nutrient runoff reduction and biodiversity provision. A score index comprising of environmental performance and the monetary size of bid is developed to rank the farmers’ applications. The green auction is analyzed empirically by using Finnish data. An auction that screens according to the environmental score and another one with an additional cost-saving component are simulated in the context of two different conservation options based on whether enlarged field edges are located in whichever edge of a parcel, providing only biodiversity benefits or are located on the waterfront (buffer strip) providing joint benefits in terms of promoting biodiversity and reducing nitrogen runoff. Empirical results show that independently of whether the auction program supports simple enlargement of field edges or buffer strips, the green auction with the cost saving component has the highest social welfare performance, followed by the flat rate payment, followed in turn by the green auction ranking by environmental score. When environmental benefits are jointly produced by an environmental practice the social welfare dominance of the green auction with cost-saving is further enhanced