Progress report

Farm production and environmental tradeoffs

Resource Economics Workshop28 October 2005

Production from farm land • Commodities• Environmental goods and services

Farm production and environmental tradeoffs

Some results and observations

Outline

1

Private goods

– Farm commodities– Timber

– Water quantity, Carbon

Public goods

– Terrestrial biodiversity– Water Quality

– Aquatic habitat– Dryland salinity

……Markets have evolved

……Can create markets

……Missing markets

Goods and services from private land

2

Commodities – efficient markets

Demand side International markets

• Producers face signals from customers• Relatively few distorting influences

Supply side Producers respond to market signals

• Low effective rates of assistance• Adjust the quantity of production and mix of products• Innovate to reduce unit costs/ improve quality of outputs

High rates of productivity growth• Adjust in and out of the sector

Net effect Efficient and responsive primary industries sector

3

Environmental goods and services

Terrestrial biodiversity

Aquatic biodiversity

Water quality

Water quantity

Carbon

4

One catchment in Victoria

Can now go to paddock scale and estimate change in carbon due to revegetation.

Red – lots of carbon sequestered.

Blue – little carbon sequestered.

Carbon

5

Stream flow

Red – large change in stream flow due to land-use change.

Blue – little change in stream flow due to land-use change.

For whole catchment: Equates to approximately 15,000 ML/yr reduction in stream flow.

6

Dryland salinity

Red – large change in dryland salinity due to replanting with natives.

Blue – little reduction in dryland salinity due to replanting with natives.

7

Where are we?Terrestrial biodiversity

0

50000

100000

150000

200000

250000

300000

350000

400000

1750 2005 1750 2005

Habitat Avon-Richardson CornellaHectares

Characteristics of environmental goods and services

Bundles Complements

• Carbon and terrestrial biodiversity

Substitutes• Carbon and stream flow

Public and private goods• Carbon and water quantity private goods• Terrestrial biodiversity, aquatic biodiversity, water quality

Type of Intervention matters Revegetation gives one bundle Ground water pump gives another

Location matters

8

Why are markets missing?

Demand Side Difficult to appropriate benefits Difficult to exclude non-payers Difficult to measure willingness to pay

• Valuable due to rising incomes, education urbanisation

Supply side No incentive to supply Information asymmetry

• Uneven distribution of information destroys markets

Aggregation• In some cases buyers need specific packages

Result Over-allocate resources to commodity production Under-allocate resources to environment

9

Efficient procurement - biodiversity

Missing markets

Asymmetric information• Hypothesis: “That correcting hidden/missing information problems would

facilitate price discovery”• Opportunity costs• Environmental benefits

Key elements Auction to reveal opportunity cost of land-use change

• Landholders know about opportunity costs of land-use• Heterogeneous agents

Contract – agreement with landholders• Efficient contract design

Metric – measure of habitat improvement• Heterogeneous impacts

10

Efficient procurement - biodiversity

Supply side Auction design

• First-price, sealed bid, single-round, price discriminating, no reserve price (for the first auction)

Contract design• Unobservable outcomes• Imperfect knowledge about transformation function• Contracts written against inputs• Progress payments

Demand side Budget allocation to biodiversity conservation Revelation of habitat preferences

• Biodiversity Significance Score (BSS) – scarcity• Habitat Services Score (HSS) – change in habitat quality

11

Attributes measured in habitat hectares

Habitat score = 0.90

tree canopy cover

logs & organic litter

large old

trees

understorey diversity

recruitment of young trees

size & connectivityof the patch

12

Reduced quality of vegetation in cleared landscapes

increased cover of weeds

reduced recruitment

reduced cover of

trees

reduced understorey diversity

Habitat score = 0.5013

increased cover of weeds

greatly reduced

vegetation in landscape

only relict trees

greatly reduced understorey

diversity

Habitat score = 0.25

Reduced quality of vegetation in cleared landscapes

14

Efficient procurement - biodiversity

Farm visit Landholder informed of actions and HSS

• fence remnants, exclude stock, control rabbits etc.

Landholder selects actions and places a bid

Ranking bids Bids assessed on “value for money” basis

• BBI = BBS * HSS/$ bid

Contracts and monitoring• Contracts ranked until budget expended• Progress payments based of performance

15

25 ha patch of "high significance" bush on his property.

Agrees to:

• fence to exclude stock from the bush

• weed & rabbit control

• retention of large trees & fallen logs…but

• wants flexibility to continue some firewood collection

Economic Theory Centre University of MelbourneExample bid:

Sheep grazier from central Victoria

16

Where are we?What is opportunity cost?

0

50

100

150

200

250

300

350

400

26,4

10

315,1

47

569,8

52

703,5

14

751,3

15

855,8

93

903,2

24

973,2

44

1,0

36,4

93

1,0

67,3

71

1,1

00,0

56

BQs (units)

$

Gross Margin perHa

Gross Bid per Ha

BushTender: Gross Bids/Ha –v- Average Gross Margin/Ha

17

Where are we?Bids in BushTender

Habitat Service / $

Bio

div

ersi

ty

Sig

nif

ican

ce

18

Supply Curve

Cost of an additional unit of biodiversity

Budget line

Supply prices discovered

19

Where are we?Actions specified in contracts

Total

Landholdercommitments

# ofsites

% ofsites

Retain large trees 182 81.6

Retain other standingtrees

174 78.0

Exclude stock 195 87.4

Retain fallen timber 194 87.0

Control rabbits 202 90.6

Control weeds 136 61.0

Supplementary plantingor revegetation

82 36.8

Average number ofcommitments per site:

5.2

20

Participation profile

BT participants likely to be …. Older & better educated Larger properties

• 275 ha v 206 ha

More native vegetation on property Similar “on-farm” income Actively involved in native vegetation management More likely to be a member of a landcare group

• 18% were not currently members of any group

More likely to have participated in other environment programs• 35% had no involvement in previous 3 yr

….relative to sample from region21

Participation profile

Participants

Over 80% rated the site assessment process as ‘good’ or ‘very good’

Over 75% rated the information sheets and management plans as ‘good’ or ‘very good’

68% said they were completely satisfied with the site visit

Non-participants

78% rated the approach as a ‘good’ idea 46% would consider participating in the future

22

Where are we?Evaluation

23

Field Officers Habitat Hectare assessment is a powerful extension tool –

landholders can engage at different levels Delivery focuses on biodiversity – not on cost-sharing Offers all landholders the opportunity to participate

Landholders Treats bush as an “asset” rather than a “liability” Flexibility to commit to actions according to their own

wishes/capabilities Simple landholder process Rigorous & equitable assessment process

Where are we?Evaluation

24

A market establishedContracts written between government and landholderHidden information revealedValue created (both sides happy)balanced flexibility in pricing with control of overall expenditure

Efficient1/7 the cost of fixed price grant (for same budget)25% more biodiversity for the (fixed) budget$400,000 for 3,200 ha. for three years

BT EMS grants$2,500/habitat hectare $6,113/habitat hectare