Paying for itself: using reverse auctions for environmental improvement

Bright Blue’s recent report A greener, more pleasant land outlined a bold vision of a market-based approach to agricultural subsidies post-Brexit. As part of this, reverse auctions were proposed as one mechanism for delivering some of these subsidies.

EnTrade is an online reverse auctions platform used by Wessex Water, United Utilities and Natural England, and have been running reverse auctions for two years. We have run six auctions in eight catchments and have received bids for over 150 tonnes of nitrogen at a cost of over £300,000.

In these auctions, we invite farmers to bid to put in measures to reduce pollution from nutrients such as nitrogen. Excess nitrogen can disturb natural nutrient balances in rivers, leading excessive growth of algae or other organisms. Nitrates are also toxic to humans, so can cause problems at drinking water sources.

There are many methods to reduce nitrogen leaching, but for the auctions we have concentrated on two. These are:

  • Planting cover crops on land over winter where it would otherwise be bare. Cover crops are green cover planted to take up excess nitrogen in the soil over winter when most leaching happens. These can then ploughed back in to the land so those nutrients are available for the next crop;
  • Arable reversion – whereby land out is taken out of agricultural use altogether and applying little or no nitrogen fertilisers.

EnTrade started with these measures as they are relatively easy to implement, and they lend themselves to an auction process. We also know from the ten years of research in this area that they are also very effective at reducing nitrogen leaching.

To place a bid, farmers create an account on the EnTrade system, register their fields and details and then place a bid. The system works out the effectiveness of the bid based on the type of cover crop planted and when the farmer will plant it. The process is opposite to a standard auction, in that we accept the lowest bids from farmers to put in measures to reduce nitrogen.

Reverse auctions will reduce the price of ecosystem services where those wanting to supply the service are greater than the demand in a market for these services. This means that there is a careful balance between the amount of requirements placed on a market; too much and the price paid will be higher, not enough and people wanting to put in measures cannot.

Wessex Water ran its most recent auction through EnTrade in June this year, to grow cover crops over the 2017/18 period. Seventeen farmers bid 111 fields in to the auction, and achieved an overall average cost of £66 per hectare. This compares very favourably to the £112 paid through Natural England’s Countryside Stewardship Scheme. In addition, by paying based on the effectiveness of the crop, we can target our spending, rather than paying a flat fee per hectare.

So, we have seen that running an auction will reduce the price. But more importantly, it can help find the market price for a measure, meaning it is a fair price for farmers as well. It takes out the negotiation element of price setting, and ensures we are getting the most amount of environmental benefit for our money.

We have found that farmers are very responsive to this way of funding measures. Because a farmer can set his terms for his bid – such as the type of cover crop used or the date planted – farmers invest in the process. And it is important that farmers do engage and do invest, as without this they will not bid in the first place.

Once they have bid, it is also important that we also make sure that contracts are simple and easy to understand, so what we expect of farmers is clear. As long as contacts are clear, we have found farmers will put in the measure required. Last winter we had over 90% success rate on cover crop growth.

As all the information they entered about their bid is on the system, we can check this using satellite data, and farmers upload a ground level photo of the crop. For now, we still follow up with site visits as the process is still new to all participants, and it is a good chance to discuss with the farmer about any concerns they have.

The online reverse auction approach has many benefits, but it is not a panacea for environmental improvement in agriculture. The most important step in the process is to get farmers engaged in the first place, and this is not something that we can solve through an online platform. This is the most difficult part to scale, but we are actively researching how best to do this.

We think online auctions can work for many environmental measures and outcomes. For example, other nutrient management methods could be auctioned through the platform. We could also auction measures for improving biodiversity, such as planting hedgerows or managing peatland. You could even run schemes for natural flood management through the system, and we are working on pilot schemes for all these measures.

Online reverse auctions can help create markets for multiple environmental benefits. We have shown they work in practice, and that they can help in making farmers more engaged in the process. We think they can play an important role in a post-Brexit approach to agricultural subsidies, and help us to create a greener and more pleasant land.

James Peacock is the Product Manager for Entrade, an online auction platform for improving the environment

The views expressed in the article are those of the author, not necessarily those of Bright Blue