Cost-effectiveness of Alternative Payment and Auction Designs for Biodiversity Conservation in Agriculture

Empirical evidence shows that biodiversity conservation policies implemented in agriculture sector in many OECD countries have not been environmentally effective nor cost-effective. There are several new policy mechanisms available to improve both environmental effectiveness and the cost-effectiveness, including spatially differentiated payments and conservation auctions. In this paper a theoretical framework is developed for describing farmers’ participation in government payment programme for enhancing semi-natural wildlife habitats on farmland. Payment types analysed include uniform payment, three types of conservation auctions with environmental targeting, uniform payment with environmental targeting and two types of differentiated payments with environmental targeting. Quantitative results show that uniform payment performs less efficiently than other payment types, and that auctions with environmental targeting are the most cost-effective option from analysed payment types. Adding environmental targeting to the uniform payment policy greatly improves the cost-effectiveness of uniform payment.