Farm production and environmental tradeoffs Resource Economics Workshop 28 October 2005

1. Farm production and environmental tradeoffsResource Economics Workshop28 October 2005 Progress report

2. Outline • Production from farm land • Commodities • Environmental goods and services • Farm production and environmental tradeoffs • Some results and observations 1

3. Goods and services from private land 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 2

4. 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

5. Environmental goods and services • Terrestrial biodiversity • Aquatic biodiversity • Water quality • Water quantity • Carbon 4

6. Carbon 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. 5

7. 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

8. 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

9. Terrestrial biodiversity Where are we? Habitat Avon-Richardson Cornella Hectares

10. 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

11. 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

12. 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

13. 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

14. Attributes measured in habitat hectares size & connectivityof the patch tree canopy cover large old trees understorey diversity recruitment of young trees logs & organic litter Habitat score= 0.90 12

15. Reduced quality of vegetation in cleared landscapes reduced cover of trees reduced recruitment reduced understorey diversity increased cover of weeds Habitat score= 0.50 13

16. Reduced quality of vegetation in cleared landscapes greatly reduced vegetation in landscape only relict trees increased cover of weeds greatly reduced understorey diversity Habitat score= 0.25 14

17. 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

18. Economic Theory Centre University of Melbourne Example bid:Sheep grazier from central Victoria • 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 16

19. What is opportunity cost? Where are we? BushTender: Gross Bids/Ha –v- Average Gross Margin/Ha 17

20. Biodiversity Significance Habitat Service / $ Bids in BushTender Where are we? 18

21. Supply Curve Supply prices discovered Budget line Cost of an additional unit of biodiversity 19

22. Actions specified in contracts Where are we? 20

23. 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 region 21

24. 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

25. Evaluation Where are we? 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 23

26. Evaluation Where are we? A market established • Contracts written between government and landholder • Hidden information revealed • Value created (both sides happy) • balanced flexibility in pricing with control of overall expenditure Efficient • 1/7 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 BTEMS grants $2,500/habitat hectare $6,113/habitat hectare 24