UK wide
2017-2021
Project Code: Auction Design
SWEEP PhD student Ben Balmford’s research was instrumental in improving the efficiency of the Forestry Commission’s unique £50M carbon-reduction tree planting scheme and Poole harbour nitrate-reduction auctions, delivering cost savings of £12.4M and £11.5M respectively. Ben continues to work with Exeter’s Mechanism Design Team developing five world-first, double-sided catchment markets, designed to allow economic development to proceed without harming the planet.
Project team
Greg Smith
Academic Collaborator
Why it matters
Payments for Ecosystem Services (PES) schemes are designed to encourage or incentivise the conservation of natural resources, or delivery of specific ecosystem services. For example, payments can be made to farmers or landowners, who agree to take certain actions to manage their land or watersheds in ways which improve water quality or biodiversity or sequester carbon.
Schemes aimed at reducing the levels of nutrients (especially nitrogen and phosphorus, to meet housebuilding ‘nutrient neutrality’ targets) in freshwater habitats and estuaries, help to reduce algal growth which disrupts natural processes and impacts wildlife. Whilst those aimed at planting trees or creating new or enriched habitat can boost carbon sequestration and deliver improved biodiversity.
The design of PES schemes can take a range of forms, from flat-rate payments to sophisticated market-based mechanisms. PES markets provide a place where buyers and sellers can come together to make mutually beneficial trades and are increasingly being used to deliver environmental improvements.
As prices are set by the market, they are helping to overcome persistent problems with predetermined price setting used in other forms of PES schemes. Ben’s PhD research explored a range of design issues relating to market-based PES schemes, including issues of perceived efficiency, trustworthiness and fairness to all participants, factors which are known to be linked to a scheme’s success.
Partners
The Bristol Avon Catchment Market is a genuine step change for the delivery of nature-based solutions at a landscape scale.
Amy Coulthard, Avon Wildlife Trust
What we did
Through collaborative work with the University of Exeter’s Mechanism Design (EMD) Team, Ben developed a range of innovative PES markets and ground-breaking trials tackling some of the UK’s most pressing environmental challenges, including:
One of the original catchment markets, Severn Trent Water’s scheme (2017-2019) for the rivers Dove and Wye in Derbyshire, in which landowners bid to undertake actions to improve water quality, with the market discovering prices, rather than predetermined fixed prices.
The Forestry Commission’s unique £50m Woodland Carbon Guarantee online auction scheme. Launched in 2019, this ambitious scheme is the UK’s first auction for carbon and is helping to deliver on Net Zero 2030 ambitions by incentivising land-owners to plant particular types of trees which lock in carbon as they grow.
Wessex Water/EnTrade’s pioneering Poole Harbour Nitrate reduction auction enabled farmers to bid to plant cover crops that reduce the amount of nitrogen run-off entering rivers. Following EMD Team advice, the pay-as-bid format (where everyone pays a different price) was changed to one where everyone pays the same price, which made bidding easier for farmers.
Ground-breaking trials of world-first catchment markets (2020-ongoing), developed in collaboration with EnTrade/Wessex Water as national pilots. These trials are unique in their double-sided nature, with multiple buyers, multiple sellers and multiple environmental services being traded simultaneously. They also use an innovative settlement mechanism, designed by the EMD Team, ensuring fair payments for environmental credits. The markets provide a place where: landowners and farmers can bid to deliver nature-based projects (variously aimed at reducing nitrogen and phosphorus pollution to improve water quality, sequestering carbon, increasing biodiversity and reducing flood risk); and housing developers and businesses can buy credits to meet their planning and ‘Nutrient Neutrality’ obligations for protected wildlife sites (including trade in verified phosphorous credits) and other environmental commitments.
Impacts & benefits
- Woodland Carbon Guarantee scheme – Ben’s research findings and advice delivered through the EMD Team was “instrumental” in shaping the design of the Forestry Commission’s Woodland Carbon Guarantee scheme according to Pat Snowdon, Scottish Forestry. To date, the scheme has delivered 2,750 hectares of new woodland and encouraged a diversification in woodland type and tree species. An estimated 2.41m tonnes of carbon sequestration has been delivered by the scheme to date which is helping the UK tackle climate change and deliver on its Net Zero targets. The benefit-to-cost ratio of the scheme was calculated to be in excess of 3:1, meaning the social value of carbon sequestration was 3 times greater than the price paid to fund the scheme. This delivered a cost saving of one third of the government’s standard price estimates for removing carbon, valued at £12.4m to the public purse delivered. Pat Snowdon explained that this was considered this “a very successful outcome” which had “impressed” H.M. Treasury.
- Poole Harbour Nutrient Market – This advice delivered by Ben’s PhD research findings delivered a 30% saving in costs for nitrate removal activity, valued at £11.45m. An estimated 275 tonnes of nitrogen has been prevented from entering Poole Harbour to date since the scheme started in 2016.
- Catchment Market schemes – The catchment markets aimed at reducing nutrients in Poole Harbour and the rivers Dove and Wye brought many benefits to nature and people. They substantially reduced nutrient pollution entering rivers and the improved water quality increased the recreation value people derived from using waterways. Farmers benefited from payments that increased their income and helped to sustain rural communities. Cost savings for the water companies, who avoided the need for large infrastructure investments to reduce nutrient pollution, will have benefited customers.
Looking ahead, the national pilot and trial catchment markets for the Solent, Somerset Levels, and the Avon will benefit farmers and rural communities by increasing and diversifying income streams in return for delivering nature-based projects like establishing grassland, developing wetlands, and planting woodlands. Housebuilders will benefit from being able to purchase verified nutrient credits and BNG offsets, allowing them to build the new high-quality homes needed to meet increased housing demand caused by population growth. This may also relieve upwards pressure on house prices to some extent.
Nutrient offsetting will also help protect fragile eco-systems, like saltmarshes and mudflats in the Solent and the lowland wetlands in Somerset. The BNG offsets will establish new habitats and, in addition to their intrinsic value, these ecosystems will also provide opportunities for leisure activities, like birdwatching, that contribute to wellbeing.
It is estimated that within all five catchment markets:
- Approximately 1,000 to 2,000 farmers are eligible to take part.
- The 2 water companies acting as buyers have over 9 million customers standing to benefit from reduced water bills.
- The building of 1,000s of new homes will be unlocked in the areas currently affected by ‘nutrient neutrality’ regulations.
- Millions of people who go walking in the Peak District, fishing in the Avon, birdwatching in the Somerset Levels, or sailing on Poole Harbour and the Solent will benefit from improved recreational experiences.
“Our partnership with Exeter University has been seminal to EnTrade’s journey from an innovative bidding platform to what could be a world-leading solution to our nature crisis. Well-functioning markets depend on detailed rules: the Exeter team’s ability to apply their leading-edge academic expertise to the practical requirements of market design has been fundamental to our ability to pull this off. Our common vision for incentivising positive land use change through well-designed markets underpins what has become a tight knit…. collaboration. At its heart lies the exchange of economic theory with the data and information that can only be revealed in a real-world context.
Guy Thompson, Director EnTrade
Looking to the future
Awarded his PhD in 2021, Ben is now a Postdoctoral Research Associate at the University of Exeter LEEP Institute. He works alongside Prof. Ben Groom, who holds the Dragon Capital Chair in Biodiversity Economics, on a specially-created 5 year programme examining: (1) the relationship between biodiversity and human well-being; (2) how much the economy depends on biodiversity and nature; and (3) how the well-being of future generations can be reflected in decisions today. Ben also continues his work with the Exeter Mechanism Design Team and EnTrade to inform and advise the ground-breaking PES markets and trials currently underway in the UK, and offer similar advice to developing schemes in Wales.