Creating Markets for Environmental Goods and Services : A Mechanism Design Approach

When landholders are subject to markets for environmental goods and services they allocate land, labour and capital resources away from commodity production and toward production of environmental goods and services. This paper reports results from a pilot in Victoria, Australia that added an auction of conservation contracts for multiple environmental goods and services and a price for carbon sequestered, derived from a tradeable emission permit market, to the existing set of input and output markets faced by landholders. From the pilot it has been estimated that investment in the creation of institutions that reveal relevant information including environmental metrics generated an economic efficiency gain of 30% in the allocation of conservation contracts. A further advantage of the creation of environmental markets is scope for the carbon market to fund a proportion of government budgets required to fund public goods such as terrestrial and aquatic habitat conservation. This finding arises because of the multiple outcomes associated with landscape intervention. This cost-sharing effect becomes larger as carbon prices rise