Using contracts to mitigate salinity: an analysis of voluntary cost-sharing agreements

This paper looks at the incentives of voluntary cost-sharing agreements being used by the Department of Conservation and Land Management (CALM) in three natural diversity recovery catchments in the South West of Western Australia. These agreements represent an understanding between CALM and the farmer to undertake salinity mitigating works according to guidelines. CALM’s objectives are to preserve and enhance target natural diversity assets through conservation and sustainable land use systems. These agreements are tailored to farmers according to the private and public benefits expected as a result of the works. Catchment management officers can respond to farmers needs and account for the importance of the works to the conservation of the natural diversity asset but are constrained by equity and efficiency considerations. Cost-sharing agreements can be analysed using a principal-agent framework and the theory of contracts. A theoretical model is used to determine the optimal amount of abatement undertaken by farmers in the recovery catchments, where abatement is measured as the area revegetated as a proxy for recharge reduction. This model is used to evaluate current approaches to contracting in the light of CALM’s objectives. Results show that an equity constraint which pays the same transfer payment for the same area of land revegetated will result in lower total of abatement, higher total transfer payments, and lower social welfare in the form of value of abatement to the environmental regulator. These results support the approach taken by CALM to negotiate VCSA on a basis of private and public benefits rather than a standard VCSA for area abated.