Funder South West Water, Natural Environment Research Council (NERC), Economic and Social Research Council (ESRC)
Key paper Balmford, B. et. al. (2023) Pricing rules for PES auctions: Evidence from a natural experiment, Journal of Environmental Economics and Management, 122, 102889.
Payments for Ecosystem Services (PES) schemes 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 in ways which improve water quality or biodiversity or sequester carbon. PES schemes aimed at reducing the levels of nutrients 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.
PES schemes can take a range of forms, from flat-rate payments to auctions to full blown trading platforms, or what might be termed a PES market. PES markets provide a place where buyers and sellers make mutually beneficial trades and are increasingly being used to deliver environmental improvements. As prices are set by the market, they can overcome problems with predetermined price setting used in other forms of PES schemes.
Why it matters
The team are developing a range of innovative Payments for Ecosystem Services (PES) markets and ground-breaking trials tackling some of the UK’s most pressing environmental challenges, including:
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 our advice, the pay-as-bid format (where everyone gets paid a different price) was changed to one where everyone gets paid the same price, which made bidding easier for farmers. More info here.
One of the first auctions for water quality improvements in the UK, Severn Trent Water’s scheme (2017-2019) for the rivers Dove and Wye in Derbyshire, in which landowners bid to undertake actions to reduce phosphate pollution, with the market discovering prices, rather than predetermined fixed prices.
Dragon project team members have been key to the design and implementation of a HMT-funded market for carbon sequestration in the UK. The novel market approach determines a price guarantee for carbon sequestration stemming from woodland creation.
Dragon project team members have been key to the design and implementation of pioneering market approaches which increase the efficient selection of land-use change projects to deliver water quality improvements. This work is carried out in the UK, with water companies paying for enhanced water quality outcomes.
